In a widely reported ruling, the Supreme Court of India has expressed its opinion on the controversy relating to reassessment proceeding under the new provisions introduced in the income tax law. The ruling in Union of India v. Ashish Agarwal is significant from various perspectives. However, there are certain aspects of the ruling which require a deeper dissection as it appears to be at divergence with various related and allied variables. This post attempts to bring the issue in perspective.
Setting the context
A fiscal law provides for a mechanism for ascertainment of tax liability. Such mechanism is referred to as “assessment”. The mechanics for assessment vary depending upon the tax law concerned. For illustration, under most indirect tax laws in India assessment is concluded by way of self-assessment i.e. it is the obligation of the taxpayer to carry out the assessment. Conversely, under the income tax law, it is the tax officer who frames the assessment.
In addition to the assessment, the tax law also provides for “reassessment” i.e. a situation wherein a concluded assessment can be reopened and the tax liability of the taxpayer concerned is redetermined. By its very nature, therefore, reassessment is detrimental to the taxpayer because it implies that its concluded assessment is revisited (after a few or many years) which results in increase in tax liability, besides which, ordinarily, penal consequences follow.
The Income Tax Act, 1961 provides for detailed provisions governing reassessment. The relevant provisions provide for limitation, procedural stipulations and substantive rights of the taxpayers, etc. They form a conjoint code as reassessment is a substantive section of the tax law. It is therefore not surprising that reassessment is often mired in disputes and results into litigation. In order to streamline the procedure and protect the taxpayer from the vagaries of reassessment, often the judiciary also intervenes and frames substantive or procedural safeguards which are read alongside the statutory provisions.
In order to address the growing number of disputes on account of challenges to reassessment, the provisions governing reassessment under the Income Tax Act were substantially modified by way of amendments through Finance Act, 2021. The new provisions came into effect from 1-4-2021. Under the new provisions, it was incumbent upon the tax officers to carry out additional enquiries than in comparison with the earlier law, besides which certain procedural safeguards and substantive rights of the taxpayers were introduced in the amended law, subject to which alone reassessment could be carried out.
While these changes were underway, the country was reeling under the devastating impact of COVID-19. In order to address the various restrictions which had been imposed by the Governments to arrest the spread of the pandemic, certain relaxations were made in different laws. One of the relaxations was under the tax laws in terms of which certain deadlines were extended by the Government to address practical exigencies. In fact, the Government had specifically issued a notification extending the timeline for reassessment under the old law which overlapped with the 2021 reassessment law. Thus, the implementation of the new reassessment provisions coincided with the extended timelines under the COVID-19 protocols.
Considering that the reassessment notices issued after 1-4-2021 were invalid as they were issued without complying with the amended provisions, such notices were challenged before High Courts by the taxpayers across the country. The Chhattisgarh High Court upheld the notices for reassessment issued after 1-4-2021 but under the unamended law. However, many other High Courts concluded that indeed there were defects in these notices insofar as the mandatory compliance with the 2021 law was not affected. As a consequence these High Courts quashed the reassessment proceedings.
Dissecting the Supreme Court Ruling
It was in this background that the issue reached the Supreme Court. Curiously, the Supreme Court approved the reasoning of the majority of the High Courts. It observed that:
- 22. … the new provisions substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assessee as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of 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. We are in complete agreement with the view taken by the various High Courts in holding so.
Despite opining in favour of the taxpayers as the aforesaid, the Supreme Court reversed the logical consequence which ensued from the aforesaid observations. Noting that the outcome of the High Courts’ views would be that there would be “no reassessment proceedings at all”, the Supreme Court changed the course of the tide to modify the conclusion emanating from the High Court decisions. Without confronting with any of the reasons of the High Courts, the Supreme Court assigned the following reason to differ in the net outcome:
- 23. However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted Sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated. It is true that due to a bona fide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under Section 148 after the amendment was enforced w.e.f. 1-4-2021, under the unamended Section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of Sections 147 to 151 of the IT Act as per the Finance Act, 2021. There appears to be genuine non-application of the amendments as the officers of the Revenue may have been under a bona fide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/unamended provision of the IT Act as those deemed to have been issued under Section 148-A of the IT Act as per the new provision Section 148-A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of Sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of Sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law. Therefore, we propose to modify the judgments and orders passed by the respective High Courts. (emphasis supplied)
On such count, the Supreme Court declared that all the reassessment notices issued under the old law would be deemed to be issued under the new law with a further direction to the tax officers and the taxpayers to comply with such notices as marking the onset of the reassessment proceedings under the new law. Besides the aforesaid, the Supreme Court also “dispensed with” the obligation of the tax officers to conduct inquiry with prior administrative approval in respect of such notices, which was a mandate under the new law.
The most crucial past of this ruling is that the Supreme Court invoked its extraordinary power under Article 142 of the Constitution to hold that its directions “shall govern, not only the impugned judgments and orders … but shall also be made applicable in respect of the similar judgments and orders passed by various High Courts across the country and therefore the present order shall be applicable to PAN India”. In addition, the Supreme Court extended its order to hold that it “shall also govern the pending writ petitions, pending before various High Courts in which similar notices under Section 148 of the Act issued after 1-4-2021 are under challenge”.
The decision of the Supreme Court raises more questions then in answers. Some of these questions are enlisted here, with the fervent hope that these would be addressed in near future given that these unsettle the jurisprudence in ways more than one:
- A close reading of the decision reveals that the Supreme Court agreed with the reasoning of the High Courts which had quashed the reassessment proceedings. On such paradigm, one wonders what could be the basis to reverse the conclusion emanating from the High Court decisions. One is left to wonder the precedential status of the High Court decisions as also the application of “merger” doctrine in such circumstances.
- The only reason the Supreme Court has assigned to reverse the decisions is that the “Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated.” There are fundamental issues with this reasoning. Some of these are enlisted below:
(a) Neither the Supreme Court has cited any precedent justifying this proposition nor any precedent appears to exist.
(b) This reasoning is directly at odds with the time tested restatement of law by Rowlett, J. in Cape Brandy Syndicate v. IRC. For illustration, see Polestar Electronic (P) Ltd. v. CST the Supreme Court inter alia observed as under:
- 12. It must also be remembered that Section 5(2)(a)(ii) and the second proviso occur in a taxing statute and it is well-settled rule of interpretation that in construing a taxing statute “one must have regard to the strict letter of the law and not merely to spirit of the statute or the substance of the law”. The oft-quoted words of Rowlett, J., in Cape Brandy Syndicate case lay down the correct rule of interpretation in case of a fiscal statute: “In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.” It is a rule firmly established that “the words of a taxing Act must never be stretched against a taxpayer”. If the legislature has failed to clarify its meaning by use of appropriate language, the benefit must go to the taxpayer. Even if there is any doubt as to interpretation, it must be resolved in favour of the subject. We would, therefore, be extremely loathe to add in Section 5(2)(a)(ii) and the second proviso words which are not there and which, if added, would have the effect of imposing tax liability on the purchasing dealer.
(c) Thirdly, the reasoning is also contrary to the principle of “fairness” which has been declared by a unanimous five-Judge Bench of the Supreme Court as the parameter for interpretation of fiscal statues. In CIT v. Vatika Township (P) Ltd., it was inter alia observed as under:
41.2. At the same time, it is also mandated that there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the provision concerned of the taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favours the subjects, as against the Revenue, has to be preferred. This is a well-established principle of statutory interpretation, to help finding out as to whether particular category of assessee is to pay a particular tax or not. No doubt, with the application of this principle, the courts make endeavour to find out the intention of the legislature. At the same time, this very principle is based on “fairness” doctrine as it lays down that if it is not very clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons or not, the subject should not be fastened with any liability to pay tax. This principle also acts as a balancing factor between the two jurisprudential theories of justice — Libertarian theory on the one hand and Kantian theory along with Egalitarian theory propounded by John Rawls on the other hand.
(d) The Supreme Court has in any case categorically confirmed that the burden is always upon the Tax Department in a contest against the taxpayer excepting for one situation wherein the taxpayer claims a tax exemption. Thus, there is no room for improving the case for the Revenue which cannot be sustained by a plain reading of the statute.
(e) Most critically, the judgment appears to violate a sacrosanct constitutional stipulation that there can be no levy or collection of tax without the authority of law. Thus, in the absence of a valid law, no amount of legislative intent or purported objective can come to Revenue’s aid to the detriment of the citizens.
- Even if the reasoning of the Supreme Court is taken at its face value and considered a valid reasoning, is it within the prowess of the courts to rewrite the statutory provisions? As the doctrine of separation of powers stands under the Constitution, the legislature legislates, the executive administers and the court interprets. The courts in India, including the Supreme Court, are not allowed to legislate. Accordingly, the court can either declare the law to be valid or invalid. It is the responsibility of the legislature to amend a law found defective by the courts. To highlight, in the field of tax laws itself, retrospective enactment accompanied by validation legislations are very common. For illustration, the Parliament retrospectively amended the Income Tax Act to legislatively reverse the outcome of the Supreme Court’s decision in Vodafone International Holdings BV Union of India and also introduced a validation law to revive the tax demand which stood quashed by the decision. As another illustration, the Parliament retrospectively amended, not once but twice, after the Supreme Court decisions in Commr. of Customs v. Sayed Ali and Canon India (P) Ltd. v. Commr. of Customs, the customs law and also introduced a validation legislation both times to confer powers upon the officers of the Directorate of Revenue Intelligence to enforce provisions of the customs law. Thus, with respect, it cannot be responsibility of the Supreme Court to effectuate the “object and purpose” of the law in tax matters which does not flow from a reading of the statutory provisions itself.
- In any case, it is well settled that the “object and purpose” is not a relevant aid in interpretation of tax statutes. The Supreme Court itself, on multiple occasions, has held “that the beliefs or assumptions of those who frame Acts of Parliament cannot make the law”. Thus, it is immaterial as to what the Parliament believed to be the effect of the 2021 amendment to the reassessment law and effect has to be given to the statutory provisions as they stand.
- Another reason assigned by the Supreme Court to uphold the reassessment proceedings is the “genuine non-application of the amendments as the officers of the Revenue may have been under a bona fide belief that the amendments may not yet have been enforced”. Serious legal issues arise even with this reasoning, some of which are enlisted below:
(a) It is the well settled in the realm that “ignorance of law is no defence”. Thus, it is no excuse that the Income Tax Department was under a “genuine doubt” that the law was not in force.
(b) At worse, with a maze of legislations, rules, notifications, etc. which tax laws encompass, being unaware of the law being enforceable may be available as a defence to a common citizen. At any rate, however, it cannot be a defence to those who themselves have the responsibility to notify, enforce and administer the law. It is ironical that the officers of the Government of India, who themselves notified the law, pleaded that they were unaware that it was in force.
(c) Even if the argument of the officers of the Government is taken at face value that there was a “genuine non-application of the amendments”, it still does not absolve them of the consequences which fell from their actions. Ignorance of law can be pleaded as only a ground to mitigate the penal consequences flowing from the infraction of the law. It cannot, at any rate, make the actions valid. Sustaining such actions amount to tolerating illegal acts.
(d) Applying the argument in reverse, had a taxpayer contended that it failed to pay the tax owing to genuine belief that the law was not applicable, what would have been the consequence? May be the courts would grant indulgence and injunct the invocation of penal provisions. But could the taxpayer be allowed not to pay the tax on such ground? One wonders.
- The Supreme Court has also exercised its extraordinary constitutional power under Article 142 to deem that the reassessment notices issued under the unamended law shall be deemed to have been issued under the amended law. This is a very significant aspect of the ruling:
(a) In the past the Supreme Court has asserted that:
- 27. … the plenary powers of this Court under Article 142 of the Constitution are inherent in the Court and are complementary to those powers which are specifically conferred on the Court by various statutes though are not limited by those statutes. These powers also exist independent of the statutes with a view to do complete justice between the parties … and are in the nature of supplementary powers … (and) may be put on a different and perhaps even wider footing than ordinary inherent powers of a court to prevent injustice. The advantage that is derived from a constitutional provision couched in such a wide compass is that it prevents “clogging or obstruction of the stream of justice”.
(b) However, a question will nonetheless persist as to the propriety of the need to invoke Article 142 in the instant case. This is neither the first time nor possibly the last time where the High Court has opined that a tax law would not apply owing to failure of the tax officer to apply the law correctly. Would this order, therefore, become a precedent wherein the tax officers cite their “genuine failure” to apply the law correctly so as to obtain remedy under the constitutional powers of the Supreme Court?
(c) Furthermore, the Supreme Court itself in the past itself has observed that:
- 36. … sympathy or sentiment by itself cannot be a ground for passing an order in relation whereto the appellants miserably fail to establish a legal right. It is further trite that despite an extraordinary constitutional jurisdiction contained in Article 142 of the Constitution of India, this Court ordinarily would not pass an order which would be in contravention of a statutory provision.
(d) Most crucially, the order does not address the balancing role which is the core test for application of Article 142 as it requires passing of an order “necessary for doing complete justice”. Even if the stand of the tax officers is taken at their face value, “complete justice” clearly requires balancing the interests of the taxpayers too. However, the Supreme Court has “dispensed with” the obligation of the tax officers to undertake an inquiry which was a condition precedent for the initiation of the reassessment proceedings. Thus, by way of this order, a valuable legal right of the taxpayers has been waived by the Supreme Court, despite the fact that the legislature intended to confer such right upon the taxpayer.
(e) A larger question remains as to the parameters of “justice” in Article 142. Does Government’s failure to understand the law or apply it incorrectly automatically leads to injustice which requires course-correction by the Supreme Court? Is the fact that a large number of tax proceedings get invalidated which applies as a criteria for “justice” under Article 142? By applying converse reasoning, when does the taxpayer get the entitlement to request invocation of Article 142? There are only few of the many questions which require answers, which no doubt will test Supreme Court’s limits to invoking Article 142 in future.
- Furthermore, the Supreme Court exercised its power under Article 142 to not just validate the invalid notices (i.e. reassessment notices declared invalid by the High Courts) but also to extend the validation to those notices which were still awaiting the scrutiny of the High Court. In other words, the Supreme Court adjudicated those disputes which were not even before the Supreme Court and conferred legality upon those proceedings which were yet to be examined or declared as invalid. Whether the Supreme Court can decide a matter under Article 142 which is not before it or has not yet been decided by any court in the country, poses interesting legal questions as also questions of constitutional propriety which require advertence by the Supreme Court in an appropriate proceeding.
To conclude, this ruling results into multiple complex legal issues, the quelling of which is bound to intensively engage the Supreme Court in near future. One would hope that the answers are imminent or else a muddling of settled jurisprudence may be the only outcome.
† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics
 Ashok Kumar Agarwal v. Union of India, 2021 SCC OnLine All 799; Bpip Infra (P) Ltd. v. ITO, S.B. Civil Writ Petition No. 13297 of 2021 dated 25-11-2021; Mon Mohan Kohli v. CIT, 2021 SCC OnLine Del 5250; Bagaria Properties & Investment (P) Ltd. v. Union of India, W.P.O No. 244 of 2021 dated 17-1-2022 (Calcutta High Court); Vellore Institute of Technology v. Central Board of Direct Taxes, W.P. No. 15019 of 2021 dated 4-2-2022 (Madras High Court); Tata Communications Transformation Services Ltd. v. CIT, 2022 SCC OnLine Bom 664.
 For illustration, see Goodyear India Ltd. v. State of Haryana (1990) 2 SCC 71, para 25. See also, Peddinti Venkata Murali Ranganatha Desika Iyengar v. Govt. of A.P., (1996) 3 SCC 75, para 13, approving Justice G.P. Singh’s Principles of Statutory Interpretation to the effect that “The beliefs or assumptions of those who frame Acts of Parliament cannot make the law.” The decision in Rakesh Vij v. Raminder Pal Singh Sethi, (2005) 8 SCC 504 is to similar effect.
 ITO v. Mani Ram, AIR 1969 SC 543 : (1969) 72 ITR 203, following Macmanaway, In re, 1951 AC 161; IRC v. Dowdall, O’Mahoney & Co. Ltd., 1952 AC 401 and Kirkness (Inspector of Taxes) v. John Hudson & Co. Ltd., 1955 AC 696.