Tax Reassessment Cases: The Silver Lining In Supreme Court's Ruling
Supreme Court may have validated the revenue department's stance but not all is lost for taxpayers fighting reassessment notices.
The Supreme Court has sealed the fate of 90,000 reassessment cases by ruling in favour of the tax department. To do that, it used a constitutional power that’s rarely been used by the apex court, much less in a commercial tax matter.
The apex court invoked Article 142, which as Senior Advocate Arvind Datar puts it, is a power to be used very sparingly and it is to be used where it is necessary to do complete justice. For instance, when the statutory provisions are inadequate.
"The rule is that you don't apply Article 142 where statutory provisions exist and they are clear. I have not seen Article 142 being invoked to serve reassessment notices or any kind of tax provision at all. This is a very unique case, and it has, of course, surprised everybody.”Arvind Datar, Senior Advocate
But in that surprise is a silver lining.
The Supreme Court View
Last year, the government had amended the reassessment provisions under the income tax law by introducing Section 148A. The provision meant that effective April 1, 2021, if a tax officer wants to initiate reassessment proceedings, stringent conditions need to be met—a pre-notice inquiry if required, prior approval from senior officers in the department, and an opportunity to the taxpayer to oppose reassessment etc. Until this amendment, a tax officer could initiate reassessment proceedings if there was a “reason to believe" that income had escaped assessment.
Even after the new provisions came into effect, the revenue department issued thousands of reassessment notices as per the old procedure. It relied on the notification issued under the Taxation and Other Laws (Relaxation of Certain Provisions) Act, 2020 which relaxed certain procedures due to Covid-19. It gave the department time until June 30, 2021 to issue reassessment notices.
This was contested before high courts by taxpayers whose past returns were being sought to be reopened. The question before the courts was whether the department should have followed the old procedure since the limitation period was extended, or the new procedure as mandated by Finance Act, 2021. All high courts except one ruled in favour of the taxpayers.
Even as the apex court agreed that the department should have followed the new requirements, it went on to validate the reassessment notices. It did so saying the revenue department made a bona fide mistake in believing that the reassessment notices could be issued under the old procedure until June 30.
Notices issued under old procedures to be deemed to have been issued under the new Section 148A and treated as show cause notices, the apex court held.
The Silver Lining
Besides introducing stringent conditions for reopening assessments, Finance Act, 2021 had also reduced the time period for which such proceedings can be initiated. Earlier, the department could reopen tax returns going back six years. This was reduced to three years last year for most situations via an amendment to Section 149.
If the apex court says that all the 90,000 reassessment notices and those pending before high courts will be deemed to have been issued under the new requirements, then even the timeline of the new provisions will apply, says Ajay Rotti, partner at Dhruva Advisors.
The new provisions and procedures apply in toto and not only for validation of the notices. This means, for example, if the revenue department issued six reassessment notices to a particular taxpayer, then only those for the last three Assessment Years survive, that is for AYs 2018-2019, 2019-2020 and 2020-21. This means notices issued for earliest 3 years i.e. before March 2019 are not valid anymore. So, not all notices will be validated.Ajay Rotti, Partner, Dhruva Advisors
The revenue department is expected to apply the new tests in all fairness. If you read the new law for procedural aspects, then you should read it for time period as well, Rotti said.
A point that the Income Tax Officers Association has also raised in its letter post the apex court’s ruling. BQ Prime has reviewed a copy of this letter to the chairperson of the Central Board of Direct Taxes.
In this, the association has conveyed its interpretation of the apex court’s ruling to the CBDT agreeing to communicate the reasons for reopening the cases within 30 days. They have also sought clarity on whether tax officers can issue notices for AYs 2015-16, 2016-17 and 2017-18 that have escaped income as those will be beyond the three-year limit as on April 1,2021.
Datar, too, believes that only notices pertaining to the last three AYs from April 2021 can survive since the apex court has said that all defences under Section 149, which prescribes the three-year time period, will continue to be available to assessees.
Watch the full interview with Datar here: