Supreme Court Clarifies Reassessment Notices Under TOLA and Finance Act 2021
The Supreme Court recently delivered a significant ruling on the validity of reassessment notices issued under the Income Tax Act, 1961, following amendments introduced through the Finance Act, 2021, and the relaxation provided under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). This case has far-reaching implications for both tax authorities and assessees, as it addresses the critical issue of whether reassessment proceedings initiated post-April 1, 2021, are legally valid under the new framework.
Background of the Case
The case arose from multiple appeals filed by the Revenue challenging High Court judgments that had quashed reassessment notices issued between April 1, 2021, and June 30, 2021. The Income Tax Department had issued these notices under the old reassessment regime (pre-Finance Act, 2021). However, after April 1, 2021, the Finance Act, 2021, brought significant changes to the reassessment procedure, including:
- Introducing a new regime for reassessment under Sections 147 to 151 of the Income Tax Act.
- Requiring a prior inquiry and issuance of a show-cause notice before initiating reassessment.
- Reducing the limitation period for reassessment proceedings.
Given these changes, various High Courts held that reassessment notices issued under the old regime after April 1, 2021, were invalid. The Supreme Court, in its earlier ruling in Union of India v. Ashish Agarwal, had ruled that such notices should be treated as show cause notices under the new Section 148A(b) of the Income Tax Act.
Key Legal Issues Considered
- Whether TOLA extended the time limit for reassessment notices beyond March 31, 2021.
- Whether reassessment notices issued under the old regime post-April 1, 2021, could be sustained.
- Whether the surviving time limit under TOLA had any relevance in the new reassessment framework.
Arguments Presented
Revenue’s Arguments
The Revenue argued that:
- TOLA extended the reassessment timeline, allowing the Income Tax Department to issue notices even after April 1, 2021.
- The first proviso to Section 149 of the Income Tax Act (introduced through the Finance Act, 2021) did not bar the application of TOLA.
- The Supreme Court’s decision in Ashish Agarwal validated reassessment notices issued after April 1, 2021, by treating them as show cause notices under Section 148A(b).
- If TOLA extended the time limit, notices issued between July and September 2022 under the new regime should also be considered valid.
Assessees’ Arguments
The assessees contended that:
- TOLA applied only to the old reassessment regime and could not extend the time limits under the Finance Act, 2021.
- The Finance Act, 2021, imposed stricter limitations and procedural safeguards, which must be followed.
- Reassessment notices issued post-April 1, 2021, should be governed solely by the new regime, rendering notices issued under the old regime invalid.
- The Revenue could not rely on TOLA to bypass the new statutory framework.
Supreme Court’s Observations
1. The Scope of TOLA
The Court clarified that TOLA applied to reassessment proceedings if the time limit for initiating such proceedings fell between March 20, 2020, and March 31, 2021. It provided relief due to COVID-19 disruptions, but it did not override the fundamental changes introduced by the Finance Act, 2021.
“The objective of TOLA was to provide temporary relief due to the pandemic, not to indefinitely extend timelines that were already amended by subsequent legislation.”
2. Treatment of Notices Issued Between April 1, 2021, and June 30, 2021
The Court ruled that such notices, issued under the old regime, could not be considered valid reassessment notices. Instead, they must be treated as show cause notices under Section 148A(b), as per its decision in Ashish Agarwal. However, for notices issued after June 30, 2021, the Revenue had to strictly adhere to the new reassessment procedure.
“Once the Finance Act, 2021, was in force, reassessment notices had to comply with its requirements. The extension granted under TOLA does not override the specific procedural safeguards introduced by Parliament.”
3. Limitation Period Under the New Regime
The Court emphasized that the surviving time limit under TOLA should be considered when issuing reassessment notices under the new regime. However, reassessment notices issued beyond the surviving time limit under TOLA were held to be time-barred.
“The Revenue must adhere to the strict limitations prescribed under the Finance Act, 2021, rather than relying on the relaxed timelines under TOLA.”
Final Judgment
The Supreme Court ruled:
- The appeal was allowed in part.
- Reassessment notices issued between April 1, 2021, and June 30, 2021, must be treated as show cause notices under Section 148A(b).
- Reassessment notices issued beyond the surviving time limit under TOLA were declared time-barred.
- All subsequent reassessment notices issued after June 30, 2021, must strictly comply with the procedural requirements of the Finance Act, 2021.
Conclusion
The Supreme Court’s decision in Union of India & Ors. vs. Rajeev Bansal provides crucial clarity on the interaction between TOLA and the Finance Act, 2021. The ruling establishes the following principles:
- TOLA provided temporary relief for reassessment proceedings affected by COVID-19 but did not indefinitely extend reassessment timelines.
- Reassessment notices issued after April 1, 2021, under the old regime must be treated as show cause notices under Section 148A(b).
- The Finance Act, 2021, governs all reassessment proceedings initiated after June 30, 2021.
- Strict adherence to procedural safeguards and time limitations is mandatory for reassessment under the new regime.
This judgment is significant in ensuring procedural fairness and upholding statutory limitations in tax reassessment matters.
Petitioner Name: Union of India & Ors..Respondent Name: Rajeev Bansal.Judgment By: Justice Dhananjaya Y Chandrachud, Justice J B Pardiwala, Justice Manoj Misra.Place Of Incident: India.Judgment Date: 03-10-2024.
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