Backlog To Breakthrough: Budget Accelerates Tax Dispute Resolution

Finance Bill 2024 proposes an array of measures to reduce tax disputes, bolster regulatory clarity and streamline allocation of time and resources in managing such conflicts.

Reassessment provisions

Reassessment procedures have long been issues of contention in appellate courts, with disputes over their validity. Finance Act 2021 attempted to tackle this by introducing Section 148A of the Income-tax Act, 1961 (‘the Act’), revolutionizing the approach to tax reassessment. This provision mandated that the Income-tax Department (‘ITD’) obtain specific approvals and adhere to procedures before issuing notices under Section 148 of the Act. It also adjusted the re-assessment timelines from 4 and 6 years to 3 and 10 years respectively. However, these changes led to a surge in litigation, with numerous cases clogging the courts’ dockets.

In response, Finance Bill 2024 proposes strategic amendments aimed at rationalising the reassessment process as under:

• The period for reassessing income escapement cases exceeding Rs 50 lakhs will be slashed from 10 years to 5 years for proceedings initiated on or after September 1, 2024. 

• Search cases initiated on or after September 1, 2024, will fall under the newly established Block Assessment provisions. The timeline for these cases will now be confined to 6 financial years aligning with the window for reopening years under reassessment and search.

• The Additional Commissioner of Income-tax or Additional Director of Income-tax will replace the Principal Commissioner of Income-tax and Principal Chief Commissioner of Income-tax.

These impending changes may prompt the ITD to issue notices for years that would soon be barred under the new provisions. In summary, Finance Bill 2024 aims at clarity and efficiency in the reassessment process, but vigilance will be required as the transition unfolds.

Block assessment

Finance Bill 2024 has heralded the return of block assessment for search and seizure cases, a concept abolished in June 2003. By re-adopting block assessment, the government seeks to expedite finalization of these cases, reduce procedural redundancy and foster more coordinated investigations.

Here's a comparative analysis of the key provisions governing these cases from inception to the upcoming changes effective September 1, 2024:

Previously characterized as ‘false’, claims deemed ‘incorrect’, are now included under the new provisions. This subtle yet impactful change could have far-reaching implications. Under the revised block assessment framework, issues that are debatable or subject to recurring disallowance may now face a steeper tax rate of 60%, as ongoing proceedings will be abated.

Prior to June 1, 2003, only expenses deemed ‘false’ during a search faced the higher tax rate, while other issues, including those considered merely ‘incorrect’, were typically resolved through ongoing assessments at the applicable rate. While the return of block assessment might rationalize processes, the new definition of undisclosed income and the implications of higher tax rates introduces a layer of complexity.

Black Money Law

It is crucial to highlight that any undisclosed foreign assets or income unearthed during re-assessment or search procedures will fall under the purview of the Black Money Law. The Black Money Law casts a wide net, capturing any foreign assets or incomes that were previously undisclosed, irrespective of when they were acquired. 

New limits

To alleviate the backlog of tax litigation, the government has raised the monetary thresholds for the ITD’s appeals - Rs 60 lakhs for Tribunals, Rs 2 crs for High Courts, and Rs 5 crs for the Supreme Court. By elevating the monetary limits, the government aims to focus judicial resources on more impactful cases, thereby reducing the pendency and accelerating the path to finality. 

These Budget proposals represent a decisive effort to streamline tax litigation and expedite resolution processes. 

Authored by: Jimit Shah, Partner,  Deloitte India