Manjiri Kamath (name changed), a senior executive working with Rothschild India received an income tax (I-T) notice in the last week of April 2021. The notice referred to assessment year (AY)2014-15 and alleged that “…we have reason to believe your income has escaped assessment…” while asking her to file a revised tax return and pay the amount before 30th April.
She reached out to her chartered accountant (CA) who asked her to “quietly file the revised return because there is no point in arguing with the tax department”. With barely three days for the deadline, a panic-stricken Manjiri (who knew that she was not at fault) filed a revised tax return and paid the entire amount of a little over Rs19,000.
Thousands of companies and individuals (including retired senior citizens) have received “reopening of old assessment” notices from the I-T department between March and June this year. CAs say this is routine and happens every year in March.
While there is no debate on the notices which were received in March this year, it is the reassessment notices that were received between 1st April and 30th June this year, which have led several corporates and individuals to challenge the validity of the notices in courts through writ petitions.
They are questioning the legality of these notices issued by the tax department under old rules, and contending that the I-T department’s move was void and arbitrary as action cannot be taken under the old provisions of the Income Tax Act.
The old tax law, amended with the passage of Finance Bill 2021 and in effect till 31 March 2021, allowed reopening of assessments for the last six years. The new rules, which came into effect from 1st April, lowered the time limit for issuing notices of reassessment to three years from six years from the end of the relevant assessment year. As per the amendment, serious cases of fraud involving tax evasion of Rs50 lakh or more can still be opened till 10 years.
The rule was supposed to come into effect on 1 April 2021, meaning that notices were to be issued by 31 March 2021, for assessment years prior to 2016-17.
Tax experts hoped that reassessment notices would focus on high value transactions or big mismatches rather than going after smaller taxpayers because one naively expected that the intent of the department was to reduce tax litigation. Their hopes soon crashed to the ground.
The tax department had, however, extended its validity till 30th June and accordingly issued notices to thousands of assessees between 1st April and 30 June 2021.
However, not everyone has the wherewithal to challenge the notices in high courts. A CA pointed out that only the corporates and high net worth individuals (HNIs) would have the money to pursue such legal battles.
He cited the case of an 85-year-old senior citizen from Mumbai, who received a similar notice for reopening her assessment for AY2014-15 from the tax department. Court cases tend to be expensive and time consuming. She would, in all probability, have no choice but to bow to the notice, which calls for reopening of old assessments. This is akin to tax bullying.
The CA further says, “The notices are completely wrong because the amendment in the law cannot be retrospective. If they have opened very old assessments -say AY2013-14 or AY2014-15…those are time-barred and cannot be reopened under the new law. Hopefully the court will strike down the date-extension provision itself and thereby all the invalid reassessment notices will be struck down”.
However, the problem is that government bureaucrats have blinkers on their eyes and are only focussed on increasing revenues and may look at other legal options to get around this.
The tax department doggedly believes that taxpayers cannot challenge any specific move of the department as various deadlines related to tax compliance have been extended in the wake of a deadly second wave of the COVID-19 pandemic.
The Central Board of Direct Taxes (CBDT) claims that it had informed about the extension because of the second wave of coronavirus infections.
The government of India extended deadline for date of issue of notice under section 148 of Income-tax Act,1961, passing of consequential order for direction issued by the Dispute Resolution Panel (DRP) & processing of equalisation levy statements.
— Prakash W. Kamat (@PrakashWKamatPK) May 25, 2021
Due to the local lock-downs and the deadly second wave, the Union government had extended the date of issue of reopening of cases till 30th June, and this was in line with various tax compliance-related relief provided to assesses.
If additional time has been given to the taxpayers, then according to the tax department, government machinery should also be given additional time to scrutinise the cases is the tax department’s argument. The CBDT contends that assessees cannot pick and choose, which extension of the deadline they want to oppose.
It appears that the I-T department does not want such suspected cases to become time-barred so it has slapped notices (during April to June 2021) to initiate action.
It is however extremely bizarre that on one hand the government amendment says that the new tax law comes into effect from 1st April while the tax department claims that the old law continues to exist till 30 June 2021.
How can both laws co-exist during the period from 1st April to 30 June 2021?
“Extending departmental deadlines, which is well within the powers of the government, is completely different from extending the deadlines of a law that has been overwritten by a new law,” points out Moneylife editor Debashis Basu in his column in Business Standard.
Narendra Goyal, president of Direct Tax Professionals Association, also expressed concern on the rampant issue of notices under Section 148 of the old provisions of the Income Tax Act. Last month, the Direct Taxes Professionals Association made a representation to the union finance minister Nirmala Sitharaman, highlighting the issue.
“Two sets of legal provisions cannot be used for the same purpose of initiating proceedings for reopening of assessments during the period from 1st April to 30 June 2021 as the new provisions have come into effect from April 2021. Naturally earlier provisions have become redundant and any notice issued under the old provisions is bad by law,” explained CA Ameet Patel.
At least one court order has already pointed out, “the impugned notification is contrary to the settled principles of statutory interpretation, namely, that any action is taken post the amendment of a procedural section would have to abide by the new procedures stipules in the amended Act. Further, it is of (the) view that by virtue of a notification, which is delegated legislation, the date for implementation of a statutory provision cannot be varied or changed”.
The government is said to be awaiting the final verdict by the courts, and exploring all legal options available to it. The matter is now to come up for hearing in August and September.
Ignoring all logic and rationale, the union government is reportedly said to be considering the possibility of bringing an ordinance to deal with the problem of income tax cases on reassessment notices under old, time-barred norms.
Delhi High Court HC has stayed operation of I-T reassessment notices issued after 31st March. Many assessees have received interim stay orders on such reassessment notices from the high courts in Mumbai and Kolkata.
As if this is not enough, there is also a gigantic chaos created by the utter failure of the new income tax portal, which has frustrated chartered accountants and the common man alike. Twitter is full of complaints against the non-functional new portal.
“Filed returns disappear. More than 8 lakh grievances registered in less than 2 months. Only God can save us professionals and the tax payers,” reads one such complaint.
Meanwhile, Infosys has been routinely seeking for more time to set the portal in order and has been doling out empty reassurances almost every week that the portal will be fully operational “soon”.
While tax scrutiny may have marginally decreased, the faceless assessments, being algorithm-driven, reject many tax computations. This has led to the number of appeals. “I have filed more appeals in the last two years than in the past seven,” says Nikhil Vadia, a Mumbai-based tax consultant.
Got a notice from income tax on 1st of June with a due date to reply till 7th of June. Don’t these income tax people know site is in maintenance till 6 th of June. Are they drunk before issuing notice or they do it purposely to harass the income tax payers.
— VINAMRA JAISWAL (@VINAMRAJAISWAL2) June 2, 2021
The government has been largely vociferous about its so-called efforts to bring in transparent taxation, to do away with “taxtortion” and to honour the honest tax payers. It introduced a tax charter, which commits the department to “provide a fair & just system”.
However, as is seen from the ground reality, very little has changed.
Two months back, Earlyguard, British subsidiary of Japanese behemoth Mitsui initiated arbitration proceedings after income tax notice of Rs2,400 crore. Mitsui has challenged the retrospective taxation after Vodafone, Cairn Energy and Antrix-Devas.
As international and domestic tax holders continue to be hounded by the draconian taxation measures, there is now an urgent need for the government to somehow get its act together and deliver on its promise. Time is also running out for the looming tax filing deadlines.