Reassessment Conundrum

Mar 28, 2023

Reassessment Conundrum – Continues!!

The legislature by way of the Finance Act, 2021 (‘Act’), revamped the reassessment regime with an objective of reducing litigation and providing ease of business to taxpayers, with effect from April 1, 2021, as envisaged under Section 147 to 151 of the Income Tax Act, 1961 (‘IT Act’). One of the major reliefs granted to the taxpayers by way of the Act was the reduction of time-limit for initiation of reassessment proceedings in general from 6 (six) years to 3 (three) years. However, in specific cases where income escaping assessment exceeded INR 50 (fifty) lakhs (approx. US$ 60,600), the time-limit was extended to 10 (ten) years.

To further safeguard the interest of taxpayers, the Central Board of Direct Taxes (‘CBDT’) by way of Instruction F.No. 225/135/2021/ITA-II, dated December 10, 2021^[1], issued instructions regarding uploading of information on verification report upload (‘VRU’) functionality on insight portal for implementation of risk management strategy for issuance of notice under Section 148 of the IT Act. In this context, CBDT directed that the information pertaining to assessment year (‘A.Y.’) 2015-16, which requires action under Section 148 of the IT Act will be identified and uploaded on the VRU functionality on insight portal only in terms of the provisions of Section 149(1)(b) of the IT Act.^[2]Meaning thereby, in terms of the limitation period provided in erstwhile Section 149 of the IT Act (as applicable till March 31, 2021), the ITD was precluded from initiating reassessment proceedings for A.Y. prior to A.Y. 2015-16 under the amended reassessment regime.

At this juncture, it is of seminal importance to mention that the Hon’ble Supreme Court (‘SC’) in Ashish Agarwal v. Union of India^[3]while exercising its inherent power under Article 142 of the Constitution of India, revived reassessment notices issued after April 1, 2021 under the erstwhile reassessment regime read with Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TLA’) & notification issued thereunder, by holding it as a “bona fide mistake” committed by ITD in issuance of such notices. Further, the SC also held that all the defenses provided under amended provisions including the defenses as provided Section 149 of the IT Act would be available with the taxpayers.

In connection therewith, the CBDT while interpreting the decision of the SC in Ashish Agarwal v. Union of India issued Instruction No. 01/2022 dated May 11, 2022^[4], clarified that the ITD can issue fresh notice under Section 148 of the IT Act from A.Y. 2013-14 to A.Y. 2015-16 with the approval of specified authority, if such case satisfies the conditions as prescribed under Section 149(1)(b) of the IT Act.

Recently, the validity of reassessment proceedings initiated after April 1, 2021 pertaining to A.Y. 2013-14 & 2014-15 were challenged before the various High Courts under writ jurisdiction. This issue first came up for consideration before the Hon’ble High Court of Delhi (‘Delhi HC’).^[5] The Delhi HC while upholding the notice issued for A.Y. 2013-14 observed that since the time limit for initiating reassessment proceedings stood extended till June 30, 2021 , the reassessment notices issued within the extended time period of limitation was not time barred.

Thereafter, this legal issue again came up for consideration before the Hon’ble High Courts of Gujarat^[6] and Allahabad^[7]. These High Courts while quashing the notices pertaining to A.Y. 2013-14 and 2014-15 being barred by limitation concluded that:

The SC in Ashish Agarwal approved the view taken by the Hon’ble High Court wherein it was held that after enactment of the Act, no notice under Section 148 of the IT Act can be issued on the basis of provisions contained in TLA and notifications issued thereunder.
The CBDT by way of Instruction No. 1/2022 dated May 11,2022 has erroneously interpreted that the extension provided by the TLA would get extended for issuance of reassessment notices to travel back in time in the original date when such notices were to be issued.

Although the objective to revamp reassessment regime was to reduce litigation, however, this objective seems to be losing its significance considering to and fro of litigation both at the behest of ITD and taxpayer. What one can reasonably expect is that this will yet again only “be resolved” at the level of the Apex Court and it would be interesting to see whether ITD is given yet another innings or can this controversy be finally put to rest.

[1] Instruction F.No. 225/135/2021/ITA-II dated 10.12.2021.

[2] See: Section 149 of the Income Tax Act, 1961.

[3] [2022] 444 ITR 1 (SC).

[4] Instruction No. 01/2022 dated 11.05.2022.

[5] Touchstone Holding (P.) Ltd. v. ITO, [2022] 289 Taxman 462 (Del. HC).

[6] Keenara Industries Pvt. Ltd. v. ITO, [Order dated 07.02.2023 in R/Special Civil Application No. 17321/2022] (Guj. HC).

[7] Rajeev Bansal v. Union of India, [Order dated 22.02.2023 in W.T. 1086/2022] (All. HC).

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