Big win for taxman: SC favours tax department in case that will impact fate of 90,000 income tax notices
Oct 3, 2024
Synopsis
The Supreme Court has ruled in favor of the tax department, stating that after April 1, 2021, the Income Tax Act must be read with its new provisions. This decision affects 90,000 notices of reassessment issued during the pandemic when both old and new laws overlapped, causing widespread disputes and legal actions.
In a big win for the tax department, the Supreme Court ruled on Thursday that the Income Tax Act must be interpreted with the amended provisions effective after April 1, 2021. This decision will impact approximately 90,000 reassessment notices, as clarified by the court.
The ruling stems from the case involving Ashish Agarwal and confirms that the Taxation and Other Laws (Relaxation & Amendment of Certain Provisions) Act (TOLA) will remain applicable to the Income Tax Act beyond the specified date.
While giving out the verdict, Chief Justice DY Chandrachud said that ITO Surat by Gujarat HC, Rajeev Bansal judgment by Allahabad HC, Siemens vs DCIT Bombay HC judgment, Ambika Anand Orissa HC judgment, Twilight industries, Ganesh Das Khanna from Delhi HC were set aside.
The legal disputes arose during the pandemic, when the government temporarily extended the previous regulations governing the reopening of old tax returns. This resulted in a rare scenario where both the old and new tax laws on reassessment were viewed as concurrently valid, leading to a flood of notices and over 10,000 writ petitions, many of which faced challenges from tax authorities in the Supreme Court.
“The judgment will have wide ramifications, affecting around 90,000 taxpayers,” noted Ved Jain, past president of the Institute of Chartered Accountants of India (ICAI). “It will be a landmark ruling regarding the extent of executive powers to extend limitations via executive orders, even after new legislation has been enacted.”
Old vs. New Law
Under the new reassessment framework, which took effect on April 1, 2021, the tax department can look back up to 11 years for cases involving tax evasion over Rs 50 lakh, and four years for amounts under that threshold. Previously, the department had a six-year look-back period for undisclosed income exceeding Rs 1 lakh, provided there was evidence of concealment.
The overlap of the old and new laws occurred due to the extension of the old provisions amid the disruptions caused by COVID-19, creating legal confusion during the transition period.
Taxpayers contested the notices issued under the old law in various high courts, arguing that the law of limitation had set in and that the department no longer had the authority to issue reopening notices after April 1, 2021. They emphasized that the old law was extended via a circular, while the new law emerged from legislative action, giving it greater validity. Furthermore, the new law mandates that the department issue a preliminary notice to taxpayers before serving the final reassessment notice, a procedure some argued was violated by the reassessment notices issued under the old law.
A setback for taxpayers
On May 4, 2022, taxpayers faced a setback when the Supreme Court upheld all reassessment notices issued post-March 31, 2021, utilizing its extraordinary powers under Article 142 of the Constitution. However, the Supreme Court left the door open for further judicial proceedings, particularly for assessment years 2013-14 to 2017-18.
"Reassessment notices have been a contentious issue due to frequent changes in laws, timelines, and procedures over the past three years," stated Ashish Mehta, partner at Khaitan & Co, Mumbai. "While the revenue department secured an initial victory, the legal discussions are far from over, and we anticipate further developments that will affect all stakeholders involved."
[The Economic Times]
