Bombay High Court strikes down post‑1 April 2021 reassessment notices under old Section 148 regime

Background and context

The Bombay High Court, in a batch of writ petitions led by Tata Communications Transformation Services Limited Vs ACIT, examined the legality of reassessment notices issued under Section 148 of the Income Tax Act 1961 on or after 1 April 2021, where the Revenue had proceeded by applying the pre‑amendment reassessment provisions.

The core controversy arose from the overlap and interaction between:

The Finance Act, 2021, which substituted the reassessment framework contained in Sections 147, 148, 149 and 151 and introduced Section 148A with effect from 1 April 2021; and
The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (the Relaxation Act), together with CBDT Notification No. 20/2021 dated 31 March 2021 and Notification No. 38/2021 dated 27 April 2021, which extended time limits for issuing Section 148 notices and purported to continue the application of the old provisions for that extended period.

Multiple assessees challenged reassessment proceedings initiated after 1 April 2021 on the basis that:

The old reassessment regime stood repealed/substituted from 1 April 2021; and
The Revenue could no longer issue notices under Section 148 by applying the pre‑amendment provisions, nor bypass the newly inserted safeguards in Section 148A.

The Bombay High Court decided these issues by aligning with the views of several other High Courts and clearly disapproving the contrary approach of the Chhattisgarh High Court in Palak Khatuja Vs. Union of India and Ors.

Pre‑amendment reassessment framework (up to 31 March 2021)

Earlier scheme under Sections 147, 148, 149 and 151

Before the amendments brought in by the Finance Act, 2021, reassessment powers were governed by:

Section 147 – permitted the Assessing Officer (AO) to assess or reassess income that had escaped assessment, based on a “reason to believe” standard.
Section 148 – required the AO to:
- Serve a notice on the assessee before making reassessment; and
- Record reasons in writing prior to issuing that notice (Section 148(2)).
Section 149 – prescribed the time limits for issuance of a Section 148 notice:
- Normally, no notice beyond 4 years from the end of the relevant assessment year where assessment was completed under Section 143(3), unless there was failure by the assessee to fully and truly disclose material facts.
- In any case, no notice beyond 6 years from the end of the relevant assessment year.
Section 151 – mandated sanction from higher authorities:
- Where 4 years had expired, sanction from Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner was necessary.
- Where the AO was below the rank of Joint Commissioner, prior satisfaction of the Joint Commissioner was required, except in cases under sub‑section (1).

Section 153 fixed the time limits for completion of assessments and reassessments.

Under this earlier regime, the jurisdictional foundation of reassessment lay in:

The existence of “reason to believe” that income had escaped assessment;
Observance of the statutory limitation periods; and
Obtaining the requisite approvals under Section 151.

New reassessment regime under Finance Act 2021 (effective 1 April 2021)

The Finance Act, 2021 substantially overhauled the reassessment code with effect from 1 April 2021. It:

Substituted Sections 147, 148, 149 and 151; and
Inserted a new Section 148A.

Substituted Section 147

Under the substituted Section 147:

The AO may assess or reassess income that has escaped assessment, or recompute loss, depreciation, or other deductions, subject to Sections 148 to 153.
The earlier distinction based on failure of full and true disclosure by the assessee is removed. That bifurcation no longer exists in the new scheme.

New Section 148 – trigger and conditions

The new Section 148 provides that, subject to Section 148A:

Before making assessment, reassessment or recomputation, the AO must serve a notice on the assessee, including a copy of the Section 148A(d) order (where applicable), requiring filing of a return in the prescribed manner.
Proviso to Section 148:
No notice under Section 148 can be issued unless:
1. The AO has “information which suggests that the income chargeable to tax has escaped assessment”; and
2. The AO has obtained prior approval of the specified authority.
Explanation (1) to Section 148 defines what constitutes “information” suggesting escapement of income.
Explanation (2) enumerates circumstances where the AO is deemed to have such information.

New Section 148A – mandatory pre‑notice procedure

Section 148A introduces a structured pre‑notice inquiry and opportunity mechanism, except in specified search‑related cases. It requires the AO, before issuing any notice under Section 148, to:

Conduct enquiry (if considered necessary) with prior approval of the specified authority concerning the information suggesting escapement of income (Section 148A(a));
Issue a show‑cause notice to the assessee (Section 148A(b)):
- Provide an opportunity of being heard;
- Provide a minimum of 7 days and a maximum of 30 days (extendable on application) to respond;
- Specify why a Section 148 notice should not be issued based on the information and the enquiry results.
Consider the assessee’s response, if any (Section 148A(c));
Pass a speaking order (Section 148A(d)):
- Decide, after considering all material including the reply, whether it is a fit case to issue notice under Section 148;
- Obtain prior approval of the specified authority;
- Pass the order within one month from the end of the month in which the reply is received or, where no reply is given, from the expiry of the allowed period.

Important:
The Proviso to Section 148A excludes this procedure where search or requisition under Section 132/Section 132A is initiated on or after 1 April 2021, or where seized material in a third‑party search is linked to the assessee with specified approvals.

The Explanation to Section 148A clarifies that the term “specified authority” has the same meaning as in Section 151.

Bombay HC on post-1 April 2021 reassessment: Section 148 notices under old law struck down