TOLA Will Apply To Income Tax Act After 1 April 2021, Rules Supreme Court: Know Key Observations 

The Supreme Court has held that the Taxation and Other Laws (Relaxation & Amendment of Certain Provisions) Act, 2020 (TOLA) will continue to apply to the Income Tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20 March 2020 and 31 March 2021.

The bench of Chief Justice Dr Dhananjaya Y Chandrachud, Justice J B Pardiwala and Justice Manoj Misra has observed that Section 3(1) of TOLA overrides Section 149 of the Income Tax Act only to the extent of relaxing the time limit for issuance of a reassessment notice under Section 148.

The court ruled that TOLA will extend the time limit for the grant of sanction by the authority specified under Section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20 March 2020 and 31 March 2021, then the specified authority under Section 151(i) has extended time till 30 June 2021 to grant approval.

The court held that in the case of Section 151 of the old regime, the test is: if the time limit of four years from the end of an assessment year falls between 20 March 2020 and 31 March 2021, then the specified authority under Section 151(2) has extended time till 31 March 2021 to grant approval.

The bench stated that the directions in Ashish Agarwal will extend to all the ninety thousand reassessment notices issued under the old regime during the period 1 April 2021 and 30 June 2021.

The time during which the show cause notices were deemed to be stayed is from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information and material by the assessing officers to the assesses in terms of the directions issued by this Court in Ashish Agarwal, and the period of two weeks allowed to the assesses to respond to the show cause notices.

The court held that the assessing officers were required to issue the reassessment notice under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. All notices issued beyond the surviving period are time barred and liable to be set aside.

Background

Theappeals involved the interplay of three Parliamentary statutes: the Income Tax Act 19611, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020,2 and the Finance Act 2021. The Income Tax Act was enacted to levy and collect tax on the income of assesses. Sections 147 to 151 of the Income Tax Act deal with the procedure of reassessment of income chargeable to tax which has escaped assessment.

The TOLA was enacted in the backdrop of the COVID-19 pandemic to provide relaxation of time limits specified under the provisions of the Income Tax Act and certain other legislations as defined under Section 2(1)(b) of TOLA. The Finance Act 2021 amended the provisions dealing with the reassessment procedure under the Income Tax Act with effect from 1 April 2021.

Relevant Provisions

Sections 147 to 151 deal with the procedure of reassessment. The scheme of reassessment under Sections 147 to 151 was substantially overhauled by the Finance Act 2021 with effect from 1 April 2021. 

Under the old regime, Section 147 empowered the assessing officer to reopen assessment proceedings if they had “reason to believe” that any income chargeable to tax has escaped assessment for the relevant assessment year. Section 148 mandated the assessing officer to serve a notice on the assessee requiring them to submit a return of their income.

Section 149 prescribed the following time limits for issuing a notice under Section 148 for an assessment year. 

Section 151 required the assessing officer to obtain the sanction of the specified authority before issuing a notice under Section 148. In case the notice was issued within four years, the sanctioning authority was the Joint Commissioner. In case the notice was issued after the expiry of four years, the sanctioning authority was the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner.

On 24 March 2020, the Central Government announced “a complete lockdown for the entire nation” for twenty-one days to contain the spread of the COVID-19 pandemic.14 Following this, the Central Government sought to implement various relief measures to redress the challenges faced by the taxpayers in meeting the statutory requirements due to the pandemic.

On 31 March 2020, the President of India promulgated the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 202016 to extend time limits for completion or compliance of actions under the specified Acts falling for completion or compliance between 20 March 2020 and 29 June 2020 till 30 June 2020.

On 24 June 2020, the Central Government issued a notification under Section 3(1) of the TOLA Ordinance to extend the time limit for completion or compliance of actions under the specified Acts till 31 March 2021.

On 29 September 2020, Parliament enacted TOLA, which came into force with retrospective effect from 31 March 2020.18 Section 2(1)(b) defines “specified Act” to mean and include the Income Tax Act. Section 3(1) of TOLA extended the time limit for completion or compliance of actions under the “specified Act”, which fell for completion or compliance during the period from 20 March 2020 and 31 December 2020, to 31 March 2021.

Read More: DIRECT TAX VIVAD SE VISHWAS 2024: ALL YOU NEED TO KNOW

The Finance Act 2021 substituted the entire scheme of reassessment under Sections 147 to 151 of the Income Tax Act with effect from 1 April 2021.

The time limit under Section 149 has been reduced from four years to three years from the end of the relevant assessment year for all situations.21 Assessments can be reopened beyond three years but within ten years from the end of the relevant assessment year if the income chargeable to tax which has escaped assessment amounts to or is likely to amount to Rupees fifty lakhs or more.

However, the first proviso to Section 149 prohibits the issuance of a reassessment notice under the new regime if such notices have become time-barred under the old regime; and

The sanctioning authorities specified under Section 151 of the new regime are different from those specified under the old regime.22 Section 151 of the new regime specifies the various authorities for Section 148 and 148A namely Principal Commissioner or Principal Director or Commissioner or Director if three years or less have elapsed from the end of the relevant assessment year; and Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General if more than three years have elapsed from the end of the relevant assessment year.

The notifications dated 31 March 2021 and 27 April 2021 issued by the Central Government under Section 3(1) of TOLA contained an explanation declaring that the provisions under the old regime shall apply to the reassessment proceedings initiated under them.

Thus, the notifications directed the assessing officers to apply the provisions of the old regime for reassessment notices issued after 1 April 2021. The assessing officers accordingly issued reassessment notices between 1 April 2021 and 30 June 2021 by relying on the provisions under Section 148 of the old regime. These reassessment notices were challenged by the assesses before various High Courts.

High Court Ruling

The High Courts allowed the writ petitions and quashed all the reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime on the ground that Sections 147 to 151 stood substituted by Finance Act 2021 from 1 April 2021. In the absence of any saving clause, the Revenue could initiate reassessment proceedings after 1 April 2021 only in accordance with the provisions of the new regime since they were remedial, beneficial, and meant to protect the rights and interests of the assesses. The Central Government could not exercise its delegated authority to “re-activate the pre-existing law.”

In Union of India v. Ashish Agarwal, the Court held that it was “in complete agreement with the view taken by various High Courts in holding” that “the benefit of the 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 1-4-2021.”

However, the Court observed that the Revenue issued the reassessment notices under a “bona fide belief that the amendments may not yet have been enforced.” This Court exercised its discretionary jurisdiction under Article 142 in order to balance the interests of the Revenue and the assesses and directed that the reassessment notices issued under the old regime shall be deemed to have been issued under Section 148-A(b) of the new regime. 

Issue Raised

1. Whether TOLA and notifications issued under it will also apply to reassessment notices issued after 1 April 2021?
2. Whether the reassessment notices issued under Section 148 of the new regime between July and September 2022 are valid?

Arguments

The department argued that Parliament enacted TOLA as a free-standing legislation to provide relief and relaxation to both the assesses and the Revenue during the time of COVID- 19. TOLA seeks to relax actions and proceedings that could not be completed or complied with within the original time limits specified under the Income Tax Act.

The department argued that Section 149 of the new regime provides three crucial benefits to the assesses. The four-year time limit for all situations has been reduced to three years. The first proviso to Section 149 ensures that re-assessment for previous assessment years cannot be undertaken beyond six years. The monetary threshold of Rupees fifty lakhs will apply to the re-assessment for previous assessment years.

The department contended that invalidation of the Section 148 notices issued under the new regime on the ground that they were issued beyond the time limit specified under the Income Tax Act read with TOLA will completely frustrate the judicial exercise undertaken by this Court in Ashish Agarwal.

The assessees contended that TOLA applies only when the period of limitation expires between 20 March 2020 and 31 March 2021. Finance Act 2021 was enacted after TOLA. Consequently, TOLA only held the field till the new regime came into effect from 1 April 2021. The Revenue had to issue Section 148 notices in terms of the new regime without recourse to the extended timelines under TOLA.

The assessee stated that notification No. 38 of 2021 was issued on 27 April 2021 to extend the time limits expiring under Section 149(1)(b) of the old regime till 30 June 2021. The notification was issued after 1 April 2021, when the old regime was repealed and substituted by a new regime. Therefore, this notification cannot be read into the new regime

Conclusion

The court while allowing the appeal of the department held that the judgments of the High Courts rendered in Union of India v. Rajeev Bansal, Keenara Industries Pvt. Ltd. v. ITO, Surat, J M Financial and Investment Consultancy Services Pvt. Ltd. v. ACIT,  Siemens Financial Services Pvt. Ltd. v. DCIT, Geeta Agarwal v. ITO, Ambika Iron and Steel Pvt Ltd v. PCIT, Twylight Infrastructure Pvt Ltd v. ITO, Ganesh Dass Khanna v. ITO, and other judgments of the High Courts which relied on these judgments, are set aside to the extent of the observations made in the judgement.

Case Title: UOI Versus Rajeev Bansal

Case No.: Civil Appeal No 8629 of 2024

Date: 03/10/2024

Counsel For Appellant: N Venkataraman

Counsel For Respondent: Percy Pardiwalla,  V Sridharan,  Tushar Hemani,  Saurabh Soparkar, and  K Shivram, learned senior counsel,  Manish Shah,  Darshan Patel,  Suhrith Parthasarthy,  Dharan Gandhi, and  Ved Jain

Read Order