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

In a notable development for taxpayers, the Supreme Court has upheld approximately 90,000 tax reassessment notices that the revenue department issued between April 1 and June 30, 2021, covering assessment years from 2013-14 to 2017-18.

The ruling came from a bench that included Chief Justice of India DY Chandrachud, Justice JB Pardiwala, and Justice Manoj Misra, who addressed a total of 727 appeals filed by the income tax department against various high court decisions. Notably, the Bombay and Allahabad high courts had previously ruled in favor of taxpayers, barring the revenue department from issuing notices under the old tax reassessment system. However, the Supreme Court has overruled these judgements.

The bench reinforced its previous 2022 decision in the Ashish Agarwal case, which validated tax notices issued under the prior regime during the contested timeframe. It dismissed arguments from taxpayers advocating for the application of the new reassessment regime, which commenced on April 1, 2021.

Tax partner Amit Maheshwari from AKM Global remarked, “This ruling constitutes a setback for many taxpayers, especially those whose reassessment notices were previously nullified by the high courts. They had anticipated the Supreme Court would uphold those high court decisions. Taxpayers must now act swiftly to comply with the reassessment notices and complete the requisite procedures.”

Maheshwari pointed out that the confusion between the old and new reassessment regimes arose from extended timelines established in the Taxation & Other Laws Act (TOLA). He believes that clearly defined timelines for past years could have eliminated much of the uncertainty.

“The Supreme Court’s ruling will influence the validity of reassessment proceedings. Nevertheless, the government’s potential tax collection will hinge on the individual merits of each case. Tax revenue is anticipated to exceed several thousand crores, including interest and penalties, assuming the tax department can succeed on those merits,” stated Mitesh Jain, partner at Economic Laws Practice.

Ruling Sets a Significant Precedent

Experts suggest that while this ruling pertains to a specific assessment year, it may establish a precedent for future cases.

“The validity of reassessment notices has been a contentious issue due to constant changes in timelines. Future legislative or policy reforms must address these concerns. All forthcoming amendments to the Income Tax Act, 1961, must be meticulously reviewed. Tax officers should receive adequate training to prevent similar occurrences and minimize unnecessary litigation for both taxpayers and tax officials,” remarked SR Patnaik, partner (head – taxation) at Cyril Amarchand Mangaldas.

Kumarmanglam Vijay, a partner at JSA Advocates and Solicitors, noted that the Supreme Court utilized its authority under Article 142 in the Ashish Agarwal case to reconcile TOLA with the new reassessment provisions, an approach it has extended in the current judgement to ensure equitable treatment for both taxpayers and tax authorities.

Other experts expressed concern that taxpayers currently lack avenues to contest these reassessment notices and must act promptly. “Unless the order is challenged and escalated to a higher bench on grounds of infringement of fundamental rights or public policy, affected taxpayers have no choice but to prepare for the reassessment process,” cautioned Patnaik from Cyril Amarchand Mangaldas.

This legal challenge emerged following the government’s enactment of the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020 on September 29, 2020, aimed at extending time limits for reassessing tax returns. This led to complications as both the old and new tax reassessment laws appeared to be in effect simultaneously, with taxpayers arguing for compliance with the new regime while tax authorities adhered to the old rules, leading to numerous legal disputes.

Over 10,000 writ petitions made their way through various high courts, many of which were subsequently counter-challenged in the Supreme Court. The Supreme Court’s earlier ruling upheld all reassessment notices issued after March 31, 2021, relying on its powers under Article 142 of the Constitution. These notices faced renewed challenges on grounds of being time-barred and lacking proper authorization, culminating in the recent ruling.

Key Differences: Old vs. New Law

The new reassessment law, which took effect on April 1, 2021, allows tax authorities to review cases up to 11 years back for tax evasion exceeding ₹50 lakh and four years for amounts below that threshold. In contrast, the old law permitted investigations for a maximum of six years concerning undisclosed income exceeding ₹1 lakh.

The old law’s provisions were extended due to pandemic-related disruptions, culminating in an overlap with the new law for a transitional period. Taxpayers contested the legitimacy of reassessment notices, arguing that the extensions of the old law were implemented via a circular, while the new law stemmed from the Finance Bill, thus possessing more legal authority. They also pointed out that the new law necessitates the issuance of a preliminary notice, which was overlooked in the cases in question, thereby breaching procedural protocols.