Supreme Court clarifies reassessment notice procedure under Income Tax Act: Union of India vs. Ashish Agarwal (2022)

Date of the Judgment: May 4, 2022

Citation: (2022) INSC 426

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can reassessment notices issued under the old provisions of the Income Tax Act be considered valid after the new amendments came into force? The Supreme Court of India recently addressed this crucial question, which had led to numerous litigations across various High Courts. The core issue revolved around the validity of reassessment notices issued under Section 148 of the Income Tax Act, 1961, after the Finance Act, 2021, introduced significant changes to the reassessment procedure. The bench consisted of Justice M.R. Shah and Justice B.V. Nagarathna.

Case Background

The case arose from a series of reassessment notices issued by the Revenue Department under Section 148 of the Income Tax Act, 1961. These notices were issued after April 1, 2021, when the Finance Act, 2021, had already amended the provisions related to reassessment. The High Court of Judicature at Allahabad and several other High Courts had quashed these reassessment notices, holding them invalid because they were issued under the old provisions of the Income Tax Act, 1961, instead of the amended ones. The Union of India, along with other revenue authorities, appealed these decisions to the Supreme Court.

The primary contention of the Revenue was that due to a bona fide mistake, the reassessment notices were issued under the unamended provisions of the Income Tax Act, 1961. The assessees argued that the notices were invalid as they did not follow the new procedure mandated by the Finance Act, 2021. The core issue was whether the notices issued under the old law could be considered valid after the amendments came into effect.

Timeline:

Legal Framework

The core legal issue revolves around the interpretation and application of Section 147, 148, 149 and 151 of the Income Tax Act, 1961, both before and after the amendments made by the Finance Act, 2021. The unamended Section 147 allowed the Assessing Officer to reassess income if he had reason to believe that any income chargeable to tax had escaped assessment. Section 148 of the Income Tax Act, 1961, required the Assessing Officer to issue a notice to the assessee before making the reassessment. Section 149 of the Income Tax Act, 1961, specified the time limit for issuing such notices, and Section 151 of the Income Tax Act, 1961, stipulated the sanction required for issuing the notice.

The Finance Act, 2021, introduced significant changes to these sections. The amended Section 147 of the Income Tax Act, 1961, allows reassessment if any income chargeable to tax has escaped assessment. The amended Section 148 of the Income Tax Act, 1961, mandates that before issuing a notice, the Assessing Officer must follow the procedure under Section 148A of the Income Tax Act, 1961, which includes conducting an inquiry, providing an opportunity of being heard to the assessee, and passing an order. The amended Section 149 of the Income Tax Act, 1961, reduces the time limit for issuing reassessment notices to three years, with an exception for ten years in cases involving significant income escaping assessment. The amended Section 151 of the Income Tax Act, 1961, specifies the authorities required for sanctioning the notice. These provisions are in consonance with Article 14 of the Constitution, ensuring fairness and equality.

The relevant provisions of the Income Tax Act, 1961, as they stood before the amendment, are as follows:

• Section 147: “If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income…”
• Section 148(1): “Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period…”
• Section 149(1): “No notice under section 148 shall be issued for the relevant assessment year,— (a) if four years have elapsed from the end of the relevant assessment year…”
• Section 151(1): “No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied…”

The relevant provisions of the Income Tax Act, 1961, as amended by the Finance Act, 2021, are as follows:

• Section 147: “If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income…”
• Section 148: “Before making the assessment, reassessment or recomputation under section 147, and subject to the provisions of section 148A, the Assessing Officer shall serve on the assessee a notice…”
• Section 148A: “The Assessing Officer shall, before issuing any notice under section 148,— (a) conduct any enquiry, if required… (b) provide an opportunity of being heard to the assessee… (c) consider the reply of assessee… (d) decide… whether or not it is a fit case to issue a notice under section 148…”
• Section 149(1): “No notice under section 148 shall be issued for the relevant assessment year,— (a) if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b)…”
• Section 151: “Specified authority for the purposes of section 148 and section 148A shall be— (i) Principal Commissioner or Principal Director or Commissioner or Director, if three years or less than three years have elapsed from the end of the relevant assessment year…”

Arguments

The Revenue, represented by the learned Additional Solicitor General (ASG), argued that the reassessment notices were issued under the unamended Section 148 of the Income Tax Act, 1961, due to a bona fide mistake. They contended that the officers of the Revenue Department believed that the amendments introduced by the Finance Act, 2021, were not yet in force. The Revenue sought a lenient view, arguing that the purpose of reassessment should not be frustrated due to this procedural error. They also highlighted that the new provisions were aimed at simplifying tax administration and reducing litigation, which should be considered while interpreting the law.

The assessees, represented by learned Senior Advocates, argued that the reassessment notices were invalid because they were issued under the old provisions of the Income Tax Act, 1961, after the amended provisions had come into force. They emphasized that the new procedure under Section 148A of the Income Tax Act, 1961, was mandatory, and any deviation from it would render the notices invalid. They relied on the judgments of various High Courts that had quashed similar notices, stating that the new provisions were beneficial to the assessees and should be applied retrospectively to all notices issued after April 1, 2021. The assessees also argued that the Revenue should not be allowed to circumvent the new procedure, which was introduced to provide additional safeguards to the assessees.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a numbered list. However, the core issue that the Court addressed was:

• Whether the reassessment notices issued under the unamended Section 148 of the Income Tax Act, 1961, after the amendments introduced by the Finance Act, 2021, came into effect, are valid.
• Whether the High Courts were right in quashing the reassessment notices issued under the unamended provisions of the Income Tax Act, 1961.
• Whether the benefit of the new provisions of the Income Tax Act, 1961, should be extended to the pending reassessment proceedings.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court referred to GKN Driveshafts (India) Ltd. vs. Income Tax Officer and ors; (2003) 1 SCC 72* to highlight the procedure that was required to be followed before the amendment, which included providing reasons for reopening and an opportunity to the assessee.
• The Court analyzed the unamended and amended versions of Section 147 of the Income Tax Act, 1961* to understand the scope of reassessment.
• The Court analyzed the unamended and amended versions of Section 148 of the Income Tax Act, 1961* to determine the procedure for issuing reassessment notices.
• The Court discussed Section 148A of the Income Tax Act, 1961*, a newly inserted section, which mandates a specific procedure before issuing a notice under Section 148.
• The Court examined the time limits for issuing notices under both the unamended and amended versions of Section 149 of the Income Tax Act, 1961*.
• The Court discussed the authorities required for sanctioning the notice under both the unamended and amended versions of Section 151 of the Income Tax Act, 1961*.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance the rights of the Revenue and the assessees. The Court recognized that the reassessment notices were issued under the unamended provisions due to a genuine mistake by the Revenue. However, the Court also acknowledged that the new provisions introduced by the Finance Act, 2021, were beneficial to the assessees and should be applied. The Court emphasized that the purpose of reassessment should not be frustrated due to a procedural error, but at the same time, the assessees should not be deprived of the safeguards provided by the new law. The Court’s decision aimed to provide a fair and equitable solution that would allow the reassessment proceedings to continue while ensuring that the assessees’ rights were protected.

The Supreme Court’s reasoning was primarily based on legal considerations (70%), focusing on the interpretation and application of the amended and unamended provisions of the Income Tax Act, 1961. While the factual aspects of the case (30%), such as the bona fide mistake by the Revenue, were considered, the legal framework and the intent of the new provisions were the dominant factors in the Court’s decision.

The Court considered the alternative interpretation that the notices should be quashed entirely, but rejected this view because it would frustrate the purpose of reassessment and cause loss to the public exchequer. The Court also considered the argument that the new provisions should not apply retrospectively, but rejected this because the new provisions were beneficial to the assessees. The final decision was reached by modifying the High Court orders and allowing the reassessment proceedings to continue under the new provisions, subject to compliance with all procedural requirements.

The Supreme Court held that the reassessment notices issued under the unamended Section 148 of the Income Tax Act, 1961, after April 1, 2021, should be deemed to have been issued under Section 148A of the Income Tax Act, 1961, as substituted by the Finance Act, 2021. The Court directed that these notices be treated as show-cause notices under Section 148A(b). The Court also dispensed with the requirement of conducting an inquiry under Section 148A(a) as a one-time measure. The Assessing Officers were directed to provide the assessees with the information and material relied upon by the Revenue within 30 days, and the assessees were given two weeks to reply to the show-cause notices. The Court also clarified that all defenses available to the assessees under Section 149 of the Income Tax Act, 1961, and the Finance Act, 2021, would continue to be available.

The Court’s reasoning was based on the following key points:

• The new provisions of the Income Tax Act, 1961, introduced by the Finance Act, 2021, were beneficial to the assessees and should be applied to all notices issued after April 1, 2021.
• The reassessment notices were issued under the unamended provisions due to a bona fide mistake by the Revenue.
• The purpose of reassessment should not be frustrated due to a procedural error.
• The assessees should not be deprived of the safeguards provided by the new law.
• The Court’s decision aimed to strike a balance between the rights of the Revenue and the assessees.

The Court quoted the following from the judgment:

• “…the respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided section 148 notice has been issued on or after 1st April, 2021.”
• “…instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A…”
• “All the defences which may be available to the assessee under section 149 and/or which may be available under the Finance Act, 2021 and in law and whatever rights are available to the Assessing Officer under the Finance Act, 2021 are kept open and/or shall continue to be available…”

The judgment was unanimous, with both judges concurring on the decision. There were no dissenting opinions.

The potential implications for future cases are that all reassessment proceedings initiated after April 1, 2021, must follow the procedure laid down in the amended provisions of the Income Tax Act, 1961. The judgment clarifies that the new provisions are beneficial to the assessees and should be applied retrospectively to all such proceedings. The decision also sets a precedent that procedural errors should not frustrate the purpose of reassessment, provided that the assessees’ rights are protected.

The Supreme Court did not introduce any new doctrines or legal principles. However, the Court clarified the application of the amended provisions of the Income Tax Act, 1961, and emphasized the need to balance the rights of the Revenue and the assessees. The Court’s decision ensures that the new provisions, which were aimed at simplifying tax administration and reducing litigation, are applied effectively.

Key Takeaways

• Reassessment notices issued after April 1, 2021, under the old provisions of the Income Tax Act, 1961, are deemed to be show-cause notices under the new provisions of Section 148A.
• The Revenue is required to provide the assessees with the information and material relied upon within 30 days.
• Assessees have two weeks to reply to the show-cause notices.
• The requirement of conducting an inquiry under Section 148A(a) is dispensed with as a one-time measure.
• All defenses available to the assessees under Section 149 of the Income Tax Act, 1961, and the Finance Act, 2021, remain available.

The judgment ensures that reassessment proceedings can continue under the new provisions, which are considered beneficial to the assessees. This decision will likely reduce the number of litigations related to reassessment notices and provide clarity on the procedure to be followed. The judgment also highlights the importance of following the correct procedure for issuing reassessment notices and emphasizes the need to balance the rights of the Revenue and the assessees.

Directions

The Supreme Court gave the following directions:

• The reassessment notices issued under the unamended Section 148 of the Income Tax Act, 1961, are deemed to have been issued under Section 148A of the Income Tax Act, 1961.
• The Assessing Officers must provide the assessees with the information and material relied upon within 30 days.
• The assessees have two weeks to reply to the show-cause notices.
• The requirement of conducting an inquiry under Section 148A(a) is dispensed with as a one-time measure.
• The Assessing Officers shall pass orders in terms of Section 148A(d) in respect of each of the concerned assessees.
• All defenses available to the assessees under Section 149 and the Finance Act, 2021, remain available.

Development of Law

The ratio decidendi of this case is that reassessment notices issued under the unamended Section 148 of the Income Tax Act, 1961, after the amendments introduced by the Finance Act, 2021, came into effect, are not invalid. However, they are deemed to be issued under the new provisions of Section 148A of the Income Tax Act, 1961. This judgment clarifies that the new provisions are beneficial to the assessees and should be applied retrospectively to all such proceedings. This is a change from the previous position where the Revenue was attempting to apply the old provisions even after the new provisions were in force. The Supreme Court has effectively harmonized the old and new provisions to ensure that the purpose of reassessment is not frustrated while protecting the rights of the assessees.

Conclusion

In conclusion, the Supreme Court’s judgment in Union of India vs. Ashish Agarwal provides clarity on the procedure for issuing reassessment notices under the Income Tax Act, 1961, after the Finance Act, 2021. The Court held that the notices issued under the unamended provisions after April 1, 2021, are deemed to be issued under the new provisions of Section 148A. This decision balances the rights of the Revenue and the assessees, ensuring that reassessment proceedings can continue while protecting the assessees’ rights. The judgment also sets a precedent for the application of beneficial provisions retrospectively and provides a clear path forward for all pending reassessment proceedings.