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ERGO Analysis of developments impacting companies: the Supreme Court grants major relief to income in tax litigation relating to notices of adjustment issued under the old regime

Introduction

In a recent order in Union of India & Ors v Ashish Agarwal (Civil Appeal No. 3005/2022) (Order), the Honorable Supreme Court (Supreme Court) ruled that notices of reassessment issued under the old regime of reassessment (i.e. law existing before 1 April 2021) are deemed to have been issued under new section 148A of the Income Tax (Computers Act) 1961.

Background

Recent changes made by the 2021 finance law have brought about a paradigm shift from the reopening of previous tax notices in that the number of years for which tax notices can be reopened has increased from 5 (five) or 7 (seven) years (depending on the amount of income missed) from the end of the financial year concerned (AF) or 17 (seventeen) years from the end of the financial year concerned in the case of foreign assets (old law) to 4 (four) years from the end of the financial year concerned except in certain cases with high stakes (New Law). In addition, the new law also requires IT authorities to follow prescribed procedures (such as conducting investigations, providing show cause notices to taxpayers before reopening the assessment, reviewing the taxpayer’s response, etc. under the article 148A of the IT law) before issuing a notice of reassessment.

Even though the new law took effect on April 1, 2021, IT authorities continued to issue reassessment notices under the old law even after March 31, 2021. To this end, they relied on the Taxation and Other Acts (Relieving and Amending Certain Provisions) Act 2020 (Relieving Act) read with certain notices under which the time limit for issuing notices of reassessment under the old Act has been extended to June 30, 2021 (Date Extension Notifications).

This caused a contentious position as the date extension notifications sought to extend a repealed provision. Consequently, several taxpayers who received reassessment notices (approximately 90,000 notices) after March 31, 2021 under the old law challenged those notices and subsequent reassessment proceedings in written petitions (approximately 9,000 written petitions ) before various high courts in the country. Please refer to our Ergo of July 21, 2021 in this regard.

Initially, the issue was decided against the taxpayers by the High Court of Chhattisgarh in Palak Khatuja v Union of India and others. [2021] 438 ITR 622 (please refer to our Ergo of September 14, 2021) in which the validity of notices of reassessment issued under the old law was confirmed. Subsequently, various High Courts opposed the opinion of the Chhattisgarh High Court and ruled in favor of the ratepayers by quashing these notices of reassessment issued under the old law:

  • Allahabad High Court in Ashok Kumar Agarwal v UOI Case [2021] 131 taxmann.com 22;
  • High Court of Rajasthan in Bpip Infra Private Limited v ITO (SB Civil Writ Petition No 13297/2021);
  • Delhi High Court in Mon Mohan Kohli v ACIT and Others (WP(C) No. 6176/2021) (please refer to our ERGO of 21 Dec 2021), etc.

Relevantly, another appeal was filed by the IT authorities in the Supreme Court against the aforementioned order issued by the Allahabad High Court.

Ordered

The Supreme Court observed that the new law, being remedial and benevolent in nature, was superseded for the specific purpose of protecting the rights and interests of the taxpayer as well as ensuring that the law is in the public interest. The Supreme Court agreed with the reasoning provided by the High Courts that the new law should have been applied when issuing notices of reassessment after March 31, 2021.

The Supreme Court further noted that the judgments of several High Courts in favor of the taxpayers would not have given rise to any reassessment proceedings even if this had been authorized by the new law. The Supreme Court thus pointed out that the tax authorities cannot be rendered irremediable and that the object and purpose of the reorganization procedure cannot be entirely thwarted. He said the IT authorities’ act of issuing reassessment notices under the old law as opposed to the new law appeared to be a genuine non-enforcement of the changes by the IT authorities, as they may have believed to good faith that the new law may not yet have been implemented. Therefore, it would not be prudent to entirely cancel and set aside these notices of reassessment issued under the old law.

In view of the above, the Supreme Court held the following:

  • Reassessment notices issued under the Old Act are deemed to have been issued under Section 148A of the Information Technology Act and treated as show cause notices under Section 148A(b). ).
  • IT authorities must provide the information and documents on the basis of which they believe the income escaped assessment within 30 days to taxpayers, who can file responses within two weeks.
  • The requirement to conduct any investigation, if necessary, with the prior approval of a specified authority under Section 148A(a) has been removed as a one-time measure vis-à-vis the notices that have been issued under the old law, including those overturned by the high courts. Even if not, the holding of any investigation with the prior approval of a specified authority is not mandatory, but it is up to the appraising officers concerned to carry out any investigation, if necessary.
  • IT authorities must pass an order under Section 148A(d) after following due process with respect to each taxpayer and can issue a notice of reassessment under the new law.
  • All defenses that may be available to taxpayers under the new law and all rights/challenges that may be available to taxpayers/IT authorities under the new law are kept open and will continue to be available.

The Supreme Court noted that the order will strike a balance between the rights of the tax authorities and those of the respective taxpayers. It was stated that revenue should not suffer due to a good faith belief by IT authorities in issuing approx. 90,000 reassessment notices under the Old Law, because it is ultimately the Treasury that would suffer.

The Supreme Court, in exercising its powers under Section 142 of the Constitution of India (Under Section 142, the Supreme Court may pass any decree or order necessary to do full justice in any cause or matter pending before it) also made the Order applicable in respect of similar judgments and orders rendered by various High Courts across the country (whether appealed to the Supreme Court or not) and motions written pending before various High Courts on the same subject. Therefore, this Order is applicable throughout India.

comments

Section 142 is generally only invoked if it is considered necessary to resolve difficult cases where the law is ambiguous or incomplete and ensure complete justice. The power to do full justice is a remedial power, which privileges equity over law. To end the controversy, once and for all, the Supreme Court invoked its extraordinary powers under Article 142 of the Constitution of India and amended all the judgments of the High Court in which the notices of reassessment issued under the old law have been cancelled. The order is a major relief for IT authorities and saves them huge revenue losses due to the issuance of reassessment notices under the old law. This order was passed by the Supreme Court to avoid further appeals from the IRS challenging identical issues and in order not to burden the Supreme Court with approx. 9,000 calls.

The Supreme Court, through this order, seeks to follow a pragmatic approach in striking a balance between the right of the tax authorities to reassess taxpayers to end the uncertainty facing taxpayers and the rights of taxpayers.

Reassessment notices overturned by the High Courts have been given new life. The hope now is that the tax authorities will conduct a fair investigation and drop notices that do not pass the tests required by the new law.

The term reassessment generally means that assessments concluded in the past are disrupted. Thus, by default, revaluation has serious consequences. The Order is a big change in jurisprudence – the full consequences of which will be felt much later.

The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected].