Prior to Finance Act, 2021, Section 148 of the Indian Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dealt with issue of notice where income has escaped assessment within the timelines defined under Section 149 of the Act. Finance Act, 2021 introduced the new Section 148A in the Act which amended the procedure and timelines to issue the notices with effect from 01 April 2021 in order to streamline and simplify the procedure for the income escaping assessment. Precisely, it provided that before issuing notices, Assessing Officer (AO) shall conduct an inquiry if required, provide opportunity of being heard to the taxpayers and consider the reply by the taxpayers. Note that even for conducting inquiry, prior approval of specified authority was required under Section 148A (b) of the Act. Further, substituted Section 149 of the Act reduced the timelines for issuance of notice to three years and only in exceptional cases ten years.
Thereafter, Indian Central Government and Indian Central Board of Direct Taxes (“CBDT”) issued Notifications dated 31st March 2021 and 27th April 2021 respectively thereby extending the timelines prescribed under Section 149 of the Act for issuance of reassessment notices under section 148 of the Act (i.e. erstwhile Section) which were expiring on 31st March 2021.
In view of above notifications, the tax department approximately issued 90,000 reassessment notices to the taxpayers under the erstwhile Sections 148 to 151 of the Act thereof by relying on explanations in the notifications as referred above. Despite the reformative changes to Sections 147 to 151 of the Act by the Finance Act, 2021, notices issued by the tax department led to the controversy and such notices were contested by the taxpayers on the validity of issue. Subsequently, issue travelled to higher authorities by way of appeals filed by taxpayers across nation thereby challenging the constitutional validity of such notices in various High Courts (HC) such as the Allahabad HC, Rajasthan HC, Delhi HC, Calcutta HC, Madras HC, and Bombay HC. On hearing the arguments of petitioner (taxpayers) and tax department, various HCs held that all the respective reassessment notices issued under the erstwhile sections 148 to 151 of the Act are bad in law as the reassessment notices issued after 01 April 2021 are governed by the substituted sections 147 to 151 of the Act. However, Chhattisgarh HC ruled out in favour of revenue stating that notifications were issued in exercise of power conferred under the Taxation and other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and timelines were increased to insulate the provisions of old regime of section 148 for interest of both taxpayers as well as tax department. This has led to the divergent views on the notices issued by the tax department.
Finally, Hon’ble Supreme court (‘Apex Court’) seems to have settled the controversy around 90,000 notices as while hearing the bunch of petitions filed before it by tax department and taxpayers, Apex Court’ observed that amendments to the Finance Act, 2021 were remedial and benevolent in nature and were introduced to strike the balance between the tax department and assessee, the apex court held that instead of quashing and setting aside the reassessment notices issued under the unamended provision of Act, the HC ought to have passed an order construing the notices issued under unamended Act/unamended provision of the Act as those deemed to have been issued under section 148A of the Act. In its reasoning, the Apex Court noted that the revenue department made a bona fide mistake in believing that the reassessment notices could be issued under the old procedure until June 30, 2021. Apex court gave the following directions in its concluding remarks:
- Notices issued under old procedures to be deemed to have been issued under the new Section 148A and treated as show cause notices.
- Assessing officers to provide information and material relied upon within 30 days to the taxpayers, who have to file replies within two weeks.
- All defences available to assesses and all the rights of the tax department introduced through the amendment shall continue to be available.
- As a one-time measure, requirement of conducting a prior enquiry before a reassessment notice is issued —has been dispensed with. In any case, the bench noted, the inquiry was not mandatory.
Therefore, apex court held that notices issued under Section 148 of the Act shall deemed to be issued under the new provision section 148A and tax department is permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the Act as per the Finance Act, 2021. This judgment will have widespread impact on both the Revenue and taxpayers and ripple effect for future cases. Nonetheless, it will be interesting to see how revenue proceeds with these 90,000 cases and adjudicate the same in time bound manner.
