In a big win for the Income Tax department, the Supreme Court on Thursday ruled that the Income Tax Act has to be read along with the substituted provisions which came into effect from April 1, 2021. This will impact 90,000 assessees who have received reassessment notices.

The three-judge bench, comprising Chief Justice DY Chandrachud and Justices JB Pardiwala and Manoj Mishra, addressed whether the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) — which had been issued as an ordinance during the Covid-19 lockdown to provide relief to taxpayers — applies to reassessment notices issued after April 1, 2021. Another issue before the court was the validity of reassessment notices issued under Section 148 of the new regime between July and September 2022.

The Court concluded that TOLA will continue to apply to the Income Tax Act after April 1, 2021.

“TOLA will continue to apply to the Income Tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20 March 2020 and 31 March 2021,” the Court said while disposing a bunch of petitions.

New framework

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 ₹50 lakh and four years for amounts under that threshold. Previously, the department had a six-year look-back period for undisclosed income exceeding ₹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, which created 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 emphasised 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 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.

The verdict

After reviewing all the arguments, the bench said that the directions in Ashish Agarwal case will extend to all 90,000 reassessment notices issued under the old regime between April 1, 2021 and June 30, 2021. It also said that the assessing officers were required to issue the reassessment notice under Section 148 of the new regime within the time limits specified by the Income Tax Act, read with TOLA. Any notices issued beyond this point are time-barred and liable to be set aside.

“The ruling also confirms that the principles from the Ashish Agarwal judgment will extend to all pending reassessment cases. The decision sets aside previous High Court rulings that had quashed these notices, offering relief to the tax authorities. This judgment defines the extent of executive powers to modify statutory deadlines during extraordinary circumstances like the pandemic,” said Rakesh Nangia, Chairman at Nangia Andersen India.

Amit Maheshwari, Tax Partner at AKM Global, added: “Taxpayers need to quickly swing in action to comply with the requirement of notices issued in their cases and complete the proceedings.”