Supreme Court upholds 90,000 tax reassessment notices issued under old regime

In a setback for taxpayers, the Supreme Court on Thursday upheld around 90,000 tax reassessment notices issued by the revenue department between 1 April and 30 June 2021, for assessment years 2013-14 to 2017-18.

A bench comprising Chief Justice of India DY Chandrachud, Justice JB Pardiwala, and Justice Manoj Misra delivered the judgement on a batch of 727 appeals filed by the income tax department against orders by various high courts. The Bombay and Allahabad high courts, among others, had ruled against the revenue department, preventing it from issuing tax notices under the old system. However, the Supreme Court set aside all these orders.

The bench reiterated the Supreme Court’s 2022 ruling in the Ashish Agarwal case that upheld tax notices issued under the old regime for the disputed period. It rejected taxpayers’ arguments that they should fall under the new reassessment regime, which took effect on 1 April 2021.

Amit Maheshwari, tax partner at AKM Global, said, “This ruling is a setback for many taxpayers, particularly those who had their reassessment notices quashed by the high courts. They were expecting the Supreme Court to uphold the high courts’ decisions. Taxpayers must now act quickly to comply with the reassessment notices and complete the necessary proceedings.”

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Maheshwari noted that confusion between the old and new reassessment regimes stemmed from the extended time limits in the Taxation & Other Laws Act (TOLA). Clear timelines for previous years could have prevented this confusion, he said.

“The Supreme Court ruling will affect the validity of reassessment proceedings. However, the amount of tax the government can collect will depend on the merits of each case. The total tax revenue is expected to exceed several thousand crores, including interest and penalties, assuming the tax department succeeds on merit,” said Mitesh Jain, partner at Economic Laws Practice.

Ruling sets a precedent, experts say

Experts said that while the ruling was limited to a specific assessment year, it could set a precedent for future cases.

"The validity of reassessment notices has long been contentious due to frequent changes in timelines. Future legislative or policy changes must consider these issues. All future amendments to the Income Tax Act, 1961 should be thoroughly reviewed. Officers should be adequately trained to avoid similar situations and reduce unnecessary litigation for both taxpayers and tax administrators", said SR Patnaik, partner (head - taxation) at Cyril Amarchand Mangaldas.

Kumarmanglam Vijay, partner at JSA Advocates and Solicitors, highlighted that the Supreme Court used its powers under Article 142 in the Ashish Agarwal case to reconcile TOLA and the new reassessment provisions, extending this approach in the current judgement to ensure justice for both taxpayers and tax authorities.

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Other experts said taxpayers now have no way to challenge these reassessment notices and must comply swiftly. “Unless the order is challenged and referred to a higher bench on grounds of violation of fundamental rights or public policy, aggrieved taxpayers will have no remedy but to prepare for the reassessment proceedings,” said Patnaik of Cyril Amarchand Mangaldas.

This legal standoff arose when the government enacted the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020 on 29 September 2020 to extend time limits for reassessing tax returns. This created confusion, as both the old and new tax reassessment laws were interpreted as simultaneously operational. Taxpayers contended that notices should comply with the new regime, while tax authorities relied on the old rules, resulting in numerous legal challenges.

More than 10,000 writ petitions were filed in various high courts, and many of these were counter-challenged in the Supreme Court. In its 2022 ruling, the Supreme Court upheld all reassessment notices issued after 31 March 2021, using its powers under Article 142 of the Constitution. These notices were later challenged again for being time-barred and lacking proper authorisation, culminating in Thursday’s ruling.

Old vs new law

The new reassessment law, effective from April 1, 2021, allows the tax department to review cases up to 11 years in the past for tax evasion exceeding ₹50 lakh and four years for amounts below that. The old law permits investigations for a maximum of six years for more than ₹1 lakh of undisclosed income.

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The old law’s provisions were extended because of pandemic-related disruptions, causing an overlap with the new law for a few months. Taxpayers challenged the validity of reassessment notices, arguing that the old law’s extension was implemented via a circular, while the new law was enacted through the Finance Bill and thus had more legal weight. They also noted that the new law requires a preliminary notice, which was not issued in the disputed cases, thus violating procedural requirements.