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Flawed IT reassessment notices quashed

The tax department’s capricious plan to harass taxpayers by extending the validity of a tax provision by 3 months was grounded in the so-called Relaxation Act of 2020
Representational image.
Pinak Ghosh


Taxpayers who received a flurry of reassessment notices last year can breathe a huge sigh of relief after several high courts have struck these down because of the dodgy manner in which the taxman issued them.

The reassessment notices had gone out under section 148 of the Income Tax Act – a proviso that should by rights have been eclipsed by an amendment in the Income Tax Act introduced in the Finance Act of 2021.

A furious debate had broken out because the Central Board of Direct Taxes (CBDT) had tried to breathe life into section 148 of the Income tax by extending its validity till June 30, 2021 when a proviso – section 148 A – had already come into effect from April 1.


How could two tax provisions that were clearly conflict coexist?

On Monday, the Calcutta High Court quashed all tax reassessment notices issued after March 31, 2021 under the old section 148 while granting the assessing officers the liberty to initiate fresh reassessment proceedings under the amended Section 148A which gives taxpayers the opportunity to be heard before such notices can be sent.

While handing down its verdict, the Calcutta high court agreed with the reasoning and the views expressed by the Allahabad, Rajasthan and Delhi High Courts which had also quashed similar reassessment notices.

“All the impugned notices under Section 148 of the Income Tax Act are quashed with liberty to the assessing officers concerned to initiate fresh reassessment proceedings in accordance with the relevant provisions of the Act as amended by Finance Act, 2021 and after making compliance of the formalities as required by the law,” the Calcutta High Court order said.

Old versus New

The tax department’s capricious plan to harass taxpayers by extending the validity of a tax provision by three months was grounded in the so-called Relaxation Act of 2020 – a piece of legislation that Parliament passed on September 29, 2020.

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 had been passed to deal with the special situation that had arisen because of the Covid19 pandemic that wrought havoc with businesses and posed compliance hurdles.

The Relaxation Act provided for extension of time limits for completion of actions under specified Acts including the Income Tax Act.

The problem arose when the Modi government introduced an amendment in the Income Tax Act through the Finance Act 2021.

By hoary practice, this should have automatically obliterated the older section 148 in the absence of any “saving clause” in the ordinance, Enabling Act or the Finance Act 2021 that would allow the tax authorities to issue fresh reassessment notices after April 1, 2021.

But that is precisely what the Central Board of Direct Taxes (CBDT) by issuing two notifications on March 31 and April 27 last year to extend the provisions of Section 148, Section 149 and Section 151 of the Income Tax Act till June 30, 2021.

This is when the quibble began. Taxpayers argued that in the absence of the “saving clause”, this meant that the extension could be used to only conclude already existing proceedings arising from reassessment notices issued before March 31, 2021.

They argued that on no account could the taxman claim the right to issue fresh reassessment notices between April and June 30 – a stand that the tax department stoutly resisted.

Justice Md. Nizammudin of the Calcutta high court eventually ruled in favour of the tax payers, declaring that the actions of the tax department were “ultra vires the Relaxation Act 2020 and are therefore bad in law and null and void.”

The Finance Act 2021 had introduced sweeping changes relating to the reassessment procedure.

One of the key amendments was the introduction of a new section 148A that required assessing officers to give taxpayers the opportunity to be heard before issuing reassessment notices.

Further, the time limit for reopening of assessment cases was brought down to three years. In the case of serious tax evasion cases, assessment could be reopened only when the concealment of income exceeded Rs 50 lakh.

“This judgment comes as a breather to the taxpayers who had challenged the reassessment notices before the High Court. Further, given the far-reaching implications of the orders of various High Courts, the taxpayers will keenly wait, in the light of the upcoming budget, for the department’s final take on this vexed issue,” said Aditya Hans, partner, Dhruva Advisors LLP.

Narayan Jain, chairman of the Direct Tax Professionals Association (DTPA) representation committee, said the Calcutta High Court had made a very appropriate decision by quashing notices issued by the Income Tax department under section 148 on or after April 1, 2021.

Physical filing

Meanwhile, taxpayers continue to battle the income tax department because of the persistent glitches with the new tax portal.

Several taxpayers have moved the Gujarat High Court with a petition pleading that they should be allowed to file physical copies of their tax audits because of the faltering system that will not allow them to comply with the extended deadline.

Earlier this month, the deadline to file tax audit report and transfer pricing audit report for FY21 was extended till February 15. Corporates can also file their income tax returns for the financial year 202021 – or assessment year 202122 – till March 15.

Taxpayers do not want to be penalized for the glitches in the tax portal.

The CBDT has, however, refused to relent. Its counsel argued that physical filing of tax audit reports and returns was not possible because the e-portal only captures digital figures.

The hearing in the matter will continue on Wednesday.