The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, commonly referred to as TOLA, was enacted by the Indian Parliament with retrospective effect from 31 March 2020. This legislation was a response to the unprecedented challenges posed by the COVID-19 pandemic, which severely disrupted legal, financial, and administrative timelines across sectors. TOLA was designed to provide relief by extending time limits for various compliance and procedural requirements under specified Acts, including the Income Tax Act.
Section 3(1) of TOLA specifically allowed for the extension of time limits for any action that was required to be completed between 20 March 2020 and 31 December 2020. Initially, the deadline was extended to 31 March 2021, with the government retaining the authority to issue further notifications extending this period.
Finance Act 2021 and the New Reassessment Regime
The Finance Act 2021 brought about significant structural reforms to the Income Tax Act, particularly concerning reassessment procedures. Sections 147 to 151, which govern the reassessment framework, were overhauled, and the new provisions came into effect from 1 April 2021. These changes aimed to bring more procedural rigor and transparency to reassessment proceedings.
One of the major changes was to Section 148, which pertains to the issuance of reassessment notices. Under the earlier regime, the limitation period for reopening an assessment was four years, which could be extended to six years if the escaped income exceeded ₹1,00,000. Under the new regime, this period was reduced to three years, with an extended window of ten years only in cases where the escaped income exceeded ₹50,00,000 and was represented in the form of an asset.
Section 151, which deals with the required level of authority for approving reassessment notices, also underwent modifications. Under the old regime, approvals were granted by the Joint Commissioner of Income Tax for notices issued within four years and by the Principal Commissioner for notices issued after four years. Under the new regime, the Principal Commissioner can approve cases within three years, while the Principal Chief Commissioner must approve those beyond that period.
A notable introduction was Section 148A, which introduced a new pre-notice inquiry mechanism. This section requires tha,before issuing a notice under Section 148, the Assessing Officer must first provide the assessee with the information that suggests income has escaped assessment and must consider their reply before passing an order under Section 148A(d).
Interpretation of the First Proviso to Section 149
The Finance Act 2021 also inserted a first proviso to Section 149. This provision clarified that no notice could be issued for the assessment year 2021–22 or any earlier years if such notice was time-barred under the old reassessment regime before the commencement of the new provisions on 1 April 2021. This proviso has played a significant role in shaping the legal landscape around the validity of reassessment notices issued in the transitional period.
CBDT Notifications Issued in 2021
Following the enactment of TOLA and the Finance Act 2021, the Central Board of Direct Taxes (CBDT) issued key notifications to guide implementation. Notification No. 20/2021 dated 31 March 2021 extended the time limit for compliance under the Income Tax Act to 30 April 2021. Notification No. 38/2021 dated 27 April 2021 further extended this deadline to 30 June 2021.
The explanations appended to these notifications clarified that the provisions of the Income Tax Act as they stood on 31 March 2021 would continue to apply to notices issued between 1 April 2021 and 30 June 2021. This created ambiguity, as it suggested a continuation of the old reassessment regime even after the Finance Act 2021 had brought in sweeping procedural changes effective from 1 April 2021.
Legal Challenges in the First Round of Litigation
These notifications became the subject of widespread litigation across various High Courts. One of the primary legal challenges was that these notifications appeared to contradict the new procedure introduced by the Finance Act 2021, which was effective from 1 April 2021. The petitioners argued that extending time limits under the old reassessment regime beyond this date amounted to reviving a repealed law, which was legally impermissible.
In the Ashok Kumar Agarwal case, the Allahabad High Court held that the notifications could not operate beyond 31 March 2021 due to the absence of a saving clause in the Finance Act 2021. Similarly, the Delhi High Court in the Mon Mohan Kohli case quashed the reassessment notices but acknowledged that the reassessment power remained until 30 June 2021, even though the procedure had changed.
Supreme Court’s Verdict in Ashish Agarwal
The Supreme Court weighed in on this issue in the landmark case of Union of India vs. Ashish Agarwal, reported in 2022. The Court held that while the new reassessment provisions apply to notices issued on or after 1 April 2021, including for past assessment years, the notices issued under the old regime would be deemed as issued under Section 148A(b) of the new regime. This provided a transitional bridge between the old and new regimes.
Importantly, the Supreme Court affirmed that the limitations prescribed under the new Section 149 would still apply. However, the Court did not specifically rule on the applicability of TOLA concerning the new reassessment provisions, leaving a grey area that later litigation would attempt to clarify.
CBDT Notification Issued After Supreme Court Ruling
In response to the Ashish Agarwal decision, CBDT issued Notification 1/2022 dated 11 May 2022. This notification permitted the issuance of reassessment notices for Assessment Years 2013-14, 2014-15, and 2015-16, provided the escaped income exceeded ₹50 lakhs and approval was obtained from the Principal Chief Commissioner by Section 151(ii) of the amended Income Tax Act.
Similarly, for Assessment Years 2016-17 and 2017-18, reassessment notices could be issued if they satisfied the conditions under Section 149(1)(a) and were duly approved under Section 151(i). This was in line with the new reassessment regime but remained subject to the broader issue of whether TOLA could be invoked to justify these actions.
The Second Round of Litigation on Reassessment Notices
Following the CBDT’s guidance, reassessment notices for the aforementioned assessment years were reissued. These, too, faced legal scrutiny and were challenged as being time-barred. The primary argument was that TOLA had no relevance once the Finance Act 2021 had come into effect on 1 April 2021, particularly in the context of Sections 148 and 149 of the amended Act.
In the Keenara Industries Pvt. Ltd. case, the Gujarat High Court ruled that the old reassessment provisions had ceased to exist after 1 April 2021. Consequently, any attempt to rely on TOLA notifications to extend time limits under a repealed framework was invalid. The Bombay High Court echoed this view in Siemens Financial Services Pvt. Ltd., holding that TOLA, as a piece of subordinate legislation, could not override the provisions of the Finance Act 2021.
Other High Courts, including those in Allahabad, Rajasthan, Orissa, and Delhi, rendered similar decisions in various cases such as Rajeev Bansal, M Financial and Investment Consultancy Services Pvt. Ltd., Geeta Agarwal, and Ambika Iron and Steel Pvt. Ltd. In each instance, the courts concluded that notices issued under the old regime post 1 April 2021 were time-barred and not legally sustainable.
Contrasting Judgments from the Delhi High Court
Despite the prevailing judicial trend, the Delhi High Court took a divergent view in certain cases, notably Salil Gulati and Touchstone Holdings. Here, the Court upheld the validity of reassessment notices issued between 1 April 2021 and 30 June 2021, holding that TOLA did extend the time limits for issuing such notices, even under the new reassessment regime.
This judicial split set the stage for further clarification from the Supreme Court, especially in light of conflicting interpretations on whether TOLA could coexist with the new regime established by the Finance Act 2021.
Affirmation of the Substitution of Old Reassessment Provisions
The Supreme Court, in evaluating the new reassessment framework introduced by the Finance Act 2021, reaffirmed the ruling in Ashish Agarwal. It clearly stated that Sections 147 to 151 of the Income Tax Act, as they stood before 1 April 2021, ceased to operate once the new provisions took effect. Therefore, any reference to the Income Tax Act after this date must be construed as referring to the amended Act.
The Court explained that the new Section 149 prescribes a time limit of three years from the end of the relevant assessment year for reopening an assessment. However, this can be extended up to ten years if the Assessing Officer has in possession evidence indicating that the escaped income exceeds ₹50 lakhs and is represented in the form of an asset.
This reaffirmation had critical implications. First, it rendered invalid any reassessment notices issued after 1 April 2021 under the old regime. Second, it ensured that any notices issued under the new regime must comply strictly with the conditions outlined in the amended Sections 148 and 149.
Applicability of TOLA to the New Regime
The Court held that TOLA, which was still in force on 1 April 2021, applied to the new reassessment regime as well. However, it clarified that while TOLA could not revive the repealed provisions of the old reassessment law, it could extend the time limit for compliance with the new provisions. This distinction was crucial.
In simple terms, TOLA could not be used to continue applying the old regime, but it could be invoked to extend the limitation period under the new regime if the original deadline fell within the window of 20 March 2020 to 31 March 2021. This interpretation allowed TOLA to coexist with the new law in a limited, procedural capacity.
Illustration of Limitation Period Extended by TOLA
To explain this application, the Court provided an illustrative example. According to Section 149(1)(a) of the new regime, the time limit to issue a reassessment notice for the Assessment Year 2017-18 was three years from the end of the relevant year, i.e., up to 31 March 2021. Because this deadline fell within the TOLA window, the government could lawfully extend the time to issue such notice up to 30 June 2021 through the earlier issued CBDT notifications.
The Supreme Court emphasized that this extension must be read in the context of the new law and cannot be used to continue actions under repealed provisions. Thus, the key takeaway was that TOLA could extend deadlines only under the new regime.
Time Limit Extensions for Sanction Under Section 151
The Court also examined the procedural requirement for a sanction under Section 151. Under the new regime, reassessment proceedings require prior approval of designated authorities depending on the time frame of the case.
If the original three-year limitation period for an assessment year ended between 20 March 2020 and 31 March 2021, then under TOLA, the concerned authority had up to 30 June 2021 to grant the requisite approval.
By contrast, if the limitation period under the old regime ended during this window, then the extended deadline applied only until 31 March 2021, as the new law became effective from 1 April 2021. Therefore, any approvals granted under the old law beyond 31 March 2021 were held to be without legal foundation.
Implications for AY 2015-16 and the Abhinav Jindal Case
For Assessment Year 2015-16, where the original four-year time limit under the old regime expired on 31 March 2020, TOLA did not extend the time beyond 31 March 2021. This meant that any reassessment notice issued on or after 1 April 2021 was time-barred.
In the case of Abhinav Jindal HUF, the Delhi High Court had previously addressed this situation and held that approval granted by a Principal Commissioner under the new regime could not validate a notice that ought to have been issued and approved under the old regime by a Joint Commissioner within the limitation period.
The Supreme Court confirmed this reasoning. It was observed that for AY 2015-16, any reassessment notice issued after 1 April 2021 had no legal sanctity and must be withdrawn.
Example of Limitation Extension With TOLA
To further illustrate the application of limitation rules post-Ashish Agarwal, consider a scenario where the original reassessment notice under Section 148 was issued on 1 May 2021. Due to the legal fiction created by the Supreme Court judgment, this notice is treated as a show-cause notice under Section 148A(b).
Assume the assessee responded to this notice on 18 June 2022. The Assessing Officer then had sixty-one days, i.e., the number of days between 1 May 2021 and 30 June 2021, to issue a reassessment order under Section 148A(d). Hence, the final deadline would be 18 August 2022.
This interpretation relies on the third proviso to Section 149, which allows for the exclusion of the period when reassessment proceedings were stayed by judicial orders or otherwise delayed due to procedural compliance.
Legal Fiction and Stay Periods in Ashish Agarwal
The Supreme Court clarified that, from 1 April 2021 until the Ashish Agarwal judgment on 4 May 2022, assessing officers were deemed prohibited from issuing reassessment orders. This was because the relevant materials had not been provided to the assessee in compliance with the new regime.
Therefore, this entire duration was to be treated as a period of legal stay, and time was excluded from the computation of limitation under Section 149. The legal fiction created by the judgment ensured that both assessees and tax authorities were not prejudiced by the transitional confusion.
Application of Third Proviso to Section 149
The third proviso to Section 149 states that any time allowed or extended to the assessee to respond to a notice under Section 148A(b) must be excluded while computing the limitation period. This ensures that procedural fairness does not undermine legal timelines and that revenue authorities retain the time needed to act after receiving the assessee’s reply.
In practice, this means that the Assessing Officer gets additional time to pass an order under Section 148A(d), equal to the time originally allowed to the assessee for furnishing a reply.
Practical Timeline Illustration
For instance, if the original Section 148 notice was issued on 1 May 2021, the limitation period as extended by TOLA ended on 30 June 2021, providing a sixty-one-day buffer. If the deemed notice under Section 148A(b) was issued post-Ashish Agarwal and the assessee submitted their reply on 18 June 2022, the Assessing Officer could issue the reassessment notice by 18 August 2022.
Such clarifications are vital to understanding how legal fictions, statutory amendments, and subordinate legislation interact in practice.
Revenue’s Concession on AY 2015-16 Notices
In light of the above principles, the revenue department conceded before the Court that any reassessment notices issued for AY 2015-16 on or after 1 April 2021 must be withdrawn. These notices did not fall within the extended period allowed by TOLA, nor were they compliant with the new law. Therefore, their continuation would amount to a violation of both statutory and judicial principles.
Conflict Between TOLA and the Finance Act, 2021
The reassessment regime under the Income Tax Act was significantly amended by the Finance Act, 2021. This new regime was notified and made effective from April 1, 2021. However, despite this, several reassessment notices were issued beyond March 31, 2021, under the old regime, relying on the extension granted by TOLA. This led to a legal conundrum regarding which law would govern the validity of such notices—the new reassessment provisions introduced by the Finance Act, 2021, or the erstwhile provisions extended by TOLA.
TOLA was enacted to provide relaxation in timelines due to COVID-19. It extended various limitation periods for different actions under tax laws. This included extending deadlines for issuing reassessment notices. However, a critical issue emerged regarding whether the extension under TOLA could override the effective date of the new reassessment regime under the Finance Act, 2021.
The Finance Act, 2021, substituted the reassessment provisions entirely, rather than amending the previous ones. This indicates the legislative intent to replace the old procedure with a new one from a fixed date. Therefore, the issuance of reassessment notices post-April 1, 2021, must comply with the new procedure and conditions prescribed under sections 147 to 151 of the Act, as substituted.
However, the revenue authorities continued issuing notices under the old provisions, citing the extension granted by TOLA. This practice led to a large number of reassessment notices being challenged across various High Courts on the groundss that such notices were not valid under the new reassessment framework, despite the TOLA extensions.
Judicial Interpretations by High Courts
Several High Courts examined the legal conflict between TOLA and the amended provisions of the Finance Act, 2021. A consistent view emerged that TOLA cannot override substantive changes introduced by the Finance Act, 2021.
The Allahabad High Court in the case of Ashok Kumar Agarwal and several other decisions held that the reassessment notices issued after April 1, 2021, under the old regime are invalid. The Court emphasized that TOLA could not be invoked to extend provisions that had ceased to exist due to a legislative substitution. This meant that the notices were void ab initio if they did not comply with the new regime.
Similarly, the Rajasthan High Court in its decision observed that once the new law came into force, the old provisions stood repealed and could not be revived through an administrative circular or notification. The Court noted that administrative instructions or relaxations, such as TOL, A, cannot override the express mandate of the law enacted by the Parliament.
Other High Courts, including those of Delhi, Bombay, Calcutta, and Madras, echoed similar views. They struck down reassessment notices issued post-April 1, 2021, under the old regime. The common thread in these judgments was the supremacy of the Finance Act, 2021, over any administrative extension of time under TOLA, especially when the legal provision itself had undergone a complete substitution.
These judicial pronouncements created a nationwide judicial consensus against the revenue department’s stand, resulting in an adverse legal position for the government in numerous reassessment cases.
Revenue’s Response and Escalation to the Supreme Court
Faced with an unfavorable wave of judgments across High Courts, the Department of Revenue escalated the matter to the Supreme Court. The central contention was whether TOLA’s relaxation could apply even after the substituted provisions came into effect and whether reassessment notices issued under the old regime could be saved.
The revenue department argued that TOLA was a special COVID-related enactment intended to preserve procedural rights and that it extended not just timelines but also impliedly allowed actions under the old regime to continue temporarily. According to the revenue authorities, the intention of the legislature was not to retrospectively annul actions taken during the transition period.
On the other hand, taxpayers contended that the new regime under the Finance Act, 2021, was self-contained, prescriptive, and mandated fresh conditions for reassessment. Once the new regime was in effect, it was not open to the authorities to issue notices under the old law, regardless of any extension under TOLA. The legislative intent was to completely revamp the reassessment framework, and TOLA could not be construed to delay or override that implementation.
The matter thus came before the Supreme Court, with several appeals clubbed together to decide the fate of reassessment notices issued during the transitional period post-April 1, 2021.
Supreme Court’s Verdict in Union of India v. Ashish Agarwal
In a landmark ruling, the Supreme Court delivered its verdict in the case of Union of India v. Ashish Agarwal in May 2022. The Court acknowledged that the reassessment notices issued post-April 1, 2021, under the old regime were indeed invalid in terms of procedural compliance with the new law.
However, invoking its extraordinary powers under Article 142 of the Constitution, the Supreme Court struck a balancing approach. While technically invalid, the Court converted all such reassessment notices issued under the old regime (post-April 1, 2021) into show-cause notices under the new reassessment regime. This was done to avoid chaos and to allow the revenue department a fair opportunity to proceed under the new law without causing undue hardship to the taxpayers.
The Supreme Court’s decision brought clarity and provided a pragmatic solution to the legal tangle. It allowed the revenue department to continue reassessment proceedings under the new regime, but only after fulfilling the procedural requirements prescribed under the amended sections 148A and 149.
This decision was hailed as a landmark because it addressed the legality of reassessment notices in the light of the interplay between TOLA and the Finance Act, 2021, while also safeguarding the interests of both taxpayers and the revenue administration.
Supreme Court’s Decision in the Ashish Agarwal Case
In the case of Union of India v. Ashish Agarwal (2022), the Supreme Court addressed the issue of reassessment notices issued under the old law post April 1, 2021. The Court took note of the substantial number of reassessment notices issued beyond March 31, 2021, which was the cut-off date for the applicability of the erstwhile provisions. Despite acknowledging the procedural lapse by the department in issuing these notices under the old regime, the Supreme Court validated such notices as “deemed notices” under the new provisions of section 148A of the Act, thereby saving them from being invalidated altogether. However, it was also clarified that all defences available to the assessee under the new law, including a challenge to jurisdiction or limitation, could still be raised. This pragmatic approach aimed to balance the interests of the revenue and the taxpayer by preserving the notices but subjecting them to the procedural safeguards of the new law.
Legislative Response and Amendments Post Ashish Agarwal
Following the Supreme Court’s ruling in the Ashish Agarwal case, several courts dealt with the scope of its application. While the Apex Court sought to standardize the treatment of such reassessment notices, divergent decisions continued to emerge from various High Courts on whether all such notices could be treated as validly issued under the new regime. Subsequently, the Finance Act, 2022, further amended the reassessment provisions to remove ambiguities. Among other changes, it clarified how information suggesting escapement of income is to be considered and the timelines to be followed. These changes aimed to bring certainty to the process, ensuring both procedural fairness and effective tax administration.
Constitutional Validity and Retrospective Application of TOLA
The retrospective application of TOLA has been a significant point of contention. Critics argue that extending limitation periods retrospectively infringes on the taxpayer’s vested rights and runs afoul of constitutional guarantees under Article 14 (equality before the law) and Article 19(1)(g) (freedom to practice any profession or carry on any occupation, trade, or business). On the other hand, the government has defended TOLA as a necessary legislative response to exceptional circumstances caused by the pandemic. Courts have generally leaned towards upholding the retrospective extensions as being within legislative competence and justified under extraordinary situations. However, this remains a fertile ground for litigation, especially in cases where the extended timelines result in reopening of assessments that were otherwise time-barred under the original provisions.
Implications for Taxpayers and the Revenue Department
For taxpayers, the reassessment regime post-TOLA introduces a complex compliance environment. Taxpayers must be vigilant about any notices received and examine them carefully to assess whether they comply with the procedural and substantive requirements of the amended law. The requirement for the revenue department to provide reasons and an opportunity for the taxpayer to respond (as mandated under section 148A) is a crucial safeguard that must be availed by the taxpayer. At the same time, the revenue authorities are under greater scrutiny to ensure that reassessment proceedings are not initiated mechanically and are backed by credible information and due process. Any lapse in procedure may render the entire reassessment process void, making it imperative for tax officers to meticulously follow the legal framework.
Conclusion
The interplay between TOLA and the reassessment provisions of the Income Tax Act highlights the tension between administrative exigencies and the rights of taxpayers. While the government’s invocation of TOLA was driven by unprecedented circumstances, its application to reassessment timelines sparked widespread legal debate and judicial scrutiny. The Supreme Court’s pragmatic approach in the Ashish Agarwal case provided a temporary resolution but also opened the door to further litigation and interpretational challenges. Subsequent legislative amendments and evolving jurisprudence have attempted to streamline the reassessment process, but clarity and consistency remain crucial. For taxpayers, the current landscape demands greater vigilance and proactive engagement with the reassessment framework. For the revenue authorities, adherence to procedural safeguards and judicial directions will be key to maintaining the integrity and fairness of the tax system. Ultimately, the experience with TOLA underscores the need for balanced tax administration that upholds both revenue interests and taxpayer rights within the rule of law.