New Budget 2024 Rule: Why the Income Tax Department Is Likely to Issue a Surge of Notices This Month

The Income Tax Department is preparing to send out a significant number of tax notices this month due to the impending implementation of a new reassessment law on September 1, 2024. The amended regulation, announced in Budget 2024, limits the period for reassessing a taxpayer’s records to five years if the escaped income is at least Rs 50 lakh and three years for amounts less than Rs 50 lakh. This is a reduction from the previous ten-year period for reassessment.

Key Details of the New Rule

• Reassessment Period: The tax authorities can now only reassess cases up to five years old if the escaped income is Rs 50 lakh or more, and three years for lesser amounts.
• Previous Rule: Authorities could reassess cases up to ten years old.
• Deadline: Financial years 2013-14 to 2017-18 will become time-barred for reassessment from September 1, 2024.

Challenges Faced by Tax Officials

Tax officials are racing against time to compile and corroborate data on tax and income mismatches for the relevant financial years. The department relies on information from banks, property registrars, and investigation wing findings to build reassessment cases.

A body of tax officers has raised concerns about the feasibility of issuing a large number of notices under Section 148 (or 148A) within a single month. They cite the overburdened nature of jurisdictional assessing officers and the time-consuming process of obtaining sanction from the chief commissioner.

Moreover, taxpayers have the right to explain their position before reassessment orders are finalized, a process that most believe cannot be completed by the end of August. The Central Board of Direct Taxes (CBDT) has been urged to postpone the effective date of the proposed amendment, but this suggestion is unlikely to be well-received by corporations and high net worth individuals.

Expert Opinions

Mitil Chokshi, partner at CA firm Chokshi & Chokshi, stated, “Capping the reassessment period at five years was a great decision as it would reduce hassles and litigation. But if the department fears there could be a genuine loss of revenue as it may not be possible to wrap up several matters by August 31, the government can think of strict parameters where time-bound cases can be selectively reopened.”

Ashish Mehta, partner at law firm Khaitan & Co., noted, “Taxpayers may expect a rush of reassessment notices in August 2024. These notices are likely to be for the assessment years (AYs) 2018-19 and prior. It is pertinent to note that the Bombay High Court in a recent ruling in a case of Hexaware Technologies has taken a view on a proviso introduced in 2021, which can be interpreted to mean that AY 2017-18 (and prior years) got time-barred on March 31, 2024.”

Historical Context

The current situation mirrors the conflict between the Income Tax office and taxpayers in 2021 when the reassessment law was amended to allow the reopening of 10-year-old tax returns if the total undisclosed income exceeded Rs 50 lakh. This change led to over 10,000 writ petitions by companies arguing that they were not given sufficient time to explain and that notices were issued without considering the carve-out.

The Supreme Court, on May 4, 2022, upheld all reassessment notices issued after March 31, 2021, under Article 142 of the Constitution, but left room for judicial proceedings based on the merits of each case. Several such matters are still pending before the court.

As the deadline approaches, taxpayers and tax authorities alike are bracing for a flurry of reassessment notices, leading to a potentially contentious and litigious period ahead.