In a significant relief for the Income Tax Department, the Supreme Court on Friday has upheld the validity of approximately 90,000 reassessment notices issued by the revenue department after April 1, 2021, under previous provisions.
The court overturned decisions from various high courts that had ruled against the extension of time limits for issuing reassessment notices under the Income Tax Act, as dictated by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act (TOLA) of 2021.
TOLA was introduced during the COVID-19 pandemic to extend deadlines for income tax compliance.
A bench comprising Chief Justice D.Y. Chandrachud and Justices J.B. Pardiwala and Manoj Misra addressed two critical legal questions concerning the interaction among three key statutes: the Income Tax Act, TOLA, and the Finance Act.
The questions examined were whether TOLA applies to reassessment notices issued after April 1, 2021, and the validity of reassessment notices issued under Section 148 between July and September 2022.
In a comprehensive 112-page judgment, Chief Justice Chandrachud stated, “We conclude that after April 1, 2021, the Income Tax Act must be read along with the substituted provisions, and TOLA will continue to apply to the Income Tax Act if any specified action or proceeding falls for completion between March 20, 2020, and March 31, 2021.”
The bench clarified that TOLA “overrides Section 149 of the Income Tax Act only to the extent of relaxing the time limit for issuance of a reassessment notice under Section 148.”
The Supreme Court’s decision comes after over 9,000 petitions were filed in various high courts challenging these reassessment notices, many of which resulted in favorable judgments for taxpayers. This prompted the revenue department to escalate the matter to the apex court.
Following a nationwide lockdown initiated by the Centre in March 2020, TOLA was enacted with retrospective effect, extending deadlines for compliance under specified Acts until June 20, 2020, and later until March 31, 2021.
The reassessment notices pertain to assessment years from 2013-14 to 2017-18, involving potentially thousands of crores in disputed amounts. The Supreme Court was tasked with determining whether the Income Tax Department could reopen assessments after April 1, 2021, under the pre-amended provisions of the Income Tax Act.
Several high courts, including those in Bombay, Gujarat, and Allahabad, had previously quashed reassessment notices, arguing that the new provisions were more taxpayer-friendly and aimed at protecting taxpayer rights. These courts held that TOLA did not extend the time limit for issuing reassessment notices.
In its ruling, the Supreme Court asserted that the substituted provisions of the Income Tax Act would apply retrospectively, even for past assessment years.
Consequently, the new reassessment regime must be interpreted alongside TOLA, which allowed for extended time limits due to pandemic-related challenges.
However, the court clarified that TOLA could not extend the old reassessment regime’s applicability beyond the timeline specified in the amended Section 149, which outlines the time limits for issuing income tax notices.
