Income Tax Department is Preparing to Release a Flood of Tax Notices this Month

A surge of income tax notices is expected during the next month, with fears that many would fall under the tax net.

Revenue officials have informed central authorities that it will be nearly hard to review old tax returns for several years before September 1, 2024, when the new reassessment statute goes into effect.

The budget amendment allows the taxman to evaluate a taxpayer’s records for up to five years if their evaded income exceeds Rs.50 lakh. They might previously examine instances dating back up to ten years. The time limit is three years for amounts under Rs.50 lakh.

Typically, the tax office would send out reassessment notices in March for the previous year, which was approaching the end of its validity period. Now, with the budget reducing the maximum reassessment term to five years, tax officials will only have one month until August 31, 2024, to send notices.

Interpretation issues may Arise

The Income tax department creates reassessment cases based on data from banks, the registrar of properties, and the investigation wing’s feedback on search results. Under the current conditions, they would have to compile and verify data on tax and income discrepancies over the next three weeks for the financial years 2013-14 through 2017-18. Since September 1, IT returns for these years cannot be reopened.

“Issuing notices under section 148 (or 148A) in a large number of cases within a period of one month will be an immense challenge for overburdened jurisdictional assessing officers….the chief commissioner is the specified authority to sanction the notices, which takes a long time to complete the proceedings,” said a tax officers’ body in a representation to the chairman of the apex body Central Board of Direct Taxes (CBDT).

Notices for reassessment are sent under Sections 148 and 148A, with the law granting taxpayers the ability to explain their position before reassessment orders are finalised – a process that most expect will not be completed by the end of August.

Time Not Enough

The officers have urged the CBDT to postpone the particular date of the proposed amendment. However, the proposal would not be well received by corporations or affluent individual taxpayers.

Capping the reassessment period at five years was an excellent option that would prevent difficulties and litigation. However, if the department is concerned that there will be an actual loss of revenue because multiple procedures will not be completed by August 31, the government could set rigorous limits under which time-bound cases might be chosen reopened based on trials of efforts made to detect escaped income.

Reminder of the Year 2021

The issue is similar to the dispute between the Income tax office and taxpayers three years ago. The law governing reassessment was revised in April 2021. Previously, the tax authorities may investigate for up to six years for undeclared income over Rs.1 lakh if the assessee was involved in concealing the facts. Starting in 2021, the department can revisit 10-year-old tax returns if the total fugitive tax income exceeds Rs.50 lakh, and examine 4-year-old matters if the amount is less than Rs.50 lakh.

However, after receiving notices, more than 10,000 writ petitions were filed by companies on the grounds that they were not given time to explain, and the notices were served disregarding the carve-out that cases that couldn’t be reopened earlier (i.e., before April 2021) couldn’t be reassessed under the changed law that went into effect in April 2021.

On May 4, 2022, the Supreme Court exercised its extraordinary powers under Article 142 of the Constitution, upholding all reassessment notices issued after March 31, 2021.

However, the matter was not resolved, as the Supreme Court allowed an opportunity for legal proceedings based on the merits of each case. Several such cases are currently pending before the courts.