Supreme Court and CBDT on reassessment notices under section 148 issued during April 2021 to June 2021

Executive Summary

• Honorable Supreme Court (SC) in the case of Union of India & Ors vs Ashish Aggarwal (Taxpayer) revisited the question of whether the order passed by Honorable Allahabad High Court in relation to the reassessment notices issued under the erstwhile section 148 to 151 of Income Tax Act, 1961 (ITA) during April 2021 to June 2021 are valid or not.
• Honorable Chhattisgarh High Court had upheld the validity of reassessment notices, however various High Courts (HCs), such as Allahabad, Rajasthan, Bombay, Delhi, Calcutta, and Madras ruled in favor of the taxpayers and quashed the reassessment notices.
• The apex court held, that the respective notice issued under section 148 of ITA shall be deemed to have been issued under section 148A of ITA as substituted by the Finance Act (FA), 2021 and shall be treated as show-cause notice as per section 148A(b) of ITA. The requirement of conducting any enquiry with the prior approval of the specified authority under section 148 A (a) of ITA be dispensed with as a one-time measure vis-à-vis those notices which have been issued under erstwhile section 148 of ITA including those which have been quashed by the High Courts.
• On the basis of SC ruling, the Central Board of Direct Taxes (CBDT) has issued instruction dated 11th, May 2022 to suggest the way forward in such cases.

Background

• Prior to the amendment made vide FA, 2021 i.e., under the old regime of reassessment, the tax authority could reopen past assessments if there was reason to believe that income had escaped assessment. Though there is no requirement in the statutes to supply reasons recorded to the taxpayer.
• The SC, in the case of GKN Driveshafts vs. ITO, provided certain guidelines (i.e. to supply reasons to the taxpayer, if sought, objections to be raised by the taxpayer, if any, disposal of objections by a speaking order, etc.) for conducting reassessment proceedings under the old regime of reassessment applicable till 31 March 2021.
• The FA, 2021 has brought the new regime of reassessment with effect from 1 April 2021.
• As per the new regime of reassessment, the tax authority is required to:
• (a.) Conduct pre-notice inquiry on the basis of information in the tax authority’s possession, which suggests that income has escaped assessment.
• (b.) Provide an opportunity to the taxpayer to support why the assessment should not be reopened.
• (c.) Pass an order if the tax authority proceeds to issue notice for reassessment.
• The Relaxation Act, 2020 relaxes various compliances under various laws, including the ITA, both for taxpayers and the tax authority. The Central Government has extended the period for issuance of reassessment notice till 30 June 2021 in respect of tax years which were getting time-barred as on 31 March 2020 or 31 March 2021 as per the old regime.
• The Assessing Officers had issued reassessment notices to various taxpayers from April 2021 to June 2021 under the erstwhile sections 148 to 151 of ITA by relying on explanations in the Notification No. 20/2021, dated 31-3-2021 and Notification No. 38/2021, dated 27-4-2021 issued under Relaxation Act, 2020.
• In reference to reassessment notice issued by Assessing Officer under the erstwhile sections 148 to 151 of ITA, Taxpayers file writ petitions before High Courts on the ground that reassessment notices issued on or after 1st, April 2021 would be governed by substituted sections 147 to 151 of ITA which came into effect vide FA, 2021, therefore Assessing Officers cannot issue the reassessment notices as per erstwhile sections 148 to 151 of ITA.
• The Honorable Chhattisgarh High Court had upheld the validity of the reassessment notices from 1 April 2021 to 30 June 2021 following the old reassessment regime. However, subsequently, various High Courts (Such as Allahabad, Rajasthan, Karnataka, Madras, Delhi, Bombay, and Calcutta) ruled in favor of the taxpayers and quashed the reassessment notices issued from April 2021 to June 2021 for past tax year/s, which followed the old procedure of reassessment that was already substituted vide FA, 2021 with effect from 1 April 2021.
• As per the substituted provisions of the ITA vide FA, 2021, no notice under section 148 of ITA can be issued without following the procedure prescribed under section 148A of ITA. Along with the notice under section 148 of ITA, the Assessing Officers is required to serve the order passed under section 148A of ITA.
• The matter was challenged before the SC.

Supreme Court Ruling

• The SC upheld the validity of reassessment notices issued during April 2021 and June 2021 following the old procedure of law.
• The SC held that the tax authority ought to have been permitted to proceed further with the reassessment proceedings as per the new reassessment regime, subject to compliance with all the procedural requirements and the defenses which may be available to the taxpayer as per the new reassessment regime.
• The Apex Court ruled that instead of quashing and setting aside the reassessment notices issued under the erstwhile provisions of reassessment, the High Court ought to have passed an order construing the notices issued under erstwhile provisions of the ITA as those deemed to have been issued under section 148A as per the new provision section 148A of ITA.
• Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of ITA as per the FA, 2021, subject to compliance with all the procedural requirements and the defenses, which may be available to the assessee under the substituted provisions of sections 147 to 151 of ITA.
• SC ruled that notices issued under section 148 of ITA to the assessees shall be deemed to have been issued under section 148A of ITA as substituted by the FA, 2021 and shall be treated as show-cause notices in terms of section 148A(b) of ITA.
• The Assessing Officers shall within thirty days from the date of the ruling provide to the taxpayer the information and material relied upon by the revenue so that the taxpayer can reply to the notices within two weeks.
• The requirement of conducting any inquiry with the prior approval of the specified authority under section 148A (a) of ITA be pass out for one-time measure for those notices which have been issued under section 148 of ITA of the unamended Act from 1-4-2021 till date, including those which have been quashed by the High Courts.
• The tax authority shall thereafter pass an order under the new reassessment procedure after following the due procedure laid therein in respect of each taxpayer.
• All the defenses which may be available to the taxpayer under the new reassessment procedure and in law and whatever rights are available to the tax authority under the FA, 2021 are kept open and/or shall continue to be available.

Given the facts of the case, notices issued under section 148 of ITA to assessees shall be deemed to have been issued under section 148A of ITA as per the new provision by FA, 2021 and will be considered as show-cause notices in terms of section 148A(b) of ITA. Accordingly, the appeal by the revenue against the HC order was accepted. SC order would be applicable PAN INDIA basis.

CBDT Instruction

• CBDT vide instruction dated 11th, May 2022 clarified that SC ruling will apply to all the reassessment notices issued between April 2021 to June 2021 following the old regime of reassessment whether or not such notices were challenged before any court of law.
• In relation to reassessment notices pertaining to the assessment years 2013-14 to 2015-16, fresh notices as per new regime of reassessment can be issued for these cases with the approval of the specified authority, only if the case falls under the extended time limit. Accordingly, cases involving escaped income less than INR 5million for these tax years are excluded from reassessment proceedings.
• In relation to reassessment notices pertaining to the assessment years 2016-17 and 2017-18, fresh notice as per the new regime of reassessment can be issued in these cases with the approval of the specified authority considering the 3-year time limit from the end of the assessment year under the new regime.
• Tax authority shall provide to the taxpayers the information and material relied upon in relation to reassessment notices within 30 days of the date of SC ruling, i.e., by 2 June 2022.
• The taxpayer will be granted two weeks’ time to reply to show-cause notice as to why a reassessment notice should not be issued.

Last updated: 24/05/2022

Article contributed by:

Gaurav Paliwal

Associate Director - Direct Tax

MBG Corporate Services