Comparative Analysis Of The Reassessment Regime Under The Finance Bill (2), 2024 And Pre-Existing Law

The authors are Samvardhan Tiwari & Prassiddhi Sachdeva from Integrated Law Course, Faculty of Law, University of Delhi

Abstract:

After the proposal of the new Financial Bill (No.2), in 2024, a lot of new avenues have been opened. The previous income tax act, 1961 posed a lot of challenges with respect to judicial interpretation regarding some ambiguous terms (like mentioned in sections 147, 148, etc.) Moreover, many people have previously critiqued before that the erstwhile act provides a space for probable discrimination against a certain class of taxpayers, typically who belong to higher brackets of income. This paper aims to analyse these issues and also provides a critical appraisal for the future of the new financial bill, in the coming years. While the new financial bill provides a liberal approach aimed towards minimising litigation suits relating to tax related disputes but at the same time it also shifts the burden of responsibility on the tax authorities heavily. This paper further suggests three tests backed by particular constitutional provisions, which the courts can practise while evaluating cases pertaining to tax administration. While the objective of the paper is mainly to analyse the extent of 'ambiguity' of the previous act and how far does the new bill clarify for the same, but this paper also suggests recommendations which can deem the new bill sustainable in the long run. While the new financial bill has opened new avenues regarding reassessments, withholding of funds and other procedural safeguards but at the same time much careful scrutinization and consideration is required to facilitate dialogue and feedback mechanism with tax-payers and business operators, as transparency in tax related cases is an urgent need of the hour.

Keywords:

Reassessment, Reasonableness, Arbitrariness, Safeguards

1. Introduction

The reassessment regime under the Income Tax Act, 1961, serves as a mechanism that allows tax authorities to reassess or reopen concluded tax assessments if new information emerges, suggesting that income chargeable to tax has escaped assessment. The reassessment process is governed primarily by Sections 147 to 149 of the Income Tax Act, 1961[i]. The core principle behind reassessment is to ensure that taxpayers do not evade their tax liabilities by withholding or misstating information during the initial assessment.

To breakdown the essential sections relating to the reassessment are as follows, beginning with section 147, which empowers the Assessing Officer (AO) to reopen assessments if the AO has reason to believe that any income chargeable to tax has escaped assessment. The phrase "reason to believe" has been judicially interpreted to mean that the AO must have tangible material to support the conclusion that income has escaped assessment. The following section, Section 148 provides the procedural requirements for issuing a notice for reassessment. It mandates that the AO must serve a notice to the assessee before proceeding to reassess income that has escaped assessment. A very essential requirement is listed in the Section 149 which lays down the time limits within which the AO can issue a notice under Section 148. The time limits vary depending on the quantum of income that is believed to have escaped assessment.

1.1 Reassessment Before Finance Bill (2), 2024[ii]

Under the previous regime, tax authorities could reopen assessments if they had "reason to believe" that income had escaped assessment. This "reason to believe" was a critical standard that had to be satisfied before issuing a reassessment notice. Judicial precedents, such as GKN Driveshafts (India) Ltd. v. ITO[iii] and Rajesh Jhaveri Stock Brokers Pvt. Ltd. v. ACIT[iv] , clarified the scope of this condition, emphasizing that it could not be based on a mere change of opinion by the AO. The courts consistently held that there must be tangible material that led to the formation of such belief, and the reopening of assessments could not be arbitrary or based solely on a review of the same facts already examined during the original assessment.

To bring more clarity to this aspect, here are a few key elements of the Reassessment Process Before Finance Bill (2), 2024. The key aspect in the Income Tax Act, 1961 was a prescribed specific time limit for reopening assessments. Typically, an assessment could be reopened within four years from the end of the relevant assessment year. In cases where the Assessing Officer (AO) had reason to believe that income exceeding Rs. 1 lakh had escaped assessment, the limitation period was extended to six years. These time limits provided a clear framework for reopening cases, balancing the need for reassessment with the principle of finality in taxation, making timing an essential aspect, however along with timing, another key aspect was the procedure, to elaborate the reassessment process began with the issuance of a notice to the taxpayer under Section 148. The AO was required to record the reasons for reopening the assessment, which had to demonstrate that there was material evidence suggesting income had escaped assessment. Furthermore, in certain cases, the AO needed to obtain approval from higher authorities (such as the Principal Commissioner or Commissioner of Income Tax) before issuing the notice. This requirement for prior approval acted as an internal check on the exercise of reassessment powers. Due to the high stakes involved there were a few essential safeguards involved; to illustrate, judicial scrutiny played a vital role in shaping the reassessment process. Courts had consistently held that reassessment could not be initiated on mere suspicion or conjecture. The AO needed to rely on "tangible material" that justified the belief that income had escaped assessment. Judicial precedents such as GKN Driveshafts (India) Ltd. v. ITO emphasized that reassessment should not be based on a change of opinion by the AO and required adherence to procedural safeguards to prevent arbitrary use of reassessment powers.

Having discussed the requirements, its pertinent to share the significance of the process of Reassessment in Tax Law, and how its an important function in the Indian tax system, to begin with, reassessment ensures that tax evasion is detected and addressed even after the completion of an initial assessment. It allows tax authorities to re-evaluate cases where new information emerges, for instance, reassessment may be prompted by data sharing between countries, whistleblower complaints, or the discovery of previously undisclosed income or assets. Another case could be where mistakes or omissions are discovered because reassessment is particularly relevant in cases where income has escaped assessment due to a taxpayer's misrepresentation or failure to disclose material facts.

The reassessment regime acts as a deterrent against non-compliance, as taxpayers are aware that even completed assessments may be reopened if there is sufficient evidence of evasion or error. However, while reassessment is crucial for maintaining the integrity of the tax system, it has been criticized for its potential for misuse and overuse. Taxpayers have often faced harassment due to vague or inadequate reasons for reopening, prolonged delays in reassessment proceedings, and excessive litigation arising from contentious reassessment notices. These issues have highlighted the need for reforms to streamline and provide greater clarity in the reassessment process. The Finance Bill (2), 2024, aims to address these long-standing concerns by introducing changes that bring efficiency and transparency to the reassessment framework.

The Finance Bill (2), 2024, introduced key amendments to address longstanding concerns regarding the misuse of reassessment powers under the Income Tax Act. The new provisions are designed to strike a balance between the powers of tax authorities and the rights of taxpayers by modifying the conditions for reassessment, the amendments have redefined the circumstances under which reassessment can be initiated, placing stricter requirements on tax authorities to justify their reasons for reopening an assessment. The introduction of well-defined criteria is expected to reduce arbitrary reassessing actions. Introducing procedural safeguards: New procedural safeguards have been incorporated to reduce frivolous reassessment proceedings. The requirement for mandatory prior approval from higher authorities before reopening an assessment has been retained and further strengthened to ensure accountability. While these measures work well, another step taken is the shortening of timelines while enhancing transparency since the amendments also involve reducing the time limits for reassessment proceedings and mandating a more transparent process for communicating reasons to taxpayers. This is intended to minimize the uncertainty faced by taxpayers and reduce the overall duration of reassessment processes. These changes are significant as they reflect a shift toward a more structured and taxpayer-friendly approach while still enabling tax authorities to perform their duties efficiently. The revised reassessment regime aims to protect taxpayer rights, reduce the burden of litigation and promote compliance by establishing clear guidelines for reopening cases.

2. Purpose

The objective of this article is to analyse the changes in the reassessment provisions introduced by Finance Bill (2), 2024, and compare them with the provisions that existed under the Income Tax Act prior to these amendments. The article will explore how the reassessment regime has evolved in terms of legal standards, procedural requirements, and safeguards for taxpayers. Specifically, it will focus on whether the recent reforms effectively address key challenges of the previous regime, such as excessive litigation, the arbitrary use of reassessment powers, and the lack of transparency. By conducting this comparative analysis, the article aims to provide a comprehensive understanding of:

The Evolution of Reassessment Standards: How the requirements for initiating reassessment have changed, including the shift from "reason to believe" to a more concrete standard.
Procedural Changes and Their Impact: The impact of procedural modifications on reducing the discretionary power of tax authorities and improving taxpayer protections.
Effectiveness of Reforms: Whether the changes introduced by Finance Bill (2), 2024, adequately address the historical concerns associated with the reassessment process and contribute to a more effective and fair tax administration system.

2.1 Understanding The Reassessment Regime Before Finance Bill (2), 2024

Before the enactment of Finance Bill (2), 2024, the reassessment procedure in India was primarily governed by Sections 147 to 151 of the Income Tax Act, 1961. These provisions outlined the circumstances under which an Assessing Officer (AO) could reopen past assessments and the procedural requirements that had to be followed. The reassessment regime operated with the aim of detecting income that had escaped taxation, either due to errors, omissions, or deliberate misreporting by the taxpayer.

a) Section 147: Grounds for Reassessment

The AO could reopen an assessment if they had "reason to believe" that income chargeable to tax had escaped assessment. This "reason to believe" was a legal threshold based on tangible material rather than mere suspicion. Generally, reassessments under this section could be reopened within four years from the end of the relevant assessment year. However, this period could extend to six years in cases involving substantial tax evasion (e.g., where the escaped income exceeded Rs. 1 lakh). In cases of fraud, wilful misrepresentation, or concealment of income, the time limit could be further extended.

b) Section 148: Notice for Reassessment

The AO could issue a notice for reassessment if they had "reason to believe" that income had escaped assessment due to fraud, wilful misrepresentation, or concealment of income. Unlike Section 147, there was no specific time limit for reopening assessments in cases involving fraud or misrepresentation. The AO could reopen assessments at any time provided they had sufficient evidence of such misconduct.

c) Section 149: Extended Grounds for Reassessment

This section allowed the AO to reopen an assessment based on omission or mistake rather than deliberate fraud or concealment. Reassessment could be initiated within four years from the end of the assessment year in which the mistake or omission occurred. This limit could be extended in cases involving larger sums of escaped income.

d) Section 150: Notice to Taxpayer

Before initiating reassessment proceedings, the AO was required to issue a notice to the taxpayer. This notice had to specify the reasons for reopening the assessment, along with the supporting facts and evidence that justified the action. The taxpayer had the right to contest the reopening through a hearing before the reassessment proceedings commenced.

e) Section 151: Approvals and Appeals

This section required the AO to obtain approval from higher authorities before reopening assessments, especially in cases where the time limit for reassessment had expired. This safeguard was designed to prevent frivolous or arbitrary reassessment actions. Taxpayers were entitled to appeal against reassessment orders to the Commissioner of Income Tax (Appeals) or the Income Tax Appellate Tribunal (ITAT), thereby ensuring a channel for redressal.

2.2 Procedural Aspects

Issuance of Notice: The AO was required to issue a formal notice of reassessment under Section 148, specifying the reasons for reopening the assessment, supported by concrete facts or documents. After issuing the notice, the AO would scrutinize the taxpayer’s records, including returns and financial statements, to gather additional evidence. Reassessment hearings involved an in-depth examination of the evidence. The taxpayer was allowed to present their case, submit documents, and contest the reasons for reopening. Upon completing the scrutiny and hearings, the AO would issue a reassessment order. This order would determine the revised tax liability, if any, along with penalties or interest. Taxpayers could appeal the reassessment order if they believed it was unjustified. Appeals could be lodged before the Commissioner of Income Tax (Appeals) or the ITAT, providing multiple levels of judicial review.

The reassessment regime before Finance Bill (2), 2024, allowed the tax authorities significant leeway to reopen closed assessments. However, the requirement for the AO to establish a "reason to believe" served as a legal check against the arbitrary exercise of power. Despite these safeguards, the system was often criticized for the potential for harassment, with claims that tax authorities sometimes misused reassessment powers, leading to prolonged litigation and uncertainty for taxpayers. Moreover, the absence of fixed time limits for reassessments involving fraud and misrepresentation allowed indefinite reopening of assessments, which posed significant challenges for taxpayers in maintaining records and defending against such claims after many years. The introduction of Finance Bill (2), 2024, seeks to address many of these concerns by refining the legal thresholds and procedural safeguards, as outlined in the subsequent sections of this article.

The reassessment regime under the Income Tax Act, 1961, prior to the amendments by Finance Bill (2), 2024, was primarily governed by Sections 147, 148, 149, 150, and 151, establishing the time limits, conditions, and procedural safeguards for reopening assessments.

Conditions for Reassessment Notices (Sections 147 & 148) were "Reason to Believe": Reassessment could only be initiated if the Assessing Officer (AO) had a genuine belief that income had escaped assessment, based on new material facts not previously considered. Courts stressed that reassessment should not be based on mere change of opinion (CIT v. Kelvinator of India Ltd.)[v]. Another essential was the notice requirement (Section 148) within which, after forming a valid reason, the AO issued a notice to the taxpayer to file a fresh return, which was required to proceed with reassessment. Afterwards, the approval requirements (Section 151) for reopening within 4 Years, approval from the Joint Commissioner of Income Tax (JCIT) was required. After 4 Years, approval from higher authorities, such as the Principal Chief Commissioner, was necessary to ensure that such actions were not arbitrary.

However, there is an exception to Time Limits listed in Section 150 which allowed reopening without time limits in exceptional cases based on findings from judicial proceedings.

Judicial precedents play a key role as courts frequently intervened to prevent misuse of reassessment powers. The Supreme Court, in GKN Driveshafts India Ltd. v. ITO, established that the AO must exercise reassessment powers reasonably and not on mere suspicion.

3. Changes Introduced By Finance Bill (2), 2024

To begin with there is an extension to the time limit for issuing reassessment notices was extended where the AO found deficiencies or errors in the original assessment or discovered undisclosed foreign assets. Along with this there is an addition of a clarification of "Reason to Believe" which is defined as a genuine belief, based on material evidence, was reinforced as necessary for reopening assessments. There were new conditions introduced for cases involving information on foreign assets or income in tax havens. There are additional strengthened procedures and safeguards for taxpayers. But at the same time there is an additional requirement of notices, which must specify detailed grounds for reopening. At the same time, taxpayers are assured of their right to be heard before reassessment proceedings.

The rationale behind this policy is that the amendments aimed to improve efficiency, reduce litigation, and balance the powers of tax authorities with taxpayer rights. By refining the criteria for reassessment and requiring clearer justifications and approvals, the changes aimed to make the process more transparent, reduce arbitrariness, and align with global standards for cross-border tax compliance. This framework encourages voluntary compliance and seeks to decrease unnecessary litigation.

3.1 Procedural Safeguards: Unleashing A New Era

The main contention or the underlying issue which was previously being face, by the companies and private parties was that, arbitrary reopening of completed assessments, was acting as a major drawback for the aforementioned groups, especially when it came to corporate auditing. To top it up, a prolonged time period for reassessment further increased the burden on the affected parties, which gave impetus towards drafting a new bill which can help in amending these issues. As section 147 of the Income Tax Act, 1961[vi] illustrates about the, ‘Income escaping assessment’, it states that:

If the [Assessing Officer] [has reason to believe] that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148[vii] to 153[viii], assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned..

The words, ‘reason to believe,’ has been interpreted to a very large extent which acts arbitrary and detrimental towards regular tax-payers, when their accounts are reopened for assessment purposes. While a lot of scholars have previously debated upon it’s, ‘arbitrary,’ prospect, as the sections itself provides room for further deliberation when it comes to reopening of completed assessments, as prior approval is required, if an assessment needs to be reopened after a period of 4 years or where the tax scrutiny has more significant grounds. In addition to this, the reassessment period could range up to 10 years, especially in cases which dealt about heavy income abouts being escaped (over 50 lakh rupees), but this prolonged uncertainty created a heavy burden on the taxpayers. Although section 147 has provided enough room for the approval of higher authorities, but still the previous act lacks lots of professional safeguards as a lot of times senior authorities would cite vague reasons while issuing reopening of assessments, this further led to a surge in litigation cases against the tax authorities. This issue has put a lot of spotlights on these higher authorities. By looking at section 151 of the Income Tax Act, 1961[ix], which illustrates about the sanctioning of the issue of notice, we can infer that it operates on the contingency of the findings made by the AO (Assessment officer): -

No notice shall be issued under section 148[x] by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice

Combining the provisions mentioned under section 147 and section 151, the act has failed in providing sufficient grounds for the reopening of completed assessments. Moreover, the courts have previously reiterated on this aspect that the, “reason to believe,” under section 147 should be supplemented by specific and tangible reasonings and not mere suspicion, on this aspect this provision is majorly silent. Taking reference from cases like, GKN Driveshafts (India) Ltd. v. ITO (2003)[xi], in which the apex court had emphasized that when a reassessment notice is issued under Section 147, the Assessing Officer must provide the taxpayer with the reasons for reopening the assessment. The phrase "reason to believe" cannot be vague, speculative, or based on a mere change of opinion. There must be tangible evidence to justify the reopening. The court reinforced that reassessment under Section 147 should not be used as a tool for arbitrary scrutiny. Similarly, in CIT v. Kelvinator of India Ltd. (2010)[xii], which is probably one of the most cited cases on Section 147, the Supreme Court held that ‘reason to believe’ cannot mean mere change of opinion. The court stated that reopening assessments based on "mere review" without tangible material would make the provision a tool for arbitrary reassessment. The court ruled that the Assessing Officer must have new, substantive evidence to reopen an already completed assessment, quoting from the judgement itself : -

“Where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments based on “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place.”

This is where the new assessment bill provides a new safety-net to the innocent tax-payers. It lays down proper procedural safeguards, wherein a more structured and a risk-based approach is introduced. It illustrates that prior approval from the Principal Commissioner should now be mandatory, before issuing a reassessment notice and can even extend to cases having a time of 3 years, as illustrated in the new Financial Bill[xiii]: -

No notice under section 148 shall be issued for the relevant assessment year,

(a) if three years and three months have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);

(b) if three years and three months, but not more than five years and three months, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of accounts or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax, which has escaped assessment, amounts to or is likely to amount to fifty lakh rupees or more.

This specification of time limit has further helped the authorities in developing a prospective approach while handling cases involving high amounts of escaped income. Instead of repetitive reopening of assessments, such measures provide a better outlook towards the assessing cases of similar veracity. Apart from this, one of the very critical aspects in these amendments, was about the withholding and the set-off of funds, wherein the tax-payer was under the suspicion of escaping a certain amount of tax income. The previous, Income Tax Act, 1961, provided guidelines in sections 241[xiv], which guided upon AO’s (Assessing officer’s) power to withhold the refund in certain cases, and section 245[xv], dealt with, ‘Set off of refunds against tax remaining payable,’ with reference to these two sections, the new financial bill proposed more stricter approach towards the same, and henceforth providing a safer approach for the taxpayers. As per the proposed financial bill, the AO (Assessing Officer), must demonstrate a strong nexus between the potential tax liability and the amount of fund withheld. The same has been reiterated by cases like, Hindustan Unilever Ltd. v. UOI (2010)[xvi] wherein the Bombay High Court in this case ruled against the arbitrary withholding of refunds. It emphasized that the Assessing Officer's discretion under Section 245[xvii] to withhold refunds should be exercised judiciously and based on solid grounds, and taxpayers should be given a proper hearing. This case had illustrated how the lack of clear guidelines for withholding refunds under Section 245 can lead to arbitrary decisions by tax authorities. It underscored the need for legislative changes that would introduce procedural safeguards and time limits for withholding funds, which the Finance Bill 2024 aims to address. Similarly, in the case of UOI v. Tata Chemicals Ltd. (2014)[xviii], The Supreme Court in this case had emphasized the right of a taxpayer to receive timely refunds. The court ruled that the interest on delayed refunds was a substantive right of the taxpayer and that the tax authorities could not arbitrarily delay or withhold refunds. This case had indirectly highlighted the need for clarity on when refunds could be withheld and how interest should be computed, encouraging legislative reforms. The decision brought attention to the necessity of refining Section 245, particularly in situations where refunds were being withheld without sufficient justification, setting a precedent for legislative amendments.

Additionally, it also provides a fair chance of recourse to the tax-payer, whose income is in question. With the prior approval of the principal commissioner, the AO is required to provide a detail communication to the subjected to tax-payer and is responsible for providing clear reasons about why his income is being withheld. On the other hand, clause 72[xix] of the proposed financial bill further proposes: -

Sub-section (2) of the said section provides that where a part of the refund is set off under the provisions of sub-section (1), or where no such amount is set off, and refund becomes due to a person and the Assessing Officer, having regard to the fact that proceedings for assessment or reassessment are pending in the case of such person, is of the opinion that the grant of refund is likely to adversely affect the revenue, he may, for reasons to be recorded in writing and with the previous approval of the Principal Commissioner or the Commissioner, withhold the refund up to the date on which such assessment or reassessment is made”.

This proposed amendment showcases the liberal side of the aforementioned bill, by providing a space of refunding a particular amount if a tax-payer has paid more tax than he was subjected to and as reiterated before, if any pending assessment is going on, the AO can, ‘write down clear reasons,’ for withholding the funds and can get the approval from the principal commissioner for the same, and then take a call on making the refund or not. To complement these procedural aspects, the ‘time limit’, under clause 45 of the new bills has also been amended as the general time limit for reassessment is now reduced to 3 years from the end of the relevant assessment year, in most cases, promoting faster resolution and less uncertainty for taxpayers. In cases where the escaped income exceeds Rs. 50 lakhs, the reassessment can now be initiated up to 10 years from the end of the relevant assessment year. This ensures that high-value cases are given sufficient time for review. The 16-year limit for foreign income or assets remains, but with more focus on ensuring that such cases are handled efficiently within this broader framework. This reduction of time limits brings more certainty to taxpayers, as they now face shorter periods of potential tax scrutiny. This change ensures that reassessment is not prolonged unnecessarily, providing finality and reducing disputes. By looking at these provisions, we can understand how holistically the proposed bill aims to reduce litigations suits which deal with tax-related disputes in courts, in light of this such amendments are a very positive initiative and should be given more impetus.

3.2 Emerging Trends And Challenges

Although the new proposed bill moderates a lot of terms which were previously ambiguous but at the same time, it also poses its own set of challenges. While the proposed bill gives very liberal time-limits when it comes to issuing notices or reopening of assessments, on the other hand, it creates a bigger issue for, ‘high-value’, cases involving amounts exceeding 50 lakhs. The prolonged period of assessment puts a burden of document retention on both ends, that is the tax-payers and the tax-authorities. This would not only require financial management but would also increase the administrative costs of the authorities, for the maintenance of such documents for a period of 10 years. In addition to this, this also increases the aspect of uncertainty for a long period of time, especially in cases which involve complex financial transactions. Moreover, this issue of time limit has many loopholes with regards to its judicial interpretation too. The 10-year provision was originally made to prevent large-scale tax evasion cases, but it may lead to a potential abuse of power in high value cases if the tax authorities start continuously targeting high-net-worth individuals or businesses, even for minor discrepancies, it can create a disproportionate burden on such taxpayers. Although the new financial bill is backed by legal competence under article 246 of the Indian Constitution[xx], which directs upon subject matter of laws which are to be made by the parliament and the state legislatures. As per entry 82 of the union list[xxi], the parliament has the exclusive authority to legislate over income tax matter but the problem arises when we look at the procedural amendments, as it can be subjected to equality and reasonable fairness. While debating on high value cases, many people have critiqued that it has an aspect of arbitrary discrimination wherein different classes of tax payers based on their income levels can be put under judicial scrutiny which may affect their business operations. While the Union's power to levy income tax is clear, the courts could scrutinize whether the specific procedural amendments (such as reassessment time limits or AI-driven assessments) are in line with constitutional guarantees. In such challenges, the courts may evaluate if the tax administration is adhering to principles of fairness and equity while implementing these amendments. In light of this, the courts can scrutinize and evaluate the cases under the following three tests: -

Test of reasonableness: Article 14[xxii] of the Indian constitution guarantees equality before law. With high value cases, it may create discriminatory practices that unfairly burden certain classes of taxpayers. Courts could demand safeguards ensuring human oversight and adequate grievance redressal mechanisms to handle disputes arising from AI-based assessments.
Test of fair opportunity: Article 19 (1) (g)[xxiii] of the Indian Constitution, allows every Indian citizen to practise any profession which they wish to. In light of the proposed prolonged assessments, if tax authorities are reopening the previous assessments again and again, the same issue can be contested in the light of excessive government interference. Moreover, this can also create hindrances in business operations, especially if there are delays in notices or errors in AI assessments. One of the critical questions which can arise here is whether the amendments provide taxpayers with sufficient legal recourse or safeguards to protect their business interests from excessive government interference, which could be deemed unconstitutional under Article 19.
Test of proportionality: The proportionality principal asses that whether government actions are justified by the objectives it seeks to achieve. The new bill can be contested on the grounds of unreasonable prolonged delays, which can cause hindrances in closing their financial affairs. The proportionality principal reinforced the ideology that the citizen’s rights should not be restricted excessively and on the same grounds the courts can demand justification for why such an extension is necessary in certain cases, and whether it can be applied more narrowly to minimize negative impacts.

4. Conclusion

The amendments introduced by Finance Bill (2), 2024 [xxiv]represent a significant shift in the reassessment regime under the Income Tax Act. As these changes are evaluated, it is crucial to determine whether they effectively strike a balance between the interests of taxpayers and the needs of revenue authorities. To ensure this, certain measures can be adopted which can further diminish any scope of confusion with respect to the new financial bill. As far as the prolonged reassessment in cases of high value cases is concerned, in order to strike a better balance for this, a tiered approach to the limits according to the severity of the case should be followed instead of a blanket extension. This can prevent tax-payers from facing unnecessary anxiety and burden of extended period of assessments. The issue of prolonged reassessments also throws light on the administrative apparatus which will be required to complete such assessments and for that the authorities should be readily equipped for the same. To alleviate the threat of delayed tax collections and assessments, tax authorities can streamline their processes by implementing case management systems and ensuring sufficient staffing levels. To complement these initiatives, special emphasis should be given on the aspect of technology ensuring that it acts an aid and not as a replacement for human judgement. This can promote quicker-decision making and shorten response time in complex financial matters and has the potential of providing high accuracy in aforementioned cases. In addition to this, although the new bill proposes new avenue for holding the tax authorities accountable but transparency remains a big issue. It could be curtailed by establishing a public reporting mechanism and regular audits of reassessment can be practised so that everyone can be kept abreast with the latest compliance rules and laws. The issue of transparency also showcases the urgency of dialogue and feedback mechanism in the modern times. Implementing regular stakeholder consultations and forums where taxpayers can voice their concerns and suggestions would be beneficial. This open dialogue can help authorities understand the real-world impact of their policies and make necessary adjustments to improve the reassessment regime. Taking reference from premier stakeholder consultations across the globe like OECD's Forum on Tax Administration (FTA)[xxv], where business representatives and other stakeholders engage and deliberate over tax policies like implementation of BEPS (Base Erosion and Profit Shifting) action plans, etc. The FTA had held regular periodical meetings, such as the 2020 consultation on digital platforms and gig economy taxation, where they took feedback from businesses and individuals. Similarly in India, independent research institutions like National Institute of Public Finance and Policy (NIPFP)[xxvi], under the aegis of Ministry of finance, conducts public consultations and provides policy advice on tax matters. These discussions involve academics, tax experts, and industry representatives to help shape long-term fiscal policies and reforms. NIPFP conducted studies and consultations on reforming corporate tax rates and rationalizing tax exemptions that fed into the design of the tax policies implemented in recent budgets.

While the new Financial Bill (No.2) has opened a lot of new avenues for the Indian citizens when it comes to paying off of taxes but it also poses a new set of challenges in the hindsight. Henceforth, careful consideration should be given to its implementation and periodical monitoring should be observed so that the new financial laws are prevented from being misused and can be utilised efficiently.

References :

[i] Income Tax Act, 1961, § 147.

[ii] The Finance (No. 2) Bill, 2024, No. 55 of 2024 (India).

[iii] GKN Driveshafts (India) Ltd. v. Income Tax Officer, 245 ITR 449 (Supreme Court 2001).

[iv] Rajesh Jhaveri Stock Brokers Pvt. Ltd. v. Assistant Commissioner of Income Tax, 253 ITR 358 (Supreme Court 2002).

[v] Commissioner of Income-Tax, Delhi-II vs Kelvinator of India Ltd., 218 ITR 503 (Supreme Court 2002).

[vi] Income-tax Act, No. 43 of 1961, § 147, India Code (1961)

[vii] Income-tax Act, No. 43 of 1961, § 148, India Code (1961)

[viii] Income-tax Act, No. 43 of 1961, § 153, India Code (1961)

[ix] Income-tax Act, No. 43 of 1961, § 151, India Code (1961)

[x] Supra 2

[xi] GKN Driveshafts (India) Ltd. v. ITO, (2003) 259 I.T.R. 19 (S.C.)

[xii] CIT v. Kelvinator of India Ltd., (2010) 2 S.C.C. 723.

[xiii] Finance Bill , 2024, Bill No. 2 of 2024, Lok Sabha (India)

[xiv] Income-tax Act, No. 43 of 1961, § 241, India Code (1961)

[xv] Income-tax Act, No. 43 of 1961, § 245, India Code (1961)

[xvi] Hindustan Unilever Ltd. v. UOI, (2010) 325 I.T.R. 102 (Bom.)

[xvii] Supra 10

[xviii] Union of India v. Tata Chemicals Ltd., (2014) 6 S.C.C. 335.

[xix] The Finance Bill, No. 2 of 2024, cl. 72, India Code (2024)

[xx] India Const. art. 246

[xxi] India Const. sch. VII, Union List, entry 82

[xxii] India Const. art. 14

[xxiii] India Const. art. 19, cl. 1(g)

[xxiv] Supra 14

[xxv] OECD Forum on Tax Administration, OECD, https://www.oecd.org/en/networks/oecd-forum-on-tax-administration.html (last visited Sept. 29, 2024).

[xxvi] Global Tax Symposium 2022, Leiden Law School, https://globtaxgov.weblog.leidenuniv.nl/event/global-tax-symposium-2022/ (last visited Sept. 29, 2024)