(2022) 444 ITR 1 (SC)
Income escaping assessment; issue of reassessment notice; inquiry and opportunity before notice
Rather than quash them, the notices are deemed to be notices under the new inquiry provision. The Revenue must supply the underlying material and follow the new procedure, and the taxpayer's objections are preserved.
What becomes of the very large number of reassessment notices issued in the old form after the new procedure, with its inquiry and opportunity safeguards, had already come into force?
The Finance Act 2021 substituted the reassessment provisions with effect from 1 April 2021, introducing a mandatory preliminary inquiry under Section 148A under which the taxpayer must be given the information relied on and an opportunity to respond before a reassessment notice may issue. Relying on notifications issued under a relaxation statute extending various time limits during the pandemic, the Revenue issued approximately ninety thousand reassessment notices after that date in the old, pre-amendment form, without following the new inquiry procedure. Taxpayers across the country challenged them.
High Courts including Allahabad, Rajasthan, Delhi, Bombay and Calcutta quashed the notices, holding that the substituted provisions applied from 1 April 2021 and that delegated legislation could not defer the operation of a statutory amendment. The Revenue appealed to the Supreme Court, which was faced with the prospect of tens of thousands of notices failing on a procedural footing.
For the assessee
The substituted provisions took effect from 1 April 2021. Notifications issued under a relaxation statute could extend time limits but could not keep the repealed provisions alive or defer Parliament's amendment. Notices issued in the old form after that date were without jurisdiction and had to be quashed.
For the Revenue
The notifications were issued in a genuine belief that the pre-amendment provisions continued to apply to the extended periods, and officers acted bona fide. Quashing every notice would cause a substantial loss of revenue in cases where escapement was genuinely suspected, and the defect was procedural in nature.
The Court agreed with the High Courts that the substituted provisions applied from 1 April 2021 and that the notices, as issued, did not comply with them. But it declined to leave the matter there. Exercising its plenary power under Article 142 to do complete justice, it fashioned a nationwide remedy applying to all such notices, including those not before it. The notices were deemed to be show cause notices issued under the new inquiry provision. The Assessing Officers were directed to furnish to the taxpayers, within thirty days, the information and material relied on in support of the allegation that income had escaped assessment. Taxpayers were given two weeks to reply, and the officers were then to pass orders under the inquiry provision in the ordinary way before deciding whether to issue a reassessment notice. The Court expressly preserved all defences available to the taxpayer, including those relating to limitation and the merits, and barred only the objection that the old procedure had been followed. It noted that the Revenue could not be left remediless where officers had acted bona fide on a genuine interpretation, while taxpayers would receive the full benefit of the new safeguards.
The reference point for the entire block of transitional reassessment litigation, and still generating disputes over limitation in individual cases, particularly on how the extended periods interact with the ordinary time limits. The corresponding provisions in the IT Act 2025 are Sections 279 to 281, so the procedural safeguards the judgment enforced carry forward in substance.