Explained| Why Supreme Court Allowed Benefit Of TOLA In Extending Timelimits For Issuing Income Tax Reassessment Notices

The Supreme Court in its recent decision allowed the revenue authorities to issue notices for reassessment under the Income Tax Act for the period between 01.04.2021 and 30.06.2021 by granting the benefit of time extensions under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions Act) (TOLA) 2021.

Here is a detailed breakdown of the key issue involved and the analysis of the Court in allowing a batch of 727 appeals filed by the Income Tax Department against the various orders passed by the High Courts. The impugned orders of the High Courts refused to extend the benefit of TOLA in reassessment proceedings initiated with the notice under Section 148 issued between 01.04.2021 and 30.06.2021. 

The bench comprising Chief Justice of India DY Chandrachud, Justice JB Pardiwala and Manoj Misra had delivered the judgment

What Was The Question Of Law?

The case involved the question whether the Income Tax Department can re-open assessments as per the pre-2021 provisions of the Income Tax Act after April 1, 2021. The prime issue was whether the benefit of TOLA 2021 would govern the time frame prescribed for re-assessment under the first proviso to Section 149 of the Income Tax Act as amended by the Finance Act 2021,

According to Section 149 of the Income Tax Act, before its amendment by the Finance Act 2021 (w.e.f 01.04.2021), assessments up to six years before a relevant assessment year could be sought to be reassessed if the escaped income is Rs 1 Lakh or above.

The 2021 amendment changed this period to which the tax department can go back. According to the amended Section 149, assessments up to three years before a relevant assessment year could be reopened if the escaped income is less than Rs 50 lakhs. If the escaped income is Rs 50 lakhs or more, then the department could go back up to ten years prior to the relevant assessment year.

Also, the 2021 amendment inserted a new provision (Section 148A) which mandated that the department should send a preliminary notice before sending notice for reassessment as per Section 148 (issue of notice where income escaped assessment). Additionally S. 151 deals with sanctions by specified authorities required for issuance of notice under S. 148 and S. 148A.

However, in view of the COVID-19 pandemic, the Union Government by way of a notification extended the provisions of the old law and reassessment notices were issued between April 1, 2021 and June 20, 2021, as per the provisions of the old law.

Decoding The Changes In Time Limits As Per The New v. Old Regime Under S. 149 Of Income Tax Act

The Court dissected that under S.149 of the Old Regime, two main time limits were prescribed for issuing reassessment notices - (1) 4 years for all situations and (2) Upto 6 years if the amount of income escaped was one lakh rupees or more

However, under the S.149 of the New Regime that was enacted from April 1, 2021, two main alterations to time limits have been done : (1) General time limit reduced from 4 years to 3 years.

S. 149 (1) of New Regime reads : . (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); (b) If three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in possession of books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year:

Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April 2021, if such notice could not have been issued at that time on account of being immediately beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021:”

The Court placed reliance on its decision in CTO v. Biswanath Jhunjhunwalla ( (1996) 5 SCC 626), where the notification of extension of the time limit for the Tax Commissioner to revise any assessment from 4 to 6 years (from date of assessment) was challenged. It was argued that the notification could not be applied to the assessments which had attained finality because of the expiry of the period of four years.

Therein, the Court upheld the notification and ruled that “if the legislative intention is clear and the language is unambiguous, full effect must be given to the legislative intention by reading the notification as applying not only to the incomplete assessments but also to assessments that had reached finality because of lapse of the earlier prescribed period.”

Applying the same, the Court presently held that notices must be evaluated based on the law in effect when they are issued. This means that the new regime's rules apply to notices issued after April 1, 2021.

It observed : “ The principle that emanates from Biswanath Jhunjhunwalla (supra) is that the courts should give full effect to the legislative intention of granting reassessment powers to assessing officers unless the legislature, by express provision, states otherwise.”

Thus, the key observations about the changes in the Time Limits were : (1) 3 year limit applies to all cases under the new regime (post April 2021); (2) 10 year limit applies only if the tax amount escaped is above 50 Lakhs; (3) The new ten-year rule cannot be used for cases where the old six-year limit has already passed;

(4) Section 149(1) of the new regime is not prospective. It also applies to past assessment years; (5) Revenue Authorities can issue notices for past years only if the time limit of 6 years under the old regime has not been expired; (6) notice issued under the time limit of the Old Regime must be dropped if the escaped income is less than 50 lakh rupees.

Understanding The Interplay Between The Finance Act 2021, The Income Tax Act And S.3 Of TOLA

1. Rules on Amendment By Substitution

The Court observed that when a law undergoes amendment by substitution, the old provision is in effect repealed and replaced by a new one. This would mean that from the date of such substitution, the amended law must be read as if the new words were written and old ones crossed out. In holding so, the Court relied upon the decision in Shamrao V Parulekar v. District Magistrate, Thana. In the said case, the Court was dealing with the challenge to the changed timelines for release of a detenue by way of an amendment to the Detention Act 1950. The Court then observed that the release of the detenue will be done as per the amended provision in the Act and not the earlier law governing the release.

Adopting the legal principle, the Court in the present instance observed :

“The process of substitution of a statutory provision generally involves two steps: first, the existing rule is deleted; and second, the new rule is brought into existence in its place. The deletion effectively repeals the existing provision.Thus, an amendment by substitution results in the repeal of an earlier provision and its replacement by a new provision.The repealed provision will cease to operate from the date of repeal and the substituted provision will commence operation from the date of its substitution.After the substitution, the legislation must be read and construed as if the altered words have been written into the legislation “with pen and ink and the old words scored out.” Therefore, after amendment by substitution any reference to a legislation must be construed as the legislation as amended by substitution.”

The Court further observed that an amendment which generally has prospective effect can be applied retrospectively if it is expressly stated or implied. Such retrospective amendments can affect even the vested rights of the parties. The Court referred to the decision in Shyam Sunder v. Ram Kumar which dealt with the extent of retrospective operation of an amendment by substitution. It had held that “where a repeal of provisions of enactment is followed by fresh legislation by an amending Act, such legislation is prospective in operation and does not affect substantive or vested rights of the parties unless made retrospective either expressly or by necessary intendment.”

         2. Application of the Rules to Finance Act 2021

Applying the above principles of amendment by substitution, the Court held that the Finance Act 2021 replaced Sections 147 to 151 of the Income Tax Act from April 1, 2021. This implies : (1) the older provisions no longer apply from April 1, 2021; (2) any reference to the Income Tax Act means reference to the amended version; and (3) The time limits prescribed for issuing reassessment notices under Section 149 operate retrospectively for three years for all situations and six years in case the escaped assessment amounts to or is likely to amount to more than Rupees fifty lakhs.

         3. TOLA enacted in the backdrop of Covid-19 induced complexities in the Tax Law Regime

The Court noted that TOLA was created to provide relaxation of time limits for various tax-related legal actions that fell between the pandemic-stricken period from March 20, 2020 to March 31, 2021. TOLA, was aimed to reduced the complications for people and businesses which faced major setbacks as a result of the Covid-19 and nationwide lockdowns. It was further clarified that TOLA applied to all action falling within the prescribed time frame, irrespective of any changes made to other law. Thus, even if other laws were amended, TOLA's relaxation still applied to actions during pandemic period. TOLA was in consonance with the suggestions of the World Bank to countries during the pandemic for “deferral of tax filings and payment deadlines to allow individuals and business entities to cope with the crisis”.

“TOLA was enacted in the backdrop of the COVID-19 pandemic, which impeded the functioning of the government at all levels. The imposition of national and local lockdowns created difficulties for the common people, including litigants and assesses, to comply with their legal obligations.”

“TOLA extended the time limits for completion or compliance of certain actions under the specified Act, which fell for completion during the COVID-19 outbreak.”

It was observed that S. 3(1) of TOLA was aimed towards providing relaxation of timelines under specified acts in this backdrop of the Pandemic. The relevant part of Section 3 reads thus: “3(1) Where, any time-limit has been specified in, or prescribed or notified under, the specified Act which falls during the period from the 20th day of March, 2020 to the 31st day of December, 2020, or such other date after the 31st day of December, 2020, as the Central Government, may, by notification, specify in this behalf, for the completion or compliance of such action as –”

The court has determined that the phrase "any time limit" in Section 3(1) of TOLA should be understood to mean "all" or "every" time limit. It also clarified that “the use of the expression “any” in Section 3(1) indicates that the relaxation applies to “all” or “every” action whose time limit falls for completion from 20 March 2020 to 31 March 2021. Section 3(1) is only concerned with the performance of actions contemplated under the provisions of the specified Acts.”

In terms of the diverse purposes of the Income Tax Act and TOLA, the Court held that while the former aimed at collecting taxes, the latter aimed to provide time extensions to fulfill certain legal obligations. The applicability of the two statutes can be seen without any overlapping conflict as they served different objectives.

“When enacting a statute, the legislature often endeavours to ensure that the provisions of one legislation do not conflict with provisions of another legislation. The purpose of the Income Tax Act is to levy tax on income and raise revenues for the functioning of the Government. On the other hand, the purpose of TOLA is to provide relaxation of the time for completion of any actions or proceedings falling for completion within a particular period. Thus, the two enactments operate in separate and distinct fields.”

Applying TOLA To The Law Laid Down In S. 149

Premised on the above principles, the Court observed that S.3(1) of TOLA applies to any notices issued under the Income Tax Act, including reassessment notices under S. 148 . However, TOLA didn't change the basic time limits set in the Income Tax Act. It only gave extra time for issuing the notices under S.148.

The court explained that TOLA doesn't apply in scenarios where the time limit specified under S. 149 had already run out before March 20, 2020. It was for the notices due between March 20, 2020, and March 31, 2021 where TOLA gave more time.

Thus for tax officials to issue a reassessment notice, they now need to consider two things: (1) the original time limit under S.149 of Income Tax Act, and (2) the extra time given by TOLA. This means TOLA needs to be read along with S. 149 of Income Tax Act to configure the correct deadline.

This was exemplified further : “ For instance, the six year time limit for assessment year 2013-2014 under Section 149(1)(b) of the old regime expired on 31 March 2020. TOLA extended the period for issuing notice until 30 June 2021, given the difficulties that arose because of the COVID-19 pandemic.”

The court emphasized that TOLA's definition of 'specified Act' under S. 2(1)(b)(ii) includes the Income Tax Act. From April 1, 2021, this definition must be understood to refer to the Income Tax Act as amended by the Finance Act 2021. Despite the substitution of certain sections, such as S. 147- 151, TOLA's primary purpose remains intact. It continues to offer relief for actions due between March 20, 2020, and March 31, 2021.

It was further clarified that TOLA's applicability to the Income Tax Act persists beyond April 1, 2021. This is particularly true for actions or proceedings under the substituted provisions that were due for completion within the specified timeframe.

The court stressed that post-April 1, 2021, the Income Tax Act should be read in conjunction with its substituted provisions, which apply retroactively to past assessment years as well.

“After 1 April 2021, the Income Tax Act has to be read along with the substituted provisions. The substituted provisions apply retrospectively for past assessment years as well”.

Impact Of TOLA On Revenue Authorities

The Court has explained that TOLA was still in effect on April 1, 2021. Therefore, the revenue authorities cannot overlook the implications of TOLA and its notifications when issuing reassessment notices under Section 148 after this date. Both the time limits under S.149 new regime and the extensions by TOLA and its notifications have to be considered by the authorities.

“Therefore, for issuing a reassessment notice under Section 148 after 1 April 2021, the Revenue would still have to look at: (i) the time limit specified under Section 149 of the new regime; and (ii) the time limit for issuance of notice as extended by TOLA and its notifications”.

Seeing the dual sides of the coin, the Court added that while the revenue authorities cannot extend the operation of the old law under TOLA, they can benefit from the extended time limit for completing actions that were due between March 20, 2020, and March 31, 2021.

Machinery Provisions Of The Income Tax Act Shall Be Applied In Line With Larger Object Of The Law

It was analysed that S.147-151 worked as machinery provisions which had to be interpreted as per the intent and object of the Income Tax Act. For doing this, a harmonious interpretation of the purposes of the Income Tax Act and TOLA has to be applied.

For example - “Section 149(1)(a) of the new regime specified the time limit of three years from the end of the relevant assessment year for reopening of the assessment. For assessment year 2017-2018, the three year period expired on 31 March 2021. The expiry of time fell within the time period contemplated by Section 3 of TOLA read with its notifications. Resultantly, the Revenue had time until 30 June 2021 to issue a reassessment notice for assessment year 2017-2018 under Section 149(1)(a)”.

“This harmonious reading gives effect to the legislative intention of both the Income Tax Act and TOLA. Moreover, Sections 147 to 151 are machinery provisions. Therefore, they must be given an interpretation that is consistent with the object and purpose of the Income Tax Act”.

Notably, the Court drew the above conclusion on the basis of it's earlier decision in Income-tax Officer v. Vikram Sujitkumar Bhatia(2023). In this case, a two-judge Bench had to decide whether Section 153C of the Income Tax Act, as amended by the Finance Act 2015, would apply to searches conducted before June 1, 2015.

The court, in that case, observed:(1) Section 153C is a machinery provision and should be interpreted to fulfill the statute's purpose; (2) the core aim of Section 153C is to assess the income of any other person; (3) thus allowing the application of the amended provision only to future cases would go against the object of Section 153C.

Non- Obstante Clause Under S.3(1) of TOLA Overrides S.149 Of New Regime Limitedly

The Court emphasised that the non-obstante clause under S.3(1) of TOLA states "notwithstanding anything contained in the specified Act." which aims at removing any hurdles that might prevent the extension of time limits until March 31, 2021, or a later date set by the Central Government.

Clearly, the object of the clause was to curb the complications that the authorities and taxpayers would have faced as a consequence of the Covid-19 constraints.

The Court held that the non-obstante clause in Section 3(1) takes precedence over other laws, including the Income Tax Act, when there's a direct conflict. The clause would override Section 149 of the Income Tax Act, but only to extend the deadline for issuing reassessment notices under Section 148.

“The non obstante clause in Section 3(1) has to be read as controlling the provisions of the specified Acts, including the provisions of the Income Tax Act. In the context of the issuance of a reassessment notice, the non obstante clause will override the provisions of the Income Tax Act in case of any direct conflict or inconsistency. Section 3(1) overrides Section 149 only to the extent of relaxing the time limit for issuance of reassessment notice under Section 148”

Resultantly, the Clause now extends the time limit for issuing reassessment notices that were due between March 20, 2020, and March 31, 2021, to June 30, 2021. However, the Court clarified that this extension doesn't apply to the three-year limit from the end of the relevant assessment year under the new regime, or the six-year limit under the old regime.

“The time limit for issuance of a reassessment notices, which fall for completion between 20 March 2020 and 31 March 2021, has been extended till 30 June 2021. However, the non obstante clause under Section 3(1) of TOLA will operate neither to extend the time limit of three years from the end of the relevant assessment year under Section 149(1)(a) of the new regime nor to extend the time limit of six years from the end of the relevant assessment years under Section 149(1)(b) of the old regime.”

The key benefit of the clause is for the Revenue Authorities to be granted additional time to complete the necessary formalities and comply with the legal requirements which they couldn't do otherwise during the pandemic period.

“The non obstante clause ensures that the Revenue has additional time beyond the statutory stipulated time limit to complete or comply with the formalities given the administrative difficulties that arose due to the COVID-19 pandemic”.

Resolving The Legal Fiction Created By The Decision In Ashish Aggarwal

Notably, in 2022, the Supreme Court in Union of India v. Ashish Agarwal had saved nearly 90,000 notices issued by the Income Tax Department as per the unamended law after March 31, 2021 by deeming them as preliminary notices as per Section 148A

The Court in the present case observed that in the decision of Ashish Agarwal a legal fiction was created by deeming the reassessment notices under the old regime as as show cause notices under the new regime with effect from the date of issuance of the reassessment notices. As a result, the Court has to now “imagine as real all the consequences and incidents that will inevitably flow from the fiction”.

Thus the revenue authorities now have additional time to complete the remaining steps related to the notices including the sending out of reassessment notices under S. 148 of the New Regime. The extra time available is calculated by counting the days between when the original notice was sent and June 30, 2021.

In order to balance the fiction created between the old and new regime, the Court observed that if the legal fiction was not in existence and if the original notices were valid under the new regime, the notices under S. 148 of the new regime would have to follow the time limits under TOLA. Logically, then the new reassessment notices would also be sent within the time allowed as per the conjoint reading of the Income Tax Act and TOLA. Such an interpretation of the legal fiction in Ashish Agarwal “ enables both the assesses and the Revenue to obtain the benefit of all consequences flowing from the fiction.”

While in Ashish Agarwal the Court had allowed the taxpayers to use the all the available defences including the the defence of time expiry under S. 149(1), however in the present appeals , the reassessment notices pertain to the assessment years 2013-2014, 2014-2015, 2015-2016, 2016-2017, and 2017-2018.

In the present instance, the assessing officer shall take the following steps to issue valid notices under S.148 : (1) Send the notices within the time frame specified in Section 149(1) of the new rules, read along with TOLA and (2) get prior approval from authorities prescribed under S. 151.

“A notice issued without complying with the preconditions is invalid as it affects the jurisdiction of the assessing officer.” The Court clarified further.

The Court then concluded that reassessment notices issued under S. 148 of the New Regime which are in pursuance of the deemed notices, “ought to be issued within the time limit surviving under the Income Tax Act read with TOLA”. It expressly stated that “a reassessment notice issued beyond the surviving time limit will be timebarred.”

Thus, the directions in the judgment in Union of India v.Asish Agarwal(2022) will extend to all the 90,000 re-assement notices issued between 01 April 2021 and 30 June 2021.

Background

In the lead case (Union of India v Rajeev Bansal), the challenge was to a judgment of the Allahabad High Court which held that the reassessment proceedings initiated with the notice under Section 148 issued between 01.04.2021 and 30.06.2021, cannot be conducted by giving benefit of relaxation/extension under the Taxation and Other Laws (Relaxation And Amendment of Certain Provisions) Act' (TOLA) 2020 upto 30.03.2021, and the time limit prescribed in Section 149 (1)(b) (as substituted w.e.f. 01.04.2021) cannot be counted by giving such relaxation from 30.03.2020 onwards to the revenue.

The High Court also held that the benefit of TOLA' 2020 will not be available to the revenue, or in other words, the relaxation law under TOLA' 2020 would not govern the time frame prescribed under the first proviso to Section 149 as inserted by the Finance Act' 2021.

Case : Union of India v Rajeev Bansal C.A. No. 8629/2024 and 726 connected cases

Citation : 2024 LiveLaw (SC) 772

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