[Analysis] Supreme Court Rulings on Validity of Reassessment Notices – Illustrations | Implications

The validity of a reassessment notice refers to the legal timeframe within which tax authorities can issue a notice to reassess a taxpayer's income under the Income Tax Act. The notice must be issued within the prescribed limitation period, which varies based on the amount of income escaping assessment. Recent legal amendments and Supreme Court rulings have clarified that notices issued under the old provisions of the Act before June 30, 2021, are deemed valid if they fall within the extended limitation periods provided by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act (TOLA), while notices issued after this date are governed by the new regime's time limits.

Table of Contents

1. Background
2. The Controversy Post SC Ruling
3. Recent Supreme Court Ruling
4. Case Studies

1. Background

Due to the COVID-19 pandemic in 2020 and 2021 and consequent nationwide lockdown, the Government extended the due dates of various compliances on multiple occasions.

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 [TOLA], extended the Assessing Officers’ time to issue notices under section 148 until June 30, 2021. The additional time was allowed if the original due date for sending such notices fell between March 20, 2020, and March 31, 2021.

In the meantime, the Finance Act 2021 had substituted sections 147 to 151 with effect from April 1, 2021. A dispute arose between the taxpayers and the revenue on the validity of the notices issued under the old provision between April 1, 2021 and June 30, 2021, i.e., during the extended limitation period granted by the TOLA.

The Supreme Court settled this controversy in the case of Ashish Agarwal[1]. The Court upheld the validity of the re-assessment notice issued under the old provision because the Assessing Officer had a bona fide belief that the old provisions also got an extension by TOLA. Thus, the Court held that reassessment notices issued under the old law shall be deemed the show cause notices issued under clause (b) of section 148A of the new law.

Considering the Supreme Court’s decision, the CBDT issued Instruction[2] to deal with re-assessment notices issued under the old provision between April 1, 2021, and June 30, 2021.

2. The Controversy Post SC Ruling

After the SC ruling in Ashish Agarwal (supra), the assessee challenged the reassessment notices based on the limitation period.

According to the proviso to Section 149(1)(b), as amended by the Finance Act 2021, a Section 148 notice cannot be issued for an assessment year if the time limit for issuing such notice for such assessment year had already expired on or before 01-04-2021.

The taxpayers contend that the Finance Act 2021 was enacted after TOLA. Consequently, TOLA only held the field once the new regime was enacted on 1 April 2021. The revenue had to issue Section 148 notices in terms of the new regime without recourse to the extended timelines under TOLA.

Accordingly, for Assessment Years 2013-2014 and 2014-2015, the six-year time limit in terms of Section 149 expired on 31 March 2020 and 31 March 2021, respectively. Thus, the reassessment notices issued after 1 April 2021 would be barred by limitation.

3. Recent Supreme Court Ruling

Recently, the Supreme Court ruled[3] that any amendments or substitutions to provisions of the Income-tax Act do not affect TOLA’s application as long as the action falls within the prescribed period.

The Court held that TOLA extended the deadlines for certain actions under specified Acts that were due during the COVID-19 period. Section 3(1) of TOLA uses “any” to indicate that the relaxation applies to all actions due between 20-03-2020 and 31-03-2021.

Section 2(1)(b)(ii) of TOLA defines ‘specified Act’ to include the Income Tax Act and after 1 April 2021, it must be read as the Act amended by the Finance Act 2021. The substitution of Sections 147 to 151 does not impact TOLA’s purpose, which is to relax time limits for actions due between 20-03-2020 and 31-03-2021. TOLA remains applicable to the Income Tax Act after April 01, 2021, if actions under the substituted provisions fall within this period.

Section 3(1) of TOLA applies to the issuance of reassessment notices under Section 148 of the Income Tax Act. TOLA did not amend the four and six-year time limits under the Act. It provided a relaxation for issuing reassessment notices during the COVID-19 period. Accordingly, revenue must check Section 149 time limit and TOLA’s relaxation period.

Accordingly, after April 01, 2021, the Income Tax Act has to be read along with the substituted provisions. TOLA will continue to apply to the Income Tax Act after April 01, 2021, if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20-03-2020 and 31-03-2021.

Thus, the Apex Court held that Assessing Officers were required to issue the reassessment notice under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. All notices issued beyond the surviving period are time-barred and liable to be set aside.

With the combined reading of the two Supreme Court’s Judgments and previous CBDT’s instruction, it can be submitted that the notice issued between April 1, 2021, and June 30, 2021, shall be deemed to be valid only if the following two conditions are satisfied:

• The notice is issued within the limitation period prescribed under new Section 149 as follows:
• within 3 years, if the income escaping assessment is less than Rs. 50 lakhs;
• within 10 years, if the income escaping assessment is Rs. 50 lakhs or more.
• The limitation period to issue notice should have remained valid under old Section 149 as of 31-03-2021.

4. Case Studies

The following case studies have been formulated to examine the validity of re-assessment notices for different assessment years.

On June 21, 2021, X Ltd., a manufacturing company, gets a re-assessment notice from the Assessing Officer to reopen the assessment for different assessment years. After the Supreme Court’s ruling in the case of Ashish Agarwal, this notice will be deemed as show-cause notice under Section 148A. The concerned Assessing Officer, within 30 days from the date of judgment of the Supreme Court pronounced on 4th May 2022 (say, on June 1, 2022), hands over the relevant material to X Ltd. based on which the Assessing Officer has formulated a view that there is an income escapement.

In this case, X Ltd., by replying to the show-cause notice on June 10, 2022, intimates to the Assessing Officer (along with documentary evidence) that there is no escapement of income in its case.

However, the Assessing Officer rejects the objection raised by the assessee and issues a fresh Section 148 notice to X Ltd. to reopen the assessment for different assessment years. This notice was issued along with the order under Section 148A(d) on June 30, 2022.

In the paragraphs below, an attempt has been made to examine whether the notice dated June 30, 2022, is within the time limit given under Section 149.

By virtue of the third proviso of Section 149(1), the time allowed to the assessee (as per show-cause notice under Section 148A) shall be excluded to determine the time limit under Section 149(1). In this case, (deemed) Section 148A show-cause notice was issued on June 21, 2021. The Assessing Officer has issued notice under Section 148 on June 30, 2022. The period from June 21, 2021, to June 30, 2022, may be excluded to find out whether (or not) the notice dated June 30, 2022, is within the statutory time limit narrated by Section 149. Consequently, the new notice issued on June 30, 2022, may be effectively taken as issued on June 21, 2021.

Category 1 – If Income Escaping Assessment is Less Than Rs. 1 Lakh

Cases 1, 2, 3 and 4 – In these cases, notices cannot be issued on June 21, 2021, under the new law. Consequently, these notices are time-barred.

Cases 5, 6, 7, 8, and 9 – In these cases, notices can be issued on June 21, 2021, under the new law as well as under the old law. Therefore, these notices are valid and not time-barred.

Category 2 – Income Escaping Assessment is Rs. 1 Lakh or More but Less Than Rs. 50 Lakhs

Cases 10, 11, 12 and 13 – In these cases, notices cannot be issued on June 21, 2021, under the new law. Consequently, these notices are time-barred.

Cases 14, 15, 16, 17 and 18 – In these cases, notices can be issued on June 21, 2021 under the new law as well as under the old law. Therefore, these notices are valid and not time barred.

Category 3 – Income escaping Assessment is Rs. 50 Lakh or More

Case 19 – In this case, notice cannot be issued on June 21, 2021. Consequently, it is time-barred.

Cases 20, 21, 22, 23, 24, 25, 26 and 27 – In these cases, notices can be issued on June 21, 2021 under the new law as well as under the old law. Therefore, these notices are valid and not time barred.

Notes:

• The above-mentioned scenarios shall apply to all cases wherein the section 148 notice (deemed as section 148A notice) was issued by the Assessing Officer during the TOLA extended time limit, i.e., issued between 01-04-2021 to 30-06-2021.
• In cases wherein reassessment notices have been issued between 01-07-2021 and 31-03-2024, only the new limitation periods provided under section 149 shall apply.
• The due dates in case of re-assessment pursuant to search proceedings have not been covered in this article.

[1] [2022] 138 taxmann.com 64 (SC)

[2] Instruction No. 01/2022, dated May 11, 2022

[3] Union of India v. Rajeev Bansal [2024] 167 taxmann.com 70 (SC)