The Supreme Court (“SC”) recently addressed the validity of reassessment notices in Rajeev Bansal[1], issued under Section 148 of the Income Tax Act, 1961 (“IT Act”), from April 1, 2021, to June 30, 2021, even though the reassessment regime had been overhauled with effect from April 1, 2021. The Revenue argued that these notices fell under the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (“TOLA”), which relaxed the time limits for reassessment due to the COVID-19 pandemic (“Pandemic”). However, several High Courts, including the Allahabad and Gujarat High Courts,[2] had ruled that such notices were subject to the new reassessment provisions introduced by the Finance Act, 2021, and hence, without the applicability of TOLA, were time-barred. The SC, in this landmark decision, ruled in favour of the Revenue, by upholding the validity of TOLA and laid down several jurisprudential observations in its judgement.
Facts
TOLA was issued on March 31, 2020, to extend deadlines for statutory compliance under the IT Act. These deadlines were extended through subsequent notifications,[3] with the final one on June 30, 2021. The Finance Act, 2021, then introduced a new reassessment procedure under the IT Act, effective April 1, 2021. The new regime under the Finance Act, 2021, reduced the reassessment time limit to three years and allowed reassessment beyond six years only for amounts exceeding Rs 5 million.
The first proviso to Section 149(1)(b) of the new regime stipulated that reassessment notices cannot be issued for assessment years on or before April 1, 2021, if the time limits under the old regime have already expired. On the other hand, TOLA aimed to extend these time limits during the Pandemic, allowing reassessment notices that would have expired between March 20, 2020, and March 31, 2021, to be issued until June 30, 2021. This led to inconsistency, in terms of limitation period.
In Ashish Agarwal,[4] the SC had ruled that reassessment notices issued after April 1, 2021, under the old regime would be treated as show-cause notices under the new regime. This was to account for the fact that the new regime had introduced additional sanction and search requirements that the Revenue had not followed. To balance the rights of the various assessees and the Revenue, who had issued approximately 90,000 notices during this period, the SC created a legal fiction, deeming the reassessment notices to be show cause notices and allowing the Revenue additional 30-days’ to comply with the procedural requirements of the new regime, along with providing two weeks to the Assessee to submit their responses. Post the Ashish Agarwal judgment, CBDT Instruction No. 11/2022[5] explained its understanding of the SC ruling and the way forward. It confirmed that these reassessment notices would be treated as pre-enquiry notices issued under the new regime, along with the subsequent actions to be taken by the Revenue to proceed with the reassessment.
The key issue in the current batch of appeals before the SC was (a) whether TOLA extended the time limits for reassessment notices issued after April 1, 2021, and (b) whether notices issued under the new regime, post June 30, 2022, i.e. between July 2022 and September 2022, by following the procedure laid down by SC in the Ashish Agarwal judgment were valid under the new reassessment regime.
Contentions on behalf of the Assessee
The Assessees argued that TOLA was only applicable to time limits expiring between March 20, 2020, and March 31, 2021, and it ceased to be relevant once the new reassessment regime took effect on April 1, 2021. The Assessees also contended that reassessment notices issued after this date should have adhered to the new regime and shouldn’t have relied on extended time limits provided by TOLA, as the applicability of old Section 149 had been substituted by the new section, along with the reduced time period from six years to three years. The Assessees also drew the attention of the Court to procedural issues, claiming that several notices were issued without proper sanction from the specified authorities, with some sanctions being improperly obtained under the old regime, even though the new regime has become effective. It was also contended that reassessment notices issued after June 30, 2021, were time-barred, asserting that the SC’s Ashish Agarwal judgment did not intend to extend the limitation period indefinitely, and taxpayers still retained their right to challenge reassessments on the grounds of limitation.
Contentions of the Revenue
The Revenue on the other hand pointed out that TOLA was enacted to extend the time limits for actions under the IT Act, which got severely squeezed and hampered due to the Pandemic, and the purpose was to benefit both the taxpayers and the revenue for actions delayed beyond the original deadlines without any fault on their part. The Revenue contended that TOLA’s extension of time limits applied to the entire IT Act, including the new regime, covering reassessment notices issued between April 1, 2021, and June 30, 2021. They further argued that notices issued after the SC’s decision in the Ashish Agarwal case, between July 2022 and September 2022, should remain valid, warning that invalidating these notices would undermine the SC’s prior judgment.
Decision of the SC
After hearing both sides of the argument, the SC came up with a well explained, well- articulated and pragmatic decision. This decision may truly be considered as a landmark one because it puts to rest many conflicting views that were in circulation. The salient feature of the decision may be summarised as under:
Purpose of TOLA
The SC discussed the interplay between TOLA and Section 149(1) of the new reassessment regime under the IT Act, particularly during the Pandemic. The SC ruled that Section 3(1) of TOLA contains a non-obstante clause that overrides time limits for issuing a notice under Section 148, read with Section 149 of the IT Act. This non-obstante clause is applicable to the IT Act (as amended by the Finance Act, 2021). The purpose of TOLA was to merely provide a relaxation to both sides on account of significant difficulties experienced by them due to Pandemic related challenges. The SC clarified that TOLA did not extend the life of the erstwhile regime.
Therefore, the SC ruled that TOLA will continue to apply to the IT Act, after April 1, 2021, if any action or proceeding specified under the substituted provisions of the IT Act falls for completion between March 20, 2020, and March 31, 2021. In other words, the SC interpreted both the laws harmoniously to ensure that the reassessment process remained functional during the pandemic, without breaching statutory limits.
Sanction requirements under Section 151 of the IT Act
The SC addressed the impact of TOLA on sanction requirements under Section 151 of the IT Act, which serves as a procedural safeguard to prevent arbitrary reassessments. Section 151 requires approval from a specified authority before issuing reassessment notices, and under the new regime (post- April 1, 2021), a higher level of authority is mandated compared to the old regime, offering increased protection to taxpayers. The validity of this section was upheld and it was ruled that TOLA only applies to extending time limits, not to substantial provisions.
In Ashish Agarwal case, the SC had permitted Section 148 notices from the old regime to be treated as pre-enquiry show-cause notices under the new regime, but emphasised that sanctions under Sections 148A(d) and 148 were still required. The SC also explained by way of an illustration how this will work, after excluding time during which the proceedings for Ashish Agrawal, along with the extra time granted to both sides.
The SC brought out the following conclusions:
- TOLA applies to the new regime, introduced by the Finance Act, 2021, affecting only those notices whose limitations expired on or after March 20, 2020, or before March 31, 2021.
- Notices issued between April 1, 2021, and June 30, 2021, are subject to a deemed stay, which was lifted on May 4, 2022, following the Ashish Agarwal case. Reassessment notices issued between July and September 2022 have also been declared valid.
- For notices issued after July 1, 2021, as the normal limitation period is available, time-bar concerns do not arise and hence, TOLA benefits shall not be extended to it.
Significant Takeaways
Firstly, the SC held that tax statutes must be interpreted literally to ascertain the legislature’s intent. However, it emphasised that strict interpretation should not lead to absurd outcomes. In instances of ambiguity, the SC stated that interpretations favouring taxpayers should be adopted, as it is unjust for a taxpayer to incur liability due to unclear legislation. The SC also asserted that statutory provisions must be construed flexibly to ensure they are workable and fulfil their legislative purposes, avoiding interpretations that render them ineffective or futile. Furthermore, the judgment highlighted the principle of harmonious construction, noting that when conflicts arise within statutory provisions, Courts should strive to reconcile them to maintain the operability of all provisions to the extent possible and avoid redundancy.
The SC applied these jurisprudential observations to harmoniously interpret TOLA and the IT Act. It clarified a major procedural aspect that will determine the assessment outcomes for a large chunk of taxpayers – making it a monumental judgement. As many as 90,000 notices issued for reassessment during April to June 2021, irrespective of whether they have been challenged or not, shall be considered as issued within the prescribed time. However, substantive challenges to these notices can still be made. Further, taxpayers and the Revenue now have clarity on applicable limitation period for the past assessment years. For future reassessments, the new regime issued post Finance Act, 2021, will squarely apply and TOLA will not impact the same. It is expected that this decision will bring finality to the friction between taxpayers and the tax administrators and instead of trying to score over the other on technical grounds, they will now be focussed on substantive issues.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Union of India v. Rajeev Bansal [2024] 167 taxmann.com 70 (SC)
[2] Keenara Industries (P.) Ltd. v. ITO[2023] 147 taxmann.com 585/453 ITR 51, Godrej Industries Ltd. v. Asstt. CIT[2024] 160 taxmann.com 13, New India Assurance Company Ltd. v. Asstt. CIT[2024] 158 taxmann.com 367 (Bom.)
[3] Notification No. 93 of 2020 dated December 31, 2020, Notification No. 20 of 2021 dated March 31, 2021, Notification No. 38 of 2021 dated April 27, 2021.
[4] Union of India v. Ashish Agarwal[2022] 138 taxmann.com 64/286 Taxman 183/444 ITR 1 (SC)
[5] CBDT Instruction No. 11/2022 dated 11 May 2022 [F. No 279/ Misc./M-51/2022-ITJ]
