Today, On 3rd October, The Supreme Court ruled in favour of the tax department, clarifying that the Income Tax Act must be interpreted with its updated provisions from April 1, 2021, onwards. This decision impacts around 90,000 reassessment notices issued during the pandemic, when the old and new laws were in conflict, leading to numerous legal disputes.
New Delhi: In a significant victory for the tax department, the Supreme Court ruled on Thursday that the amended provisions of the Income Tax Act, effective from April 1, 2021, must be applied.
This decision expected to affect around 90,000 reassessment notices, as noted by the court. The ruling arose from the Ashish Agarwal case, affirming that the Taxation and Other Laws (Relaxation & Amendment of Certain Provisions) Act (TOLA) will continue to apply to the Income Tax Act beyond this date.
During the judgment, Chief Justice DY Chandrachud highlighted that several previous rulings were set-aside, including those from the Gujarat High Court (ITO Surat), Allahabad High Court (Rajeev Bansal), Bombay High Court (Siemens vs. DCIT), Orissa High Court (Ambika Anand), as well as Twilight Industries and Ganesh Das Khanna from the Delhi High Court.
The legal disputes emerged during the pandemic when the government temporarily extended the previous rules for reopening old tax returns. This created an unusual situation where both the old and new reassessment laws were seen as simultaneously applicable, resulting in a surge of notices and over 10,000 writ petitions, many of which were contested by tax authorities in the Supreme Court.
Former president of the Institute of Chartered Accountants of India (ICAI) Ved Jain, said,
“This judgment will have significant implications, affecting approximately 90,000 taxpayers,”
He added,
“It will be a landmark ruling on the scope of executive powers to extend limitations through executive orders, even after new legislation has come into force.”
Under the new reassessment framework, effective from April 1, 2021, the tax department can reassess cases up to 11 years old for tax evasion exceeding Rs 50 lakh, and four years for amounts below that threshold.
Previously, the department could only look back six years for undisclosed income over Rs 1 lakh if concealment was proven. The overlap between the old and new laws occurred due to the extension of the old provisions during the disruptions caused by COVID-19, leading to legal confusion during the transition period.
Taxpayers challenged the reassessment notices issued under the old law in various high courts, arguing that the law of limitation had already taken effect, preventing the department from issuing reopening notices after April 1, 2021. They pointed out that the extension of the old law came via a circular, while the new law resulted from legislative action, granting it more legitimacy.
Additionally, the new framework requires the department to issue a preliminary notice to taxpayers before serving the final reassessment notice a step some argued bypassed with the reassessment notices under the old law.
Taxpayers faced a setback on May 4, 2022, when the Supreme Court upheld all reassessment notices issued after March 31, 2021, exercising its extraordinary powers under Article 142 of the Constitution. However, the court allowed further legal proceedings, particularly for the assessment years 2013-14 to 2017-18.
Ashish Mehta, partner at Khaitan & Co, Mumbai said,
“Reassessment notices have been a contentious issue due to the constant changes in laws, timelines, and procedures over the past three years,”
“While the revenue department has gained an initial victory, the legal discussions are far from concluded, and we expect further developments that will impact all stakeholders.”