Direct Tax Alert

BACKGROUND

Reassessment provisions under the Income-tax Act, 1961 (‘the Act’) are contained in Sections 147 to 151 of the Act. The Finance Act, 2021 revamped the reassessment regime and introduced faceless assessment of income escaping assessment. In 2022, the Central Board of Direct Taxes (‘CBDT’) notified an e-assessment scheme mandating faceless and automated reassessment via a faceless assessing officer (‘FAO’). Over the past few years, it has been a contentious issue with taxpayers repeatedly challenging notices issued by their JAOs on the ground that only an FAO had the authority to issue such notices. Several High Courts ruled in favour of taxpayers, holding that JAOs lacked jurisdiction to do so. To address this, the Finance Act, 2026 introduced Section 147A with retrospective effect from 1 April 2021, clarifying that the assessing officer (tax officer) for reassessment purposes would also mean JAO. After the introduction of Section 147A of the Act, the Supreme Court remitted the pending matters on this issue to the respective jurisdictional High Courts for fresh consideration.

Pursuant to such direction, the Punjab & Haryana High Court examined the constitutional validity of Section 147A of the Act and whether a retrospective, non-obstante amendment can override binding judicial precedent.

We, at BDO India, have analysed and summarised the key aspects of this judgement and provided our comments on its impact hereunder.

FACTS OF THE CASE

• The taxpayer¹, a practising Advocate, filed her income-tax return for fiscal year 2019-20, which was duly processed.

• Later, she received a notice for reopening assessment issued by her JAO, based on information relating to a search conducted on another person. She received yet another notice intimating that assessment proceedings will be conducted in a faceless manner.

• The taxpayer challenged the notice before the Punjab & Haryana High Court, contending that under the e-Assessment scheme (faceless assessment), only FAO was empowered to issue such notice and not the JAO. Therefore, the notice was not issued by an authorised officer empowered in law to do so and accordingly the notice was not valid in law.

• The High Court accepted her contention, placing reliance on various judicial precedents² of various High Courts, holding that the JAO lacked jurisdiction to issue reassessment notices under the faceless scheme.

• Aggrieved, the Revenue challenged the same before the Supreme Court by way of a Special Leave Petition, which was remitted back to the High Courts for consideration due to the introduction of Section 147A, which retrospectively clarified from 1 April 2021 that assessing officer means JAO and not FAO.

• The question before the High Court was whether Section 147A, enacted retrospectively, was constitutionally valid.

HIGH COURT RULING:

The Court ruled that provisions of Section 147A of the Act clarifying JAO to be assessing officer for the purpose of reassessment proceedings are unconstitutional on the following grounds:

• Various High Courts across jurisdictions have categorically held that only FAO can issue such notices.

• Even though the doctrine of separation of powers is not an express part of the Indian Constitution, this doctrine is clearly visible from the scheme of the Indian Constitution. The Indian Constitution makes a clear demarcation between the judiciary, executive and the legislature and seeks to maintain separation of powers between the three organs of the State. A breach by either also negates equality enshrined under Article 14 of the Indian Constitution.

• Under Articles 245, 246 and other companion Articles, read with the respective lists in the seventh schedule of the Indian Constitution, the legislature has the right to ‘make’ laws, which includes the power to amend the law. The legislature also cannot directly annul a judgment of a constitutional court or, through a mere declaration, overrule a judicial decision.

• The legislature can retrospectively enact a law validating a statute which has been held by a Court to be illegal, provided that through such validating law the legislature removes the basis or foundation of the judgment of the Court by curing the defect(s) pointed out by the courts in the statute as it existed before the promulgation of the validation law. If the validating legislation is enacted solely with the intention to defy a judicial pronouncement, such legislation would be an example of legislative overreach and therefore unconstitutional.

• The non-obstante clause in Section 147A seeks to wipe out the effect of decisions of various High Courts or provisions of Section 151A or the scheme framed thereunder, but reference to Section 130 or the scheme dated 28 March 2022 framed under that provision is missing in the non-obstante clause.

• Section 147A is silent with regard to the categoric findings in various High Court decisions that, as per the scheme dated 29 March 2022 framed under Section 151A, allocation of tax officers is required to be done randomly and through automated allocation.

• The retrospective enactment of section 147A does not cure these issues. The primary reasons on which various High Courts held that notices for reopening of assessment cannot be issued to JAOs have not been removed through the retrospective provisions of Section 147A.

• The primary provision of faceless assessment continues to be the same without any amendment even after the introduction of Section 147A. Further, the object of such scheme to impart greater efficiency, transparency and accountability does not stand to be achieved.

• Section 147A is found to be in direct conflict with provisions of faceless assessment in Section 151A read with the scheme framed thereunder.

• With the retrospective enactment of Section 147A, the legislature has clearly trenched upon judicial power and sought to upset the findings of various High Courts on this issue.

• Section 151A(2) provides that for the purpose of giving effect to the scheme made under Section 151A(1), the Central Government, by issuance of a notification in the official gazette, could direct that any of the provisions of the Act shall not apply or shall apply with certain exceptions, modifications, etc. The first proviso to Section 151A(2) restricted the issue of such a direction after 31 March 2022. What was prohibited under Section 151A should not have been done through the introduction of Section 147A.

• Even though the introduction of Section 147A is stated to be clarificatory in nature, it has brought in more confusion instead of resolving the ambiguity.

Accordingly, based on the above, the Court concluded that retrospective applicability of Section 147A is unconstitutional, i.e. not valid in law. The Court also set aside the notices issued to the taxpayer on the ground that such notices have not been issued through the process of randomised allocation of assessing officers and in a faceless manner as required by section 151A read with the scheme dated 29 March 2022.

BDO INDIA COMMENTS:

This is a significant ruling which goes beyond reassessment and reinforces a fundamental constitutional principle. It states that the legislature can amend the law, but it cannot simply legislate a judicial decision out of existence without curing the defect identified by the Court. This is the first Ruling on the constitutional validity of section 147A introduced by The Finance Act, 2026 and reinstates relief to taxpayers whose reassessment notices were issued by JAO without following the automated, faceless allocation process prescribed under Section 151A of the Act. The ruling is expected to have a wider impact since a large number of reassessment litigation involving the same issue of JAO v. FAO is challenged before courts. This matter is likely to remain subject to further litigation before the Apex Court.