Supreme Court’s Landmark Verdict: Clarifying Reassessment Timelines and Taxpayer Rights Under the Income Tax Act

[Eshaan Singal]

The Supreme Court’s landmark decision in UNION OF INDIA & ORS. VERSUS RAJEEV BANSAL - 2024 (10) TMI 264 - SUPREME COURT (LB) has resolved a long-standing controversy surrounding reassessment proceedings under Section 148 of the Income Tax Act. This controversy stemmed from notices issued between April 1, 2021, and June 30, 2021, following the extended timelines provided under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). The Court’s ruling provides a balanced interpretation of the reassessment provisions, reconciling the old and new regimes introduced by the Finance Act, 2021.

Background: The Reassessment Framework and Legislative Changes

The reassessment process under the Income Tax Act allows tax authorities to reopen past assessments if income has escaped assessment. Traditionally, these proceedings were governed by Section 148. However, significant procedural changes were introduced by the Finance Act, 2021, effective from April 1, 2021, replacing the old reassessment framework with a new regime involving Sections 148A, 148, and 151. This new regime mandated stricter procedural safeguards, including issuing a show-cause notice (SCN), providing supporting material, and securing approval from higher authorities before issuing reassessment notices.

Simultaneously, TOLA extended statutory timelines for various tax-related actions due to the COVID-19 pandemic. This overlap between TOLA and the Finance Act, 2021, created significant legal uncertainty about the validity of reassessment notices issued between April 1, 2021, and June 30, 2021.

First Round of Litigation: High Court Rulings and the Ashish Agarwal Case

Several High Courts across India ruled in favor of taxpayers, holding that reassessment notices issued during the contentious period were invalid as they failed to comply with the new regime introduced by the Finance Act, 2021. Tax authorities continued to rely on the old provisions, arguing that TOLA extended the timeline for issuing reassessment notices.

The Supreme Court intervened in Union of India vs. Ashish Agarwal, exercising its powers under Article 142 of the Constitution. It converted these reassessment notices into show-cause notices under Section 148A(b) of the new regime, directing tax authorities to comply with the new procedural requirements. The Court left all legal arguments open for both parties.

Second Round of Litigation: Fresh Notices and Renewed Challenges

Following the Ashish Agarwal judgment, tax authorities issued fresh reassessment notices after following the new regime’s procedures. Taxpayers challenged these notices again, arguing they were time-barred under the new regime’s limitation periods: three years for income escapement below ₹50 lakh and six years for amounts exceeding ₹50 lakh.

Multiple High Courts, including those in Bombay, Delhi, Gujarat, Allahabad, and Rajasthan, sided with taxpayers. They reasoned that TOLA could not extend timelines beyond April 1, 2021, under the new reassessment framework, rendering such notices invalid.

Supreme Court’s Ruling in Rajeev Bansal: Resolving the Conflict

In Union of India vs. Rajeev Bansal, the Supreme Court overruled these High Court judgments. The Court held that TOLA’s extension of timelines applied even after April 1, 2021, for actions related to assessment years (AYs) where statutory deadlines fell within the “COVID exclusion period” from March 20, 2020, to March 31, 2021.

The Court clarified that:

AYs Affected by the Extension: Reassessment notices for AYs 2016-17 and 2017-18 (three-year limitation for amounts below ₹50 lakh) and AYs 2013-14 and 2014-15 (six-year limitation for amounts above ₹50 lakh) were valid, as these would have otherwise become time-barred during the COVID exclusion period.

AYs Outside the Extension: For AY 2015-16, where the reassessment deadline expired before or after the COVID exclusion period, TOLA’s extension did not apply. The Revenue conceded this point.

Procedural Safeguards and Limitation Clarifications

The Supreme Court underscored the necessity of adhering to the new reassessment procedures, despite the extended timelines under TOLA. Key takeaways include:

Approval Requirements: Higher levels of sanctioning authority approvals, as mandated under Section 151 of the new regime, are essential for reassessment notices issued after April 1, 2021.

Limitation Computation: The Court ruled that the period between issuing an SCN under Section 148A(b) and the taxpayer’s response should be excluded from the limitation computation. For instance, if an SCN was issued on June 15, 2021, with the limitation period ending on June 30, 2021, the balance of 16 days would be available after the taxpayer’s response.

Conclusion: A Balanced Outcome

The Supreme Court’s decision in Union of India vs. Rajeev Bansal harmonizes the application of TOLA with the stricter procedural mandates of the new reassessment regime. By upholding the reassessment notices issued under TOLA’s extended timeline while enforcing compliance with the Finance Act, 2021, the ruling provides much-needed clarity for taxpayers and tax authorities.

While the decision validates notices issued within the extended timeline, taxpayers can still contest reassessment proceedings where procedural lapses occur. The Court’s interpretation ensures a fair balance between protecting taxpayers’ rights and enabling the tax administration to address income escapement within a clearly defined legal framework.