The Saga of Reassessment
The Apex Court held that revenue cannot be made remediless, and the object and purpose of reassessment cannot be defeated. It was held that it was a bonafide mistake on the part of revenue to issue the impugned notices under the unamended law. Therefore, High Courts instead of quashing the impugned notices ought to pass the order constructing them as notices issued under the amended law. This also allows the revenue to proceed with the reassessment proceedings as per the substituted law.
Introduction: The “Brahmastra” of Revenue and Historic Friction
Reassessment Provisions (Sec. 147 to 153 of IT Act 1961) give extensive power to revenue to tax any income chargeable to tax which has escaped assessment. Thus, it was like a Brahmastra with revenue to tax the escaped income. However, reassessment proceedings were always subject to litigation, since the very inception and there is a plethora of litigation pending at various appellate forums.
Key Drivers of Reassessment Litigation Under Pre-Amended Law:
- i. No valid reason to believe.
- ii. No tangible information/material in possession of revenue to show that income chargeable to tax has escaped assessment.
- iii. Change in opinion of the assessing officer.
- iv. No inquiry is conducted by the Assessing Officer before initiation of reassessment proceedings.
- v. Mandatory procedure as laid down by the Apex Court in the case of GKN Driveshafts was not being followed.
Twist to Reassessment: Paradigm Shift Under Finance Act 2021
Vide Finance Act 2021, Parliament made radical and reformative changes in the reassessment procedure and substituted sections 147 to 153 of the Act in order to simplify administration, ease compliance, and reduce litigation. Salient provisions of the substituted provisions are as follows:
a. Procedure to be Followed: GKN Driveshafts vs. Newly Inserted Section 148A
Under the pre-amended law: The judgment of the Apex Court in the case of GKN Driveshafts (India) Ltd v. ITO (259 ITR 19 / 1 SCC 72) provided detailed guidance as to the procedure to be followed for reassessment viz., providing copy of reasons recorded, raising of objections against the reasons recorded by an assessee, and passing a speaking order to dispose of the objections by the assessing officer.
Under the amended law: The procedure as given u/s 148A (newly added section) must be followed before issuing any notice u/s 148:
- Assessing Officer shall conduct an inquiry after obtaining necessary prior approval about information available suggesting income has escaped assessment.
- Provide an opportunity of being heard to the assessee by issuing a show-cause notice u/s 148A(b) as to why notice u/s 148 should not be issued on the basis of available information and results of inquiry.
- Pass an order u/s 148A(d) after necessary approvals and considering the submissions of the assessee deciding whether it is a fit case for issuance of notice u/s 148.
- Notice issued u/s 148 shall be accompanied (if required) by the copy of the order passed u/s 148A.
b. Time Period for Issuance of Notice: Unamended vs. Amended Law
| Unamended Law | Amended Law (Finance Act 2021) |
|---|---|
| Four years from the end of relevant Assessment Year. | Three years from the end of relevant assessment year. |
| Six years from the end of relevant assessment year where the income escaping assessment exceeds ₹ 1 lakh. |
Ten years from the end of relevant assessment year where:
|
| Sixteen years from the end of relevant assessment year where income in relation to any asset located outside India has escaped assessment. | Meaning of Asset: Immovable Property being land and buildings, shares and securities, loans and advances, and deposits in Bank Account. |
c. Information with Assessing Officer vs. “Reasons to Believe”
Under the previous law: Assessing Officer could proceed to reassessment proceedings if he had “reasons to believe” that any income chargeable to tax had escaped assessment. The phrase “reasons to believe” was constantly subject to litigation; High Courts repeatedly held that there must be existence of tangible material to safeguard against arbitrary exercise of power (e.g., Aventis Pharma Ltd vs ACIT [323 ITR 570 Bom HC]).
Under the amended law: There is no requirement of subjective “reasons to believe”. The sole requirement is that the Assessing Officer must have information in his possession suggesting that income chargeable to tax has escaped assessment, followed by strict adherence to the procedure laid down u/s 148A.
Why Dispute? The Intersection of TOLA Extensions and Finance Act 2021
In March 2020, India witnessed the outbreak of the Covid-19 pandemic followed by nationwide lockdowns, making statutory compliance difficult for both citizens and the government. Government of India enacted the Taxation and Other Laws (Relaxation of certain Provisions) Ordinance 2020 (TOLA) and issued notifications extending time limits under various statutes.
In exercise of powers under TOLA, the revenue extended the time limit for issuance of notice u/s 148 (original deadlines 31.03.2020 and 31.03.2021) up to 30.06.2021. Simultaneously, Parliament amended the law of reassessment vide Finance Act 2021, applicable from 01.04.2021.
The Controversial CBDT Notification of 27.04.2021:
Parliament/CBDT issued a notification on 27.04.2021 containing an Explanation stating that provisions of sections 148, 149 and 150 as they stood as on 31.03.2021 before the commencement of Finance Act 2021 (unamended law) shall apply to proceedings initiated under the said notification. In exercise of this power, revenue issued approximately 90,000 reassessment notices u/s 148 between 01.04.2021 and 30.06.2021 under the old unamended procedure.
Example: For Assessment Year 2013-14, the time limit for issuance of notice u/s 148 (assuming escaped income > ₹ 1 lakh) was 31.03.2020. TOLA extended it to 30.06.2021. The dispute was: which procedure must be applied—the earlier law or the amended Section 148A procedure?
Contentions of Assessees Across 9,000 High Court Writ Petitions:
- a. Substituted Law Governs Post 01.04.2021: Finance Act 2021 took effect on 01.04.2021, and reassessments initiated after that date must strictly adhere to the amended provisions.
- b. Mandatory Section 148A Inquiry: Assessing Officers ought to have followed the new procedure: conducting inquiry, providing show cause, and passing speaking orders u/s 148A.
- c. Ultra Vires Delegation: The Relaxation Act (TOLA) conferred specific and limited powers to extend compliance time limits; it never delegated power to defer statutory provisions or resurrect repealed procedures.
- d. Subordinate Legislation Subordinate to Parliament: Executive notifications cannot override Parliamentary legislation (Finance Act 2021). Hence, all such notices are illegal, bad in law, and liable to be quashed.
Judicial Split: Delhi High Court vs. Chhattisgarh High Court
Delhi High Court: Mon Mohan Kohli vs ACIT [WP(C) 6176/2021]
Ruled decisively in favour of the assessee and quashed the reassessment notices. Key holdings:
- Explanation to notification is ultra vires TOLA and Finance Act 2021.
- Section 3(1) of TOLA extends compliance dates; it does not authorize deferring newly enacted statutory provisions.
- Revenue cannot invoke Covid-19: Parliament was fully conscious of the pandemic when enacting Finance Act 2021.
- Executive cannot undermine parliamentary supremacy. Similar rulings delivered by Bombay, Calcutta, Rajasthan, and Madras High Courts.
Chhattisgarh High Court: Palak Khatuja vs UOI [438 ITR 622]
Took a conflicting view, ruling in favour of the revenue and upholding the reassessment notices:
- Covid-19 lockdowns justified granting relief to citizens and preserving departmental rights.
- The individual identity of Section 148 prevailing prior to amendment was insulated and saved till 30.06.2021.
- Delegation to Ministry of Finance ensured flexibility and administrative efficiency.
- Dismissed the writ petitions and allowed reassessments to proceed.
The Apex Court: Balancing Stakeholders Under Article 142
Key Rulings of the Supreme Court:
- Statutory Safeguards: All procedural safeguards have been provided under the amended law (inquiry, prior approvals, show-cause opportunities, and reduced time limits of 3 years and 10 years).
- Remedial Nature: The substituted law is remedial in nature, enacted to protect taxpayers’ rights and public interest.
- New Law Applies Post-01.04.2021: High Courts rightly held that the benefit of newly substituted law must be made available for reassessments initiated after 01.04.2021.
- Public Revenue Hazard: However, outright quashing of 90,000 notices would result in complete non-assessment, severely harming public revenue.
- Revenue Cannot Be Made Remediless: The object and purpose of reassessment proceedings cannot be frustrated due to technicalities.
- Bonafide Mistake: It was a bonafide mistake on the part of the revenue in issuing notices under unamended law.
- Deemed Notice Under Section 148A: High Courts ought not to have quashed the notices, but rather construed them as show-cause notices issued under Section 148A(b).
- Procedural Roadmap: The Supreme Court formulated comprehensive transitional guidelines for revenue and assessees.
- Pan-India Operation: The verdict operates across India; all conflicting High Court orders stand modified in terms of this judgment.
Way Forward: Step-by-Step Directions Ordered by the Apex Court
CBDT Instruction No. 1/2022 (Dated 11.05.2022):
Issued under Section 119 to operationalize the Supreme Court ruling. CBDT clarified that the Supreme Court order applies to ALL cases where reassessment notices were issued post-01.04.2021, whether challenged in court or not.
Conclusion: A New Chapter of Tax Litigation
The series of amendments in reassessment law via Finance Act 2021 was introduced with the specific purpose of reducing litigation and doing away with the dual assessment regime for search and seizure. However, its intersection with pandemic-era TOLA extensions triggered nationwide legal battles. While the Supreme Court invoked Article 142 to strike an equitable balance, the ruling has itself unleashed a new chapter of conflicting interpretations, limitation disputes, and ongoing courtroom debates.
- Order of Apex Court in Union of India vs Ashish Agarwal [Civil Appeal No. 3005 of 2022] / 444 ITR 1 / 286 Taxman 183 (SC).
- Order of Delhi High Court in Mon Mohan Kohli vs ACIT [WP(C) 6176/2021].
- Order of Chhattisgarh High Court in Palak Khatuja vs UOI [WP(T) 149 of 2021] / 438 ITR 622 / 284 Taxman 27.
- CBDT Instruction No. 1 of 2022 dated 11.05.2022 issued u/s 119 of the Income-tax Act, 1961.