Supreme Court upholds validity of almost 90,000 reassessment notices issued during COVID-19 times and grants big relief to tax department

This Tax Alert summarizes a significant decision of 3 Judge Bench of Supreme Court^[1] (SC) addressing the interplay between the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (TOLA), which extended certain time limits under Income Tax Law^[2]  (ITL), and the provisions of ITL as amended vide Finance Act (FA) 2021 dealing with reassessment of past years.

The issue of validity of reassessment notices issued during April to June 2021 were already a subject matter of appeal in the first round of litigation before the SC in case of Ashish Agarwal^[3]  wherein invoking Article 142 of the Constitution of India, the SC saved validity of notices by deeming these notices under old reassessment regime (i.e. prior to its amendment vide FA 2021) to be pre-inquiry notices under new reassessment regime (i.e. post amendment vide FA 2021) and allowed proceedings to continue under new reassessment regime.

In the second round, now the issue arose whether the reassessment notices issued in July to September 2022 post following the procedure laid down in SC decision in Ashish Agarwal (supra) for certain tax years (TYs) are barred by limitation period under new reassessment regime. Various high courts (HCs) have held that TOLA does not extend the limitation period under new reassessment regime and hence notices issued in July to September 2022 for specific TYs were time barred. Consequently, issue of validity of notice again reached the SC in the present judgement wherein the SC examined two critical issues i.e. the application of TOLA to new reassessment regime, and the validity of reassessment notices issued between July to September 2022 post the SC decision in Ashish Agarwal (supra).

The SC, in the present judgement, accepting the tax authority’s contention, held that TOLA is applicable to ITL (as amended by FA 2021) if any action falls due during 20 March 2020 to 31 March 2021 (Covid-19 disruption period). The SC further held that time limit for issuance of reassessment notice shall be determined after factoring the period of implied stayed from date of pre-inquiry notice till date of supply of material or information by tax department and a two-week response period granted thereafter to taxpayer, pursuant to directions by SC in Ashish Agarwal (supra). Basis this, reassessment notices issued during July to September 2022 were held to be valid. 

The SC also clarified that extension granted in limitation period due to applicability of TOLA will not change the class of sanctioning authority for issuance of reassessment notice as applicable to the taxpayer under the applicable provisions.

[1] Union of India and Others v. Rajeev Bansal [2024] 167 taxmann.com 70
[2] Income-tax Act 1961 read with Income Tax Rules, 1962
[3] Union of India & Others v. Ashish Agarwal - Civil Appeal No. 3005/2022. Refer EY alert dated 5 May 2022 “SC validates reassessment notices issued between April and June 2021 following old procedure”