THE TAX REASSESSMENT DILEMMA: THE INDIAN CHAPTER

Introduction

The Income Tax is one of the most important aspects for a citizen of a country. It is dealt with by every person across various countries. In India, the regime of income tax has been governed by the Income Tax Act, 1961, which is now being shifted to the Income Tax Act, 2025. The new tax regime aims to simplify the current dynamics of tax systems by reducing the number of sections and simplifying its structure, introducing new terms such as “Tax Year”. But before delving into the future, we should take a hard look at the mistakes of the past. The Income Tax Amendment, 2021 (introduced via the Finance Act, 2021) was brought forward as an assessee-friendly amendment to simplify the re-assessment procedure, which resulted in a disaster. It was reported that more than 9,000 collective petitions were filed in various high courts in India. This conflict opened the floodgates of complex litigation that continues to clog the judicial system even as we move toward the implementation of the new act. The failure of the 2021 transition serves as a prime example of all the things which are needed to be taken care of before it’s the effective implementation of the new act on 1st April,2026. This article explores the context in which the 2021 reassessment amendments were enacted and undertakes a critical evaluation of the deficiencies inherent in the amended scheme, while analyzing the solution proposed by the judiciary.

Development of Re-Assessment Conflict:

The conundrum of income tax began when the legislative amendment of 2021 collided with the COVID-19 emergency. The amendment was brought forward with the intention of controlling the powers of the Assessment Officer (AO) for the process of re-assessment. Before the amendment, the functioning of the AO was governed by the Income Tax Act,1961from sections 147-150 of. The tax authorities’ powers under the aforementioned sections were sometimes considered arbitrary and unjust, as they empowered the AO to reopen any completed assessment without any proper cause, which often led to plenty of litigation.

On 1st April, 2021, the Finance Act, 2021 came into effect and did not just tweak the law; it substituted the entire re-assessment framework. The hallmark of this amendment was the introduction of Section 148A. Thus, the 2021 amendment brought forward the following changes to remove such an unjust practice from the system:

Conduct an Inquiry:

The AO has to conduct a proper inquiry and submit its report to the tax authority before beginning re-assessment proceedings.

By introducing a show-cause notice system:

Under this, the AO was required to send a show-cause notice before commencing the re-assessment proceedings, giving the assessee a chance to give their perspective.

Reply by the Assessee:

The reply of the assessee would be given a paramount weight and properly investigated. Further, the reply would only be rejected if the reply does not satisfy the reason for the undisclosed income.

Speaking Order:

The AO is required to state the reason for refusing to accept the reply.

Additionally, the amendment reduced the timeline for opening a reassessment. Now, the authority could open a reassessment only within 3 years from the end of the relevant assessment year, except in serious cases involving escaped income of ₹50 Lakhs or more, where it could extend to ten years. Therefore, this ensured the finality of the assessment and avoided reopening of stale matters.

COVID–19 Emergency:

The amendment was rolled out on 1 April 2021, which directly collided with the presence of the COVID-19 situation. This marked the beginning of turmoil as the income tax department continued to give notices under the old regime and relied on the notification passed under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). The department contended that notification under TOLA allowed them to give notification under the old regime due to the COVID-19 pandemic, even though the new regime had already started.

Judicial Stance:

•  Allahabad High Court

The Allahabad High Court was one of the first courts to take action on the reassessment controversy. It paved the way for other High Courts in understanding the nuances of this issue. In the case of Ashok Kumar Agarwal v. Union of IndiaThe high court held that once the amendment was passed by the legislature, the older clauses would be considered superseded. Thus, the earlier clauses would be considered non-existent. In furtherance, the court held that such re-assessments after the amendments would be void.

The High Court further pointed out that the amendment came without any saving clause, i.e., no preservation of the previous clause. Therefore, in any way, no proceedings could have been initiated on the causes of the previously repealed Act. Moreover, the court strictly rejected the contention of the Revenue Department that TOLA can be used to send the notification through the previous Act, suggesting that such action by the revenue department would go against the very legislative intent of the Parliament.

• Bombay High Court

The Bombay High Court played a significant role in the jurisprudence of the reassessment controversy by passing various landmark judgments. The Bombay High Court in the case of Godrej Industries Ltd. v. ACIT Explained that the validity of a re-assessment notice should be judged based on the law which in force at the time when such notice was issued. Thus, any re-assessment notice that was sent for the Assessment year 2014-2015 would not be valid in any circumstances if such notice was issued after 1st April, 2021, i.e., when the Finance Act, 2021 was in effect.

The same question of law again appeared in the case of New India Assurance Company Ltd. v. ACIT., wherein the High Court held that any re-assessment proceedings for the Assessment Years 2013-14 and 2014-15 are barred by the limitation. The bench went in consonance with its previous judgment and declined any further arguments. The High Court restated that the jurisprudence of this was settled in the previous case.

Finally, in the case of Tata Communications Transformation Services Ltd. v. ITOThe Bombay High Court reiterated that it is a settled legal argument that when a statute or law recommends any limit or any requirement, or any method for performing an act, it should be done in the same manner as prescribed. Accordingly, reassessment notices issued after 1 April 2021 without adhering to the amended provisions were held to be invalid.

• Delhi High Court

The Delhi High Court in the case of Mon Mohan Kohli v. ACIT faced a petition addressing 1356 re-assessment notices under Section 148 of the Income Tax Act, 1961, which were issued after 31 March 2021. The Delhi High Court held that it was the intent of the legislature to simplify such income tax proceedings for the citizens, so every notice after 31st March 2021 had to comply with the requirements of the new provisions. Furthermore, it explained that there was no discretion on the part of the administrative authority to choose from the provisions. The court further held that Section 147 was not even denoted in the Financial Act, 2021. Thus, it can be rightly interpreted that the legislature wanted further notification as required by the new regime.

• Rajasthan High Court

The Rajasthan High Court, in its various judgments, was in alignment with the view taken by the Allahabad and the Delhi High Courts. One of the earliest cases that came across the Rajasthan High Court was Sudesh Taneja v. ITO.. In this case, the court focused on the relation of Section 149(1) of the Income Tax Act, 1961, and extended the limitation of 10 years, which was introduced by the Finance Act, 2021. The court explained that the notices, which were time-barred in accordance with old provisions, could not be revived by applying them under new provisions. It clarified that the re-assessment limit given under Section 149(1)(b) of the Income Tax Act, 1961, has no retrospective effect under the new regime. Additionally, the Court found reassessment notices issued after 1 April 2021 without compliance with Section 148A to be invalid.

Similarly, in BPIP Infra Private Limited v. Income Tax Officer, the Rajasthan High Court explicitly went with the reasoning and explanation given by the Allahabad High Court in the Ashok Kumar Agarwal case, holding that re-assessment notices which were issued under the old regime were void. The Rajasthan High Court further affirmed that any reassessment proceedings that were initiated after 1st April 2021 must be in accordance with the new regime.

•  Calcutta High Court

The Calcutta High Court, like the other High Courts, was also presented with this issue. In the case of Manoj Jain v. Union of India & Ors., the Calcutta High Court showed its agreement with the judgment of various other High Courts. The Court held that any re-assessment notices that were passed under the old regime of tax laws were invalid. Thus, any notice would be held void.

• Supreme Court of India

With many cases coming in various high courts that had conflicting views, the Apex Court of India took all the petitions collectively and answered them in the case of Ashok Kumar Agarwal v. Union of India. Herein, the focus of the Supreme Court of India was to strike a balance between both parties and find a solution for the affected assesses. The judgment of the Apex Court held the following;

• Sections 147-151 of the Income Tax Act,1961, of the old regime cease to exist after 1st April, 2021, and further actions would be governed by the new law.
• The Notices that were passed by the tax authority during the period of 01-04-2021 to 30-06-2021 are not automatically invalid.
• TOLA does not revive any lapsed law but can relax any time limit that comes due to any emergency.
• The Ashish Aggarwal judgment would act as a legal fiction, so any notice that was given between 1st April, 2021, to 30th June, 2021, would be converted into show cause notices.

Points for future:

The aforementioned controversy serves as a “stress test” for future amendments in the tax regime. To ensure that future changes achieve their goal without triggering a wave of litigation, some lessons are to be followed, which are:

• Inclusion of Saving Clause:

Saving clauses are considered to be one of the essentials of statute as they act as a legislative bridge between various statutes. Passing of the amendment act without its saving clause resulted in a full blunder, as seen with the Financial Act,2021. Therefore, for any future amendment, a saving clause must be given to understand the continuation and completion of a provision.

• Misapplication of TOLA:

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, was enacted to relax statutory timelines during the COVID-19 pandemic. Its amalgamation without any proper guidelines resulted in different interpretations of the statute by various courts. Thus, if any such situation arises wherein there is a question of law and is being asked in this many petitions, the Apex Court should move towards suo-moto cognizance rather than wait for the judgments of various high courts.

• Inadequate Implementation:

It can be rightly said that the intention behind the amendment was simplification, but its implementation resulted in a disaster. The Act lacked many important provisions, and in some places it seemed incomplete. There were no guidelines for assessment officers for evaluating such show cause notices or for reference to higher authorities. Thus, in the future, a complete guideline for tax amendment would be helpful for the tax authorities as well as the assesses.

Conclusion:

As India is moving towards its new tax regime that is going to be implemented next year, this re-assessment fiasco serves as a cautionary tale. Any future amendment should be accompanied by proper guidelines for its implementation, clauses specifying the limitation period, continuity for provisions, etc. While the judiciary has played a crucial role in mitigating this situation but it cannot substitute legislative prudence. Moreover, such an issue opens the floodgates of litigation and re-litigation, burdening the already burdened judiciary.

This episode has been a nightmare for the side of the taxpayers. They did not seem to get finality and conclusion for them, for which they had already fulfilled their legal duty of paying taxes. They had to enforce the constitutional safeguards just to get procedural safeguards expressly granted by statute. This should now be the primary goal to ensure that the rights of taxpayers are protected. Ultimately, the next tax regime has the potential to mark a genuine shift toward transparency, fairness, and restore the trust of taxpayers in India’s tax regime.