Supreme Court Ruling On Reassessment Laws A Win For IT Department

Supreme Court Ruling On Reassessment Laws A Win For IT Department

The pros and cons of its impact on taxpayers

The decision of the Supreme Court is a major victory for the Income Tax Department, as the landmark case was a tax war over old and new reassessment laws effective 01 April 2021.

The top court has ruled, that the Income Tax Act must be interpreted with the amended provisions effective after 01 April 2021.

The verdict will impact over 90,000 taxpayers, settling numerous disputes, and reaffirming the legislative over executive ordinances, leading to significant repercussions for individuals and businesses.

The tax disputes were triggered during the Covid-19 pandemic. The government had extended the old law on how the taxman could go back to reopen old tax return cases. It was based on the suspicion that some incomes remained out of tax purview. Simultaneously, the government passed a new law that changed the time threshold for reassessment.

An unprecedented situation followed as the old and the new tax laws were concurrently 'operational' for a few months. It led to a number of tax notices and over 10,000 writ petitions. The IT department counter-challenged several petitions in the apex court via special leave petitions (SLPs).

According to Ved Jain, former president of the Institute of Chartered Accountants of India (ICAI), “The case is about the interpretation of the power of the executive to extend the limitation by executive order despite the new law enacted by legislature putting a specific limitation."

The decision has set aside the earlier rulings in cases including ITO Surat (Gujarat High Court), Rajeev Bansal (Allahabad High Court), Siemens vs DCIT (Bombay High Court), Ambika Anand (Orissa High Court), Twilight Industries, Ganesh Das Khanna (Delhi High Court).

In the earlier 04 May 2024 hearing, the taxpayers suffered a setback when the top court upheld all reassessment notices issued post 31 March 2021, under Article 142. However, it kept the avenue open for future hearings, culminating with the latest verdict.

The ruling will settle thousands of tax feuds going back over a decade.

The key points of the clash between the two laws:

• The new reassessment framework took effect on 01 April 2021.

• It enabled the taxman to look back to 11 years for cases involving tax evasion over Rs.50 lakh, and four years for amounts under that threshold.

• Until that point, the relevant threshold was six years (for undisclosed income exceeding Rs.1 lakh, provided there was proof of hiding).

• As the life of the old laws was extended, it caused an overlap with the new laws.

• It created legal confusion during the transition, leading to numerous lawsuits.

Taxpayers argued that the "law of limitation had set in and that the department no longer had the authority to issue reopening notices after 01 April 2021."

Importantly, while the old law was extended by way of a circular, the basis of the new law was legislative action. This, according to the litigants, has a greater validity.

Under the new law, the IT department must issue a preliminary notice to the taxpayers before serving a final reassessment notice. According to many litigants, this procedure was "violated by the reassessment notices issued under the old law.”