Union Budget 2026 from the Prism of Tax Disputes Resolution

Union Budget 2026 from the Prism of Tax Disputes Resolution

The Finance Bill of 2026 has set the stage for introducing the simplified new Income Tax Act of 2025. There appears to be a shift in the Taxman’s mindset, which can be seen from the significant rationalization of penalty and prosecution framework under the Income Tax Act. A number of procedural defects and minor offenses which carried penalties and prosecution risk, have now been changed to fines. Immunity from prosecution has been extended upon payment of certain amount.

At the same time, the Finance Minister has also attempted to lay to rest several direct tax controversies that have been burdening the Apex Court, High Courts and the tax tribunals with substantial litigation. This has been proposed through a slew of clarificatory amendments that are intended to clarify the law retrospectively.

The three significant areas of direct tax dispute revolve around questions of jurisdiction, procedure, and limitation.

Firstly, the period of limitation to complete assessment proceedings in transfer pricing matters, and those of non-resident taxpayers (where under Section 144C of the Income Tax Act, 1961, the taxpayers have the option of approaching either the Dispute Resolution Panel or the Appellate Commissioner) – has been subject of a split verdict of the Supreme Court in Shelf Drilling (following taxpayer-favourable rulings from Madras and Bombay High Court), and is currently pending before the Chief Justice of India for constitution of a larger bench. The controversy concerns thousands of appeals involving more than INR 1 lac crore of tax rests on whether the limitation under Section 153 of the Income Tax Act, 1961 applies to such draft order, or the final order (in which case the entire process until passing of the final assessment order would also need to be completed within the statutory limitation period under the said Section 153).

Second has been the issue of whether tax notices and orders, issued without a Document Identification Number (DIN) set out in the document – is valid on account of it being a irregularity, or whether such a notice or order vitiates the proceeding on account of the notice or order itself being treated as void. This mandatory requirement was introduced by way of a circular issued by the Central Board of Direct Taxes (CBDT). This too remains sub-judice before the Supreme Court.

Third, has been the controversy over whether the jurisdictional assessing officer (JAO), or the faceless assessing officer (FAO) (after the introduction of the mandatory faceless assessment scheme under the direct tax regime) has the jurisdiction to initiate reassessment proceedings. High Courts have issued conflicting rulings – with certain judgments invalidating notices issued by the JAO due to the scheme's compulsory nature, and mandate for FAO involvement; while others have found concurrent jurisdiction, creating uncertainty. This too remains sub-judice before the Supreme Court, which is scheduled for final hearing from 17 February 2026.

Given that the abovementioned issues go into the root of jurisdiction – these grounds have been raised by taxpayers in several of their cases in addition to their grounds on merits and are currently pending before various tax and judicial forums. The Supreme Court’s adjudication, if in favor of the taxpayer on any of these issues, would have resulted in huge amount of such litigation being disposed of based on these technical issues alone, without any adjudication on merits. This perhaps will be too big a loss to the Revenue – and as a pre-emptive measure to avoid such possibility, the Government has placed the proposal for retrospective amendments before the legislature for clarification of their intent.

While the intent of these proposals may have been to lay to rest substantial ongoing litigations on these issues, if these proposals get the legislature’s approval, it is imminent that further litigation would ensue on the validity of the retrospective applicability of clarificatory amendments which impact the vested rights of the taxpayers. The issue of limitation is procedural in nature, and to this extent, courts have previously taken the view that amendments to procedural provisions can indeed be retrospective. However, there are exceptions to this rule – where such retrospective changes to procedural laws affect the vested rights of taxpayers. Where the limitation period for assessments expires, taxpayers enjoy a vested right against assessment.

Courts too have read down certain clarificatory amendments (intended to have retrospective effect by using the language “deemed to have always been”) as being prospective in nature if it alters the substantive underlying law, unless the same is expressly provided for. Here however, given the express provision for the clarificatory amendment to have been deemed to apply from 2009, within the language of the Finance Bill itself – the issue is likely to be subjected to scrutiny on the constitutional vires of the amendments subject to the interpretation arrived at by the Supreme Court. If the Supreme Court’s decision on these issues fall in favor of the taxpayer – the sanctity of the retrospective amendments will need to be tested as mentioned above. To the contrary, if it falls in favor of the Taxman – the amendment will remain as being merely clarificatory.

From a goods and services tax (GST) perspective, the proposed removal of the specific place of supply clause for intermediary services is particularly significant, as disputes pertaining to ‘export of services’ v. ‘intermediary services’ has been one of the largest sources of GST litigation, with a substantial volume of cases pending across various forums and GCCs/ MNCs being denied benefit of export. By aligning place of supply for intermediary services with the default place of supply rule, the amendment is expected to decisively curb future disputes in this area and may also pave the way for administrative guidance or circulars to address the impact on pending matters.

There is a long journey ahead when the taxpayers and Taxman both can achieve certainty on these litigated issues.