Delhi High Court Provides Clarity on Time Limits for Income Tax Assessments

The recent ruling by the Delhi High Court has clarified the extension of the 10-year review period for Income-Tax (I-T) assessments. According to the sources, the court clarified that this extended period applies only when the alleged undisclosed income of the assessee exceeds Rs. 50 lakh. Below this specified threshold, assessments can only be reopened within three years. 

This clarification applies to all review notices issued on or after April 1, 2021. The court made this decision while addressing petitions filed in FY16 and FY17, assessing the validity of I-T notices issued under Section 148 of the I-T Act and considering the 'period of limitation' for reopening cases.

What were the arguments?

The petitioners argued that if the undisclosed income was below Rs.50 lakh, the stipulated three-year limitation, as per clause (a) of section 149(1), should be enforced. They contended that the extended 10-year limitation applied only to income exceeding the Rs.50 lakh threshold.

On the other hand, income tax authorities supported the validity of the notices, referring to a May 2022 Supreme Court judgment on a subsequent circular from the Central Board of Direct Taxes (CBDT). They also suggested a theory of 'retroactive application' based on the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), to legitimize notices issued at a later date.

Court’s verdict and its implications

The Delhi HC rejected the 'travel back in time' theory, considering it legally unsound based on CBDT’s instruction.

This decision is welcomed as it will benefit taxpayers facing belated reassessment proceedings involving undisclosed income of less than Rs.50 lakh. It will be beneficial even to those taxpayers who did not file a writ petition, as this order operates in rem.

The HC noted in its statement that recent amendments highlighted in the Finance Minister’s speech and the memorandum elucidating provisions of the Finance Bill 2021 reduced the assessment review period to three years from six.

It allows I-T authorities to scrutinize cases for a maximum of 10 years, but this is applicable only if the undisclosed income surpasses Rs.50 lakh. Crucially, this updated rule is effective for prior years as well, as long as notices under section 148 were issued on or after April 1, 2021.

Also Read: Income Tax Department Uncovers Online Retailers Evading Rs 10,000 Crore in Taxes

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