Section 536 of the Income Tax Act, 2025 - “Repeal and Savings” - The Legal bridge between the Income Tax Act, 1961 and the Income Tax Act, 2025

Section 536 - “Repeal and Savings” is the last and one of the most significant provisions of the Income Tax Act, 2025. This section is broadly divided into four parts:  The first part pronounces the repeal of Income Tax Act, 1961; the second part enumerates a long list of 22 situations calling for clarification; the third, clarifies that a mention of tax year up to 31,03,2026 refers to the previous year under the repealed Act; and the fourth part concedes overriding effect of Section 6 of the General Clauses Act, 1897.  It acts as a transition provision, ensuring a smooth shift from the Income Tax Act, 1961 to the Income Tax Act, 2025. While it formally repeals the Income Tax Act, 1961, it simultaneously protects all rights, liabilities, proceedings, and benefits that arose under the repealed law.

Objective

The primary objectives of Section 536 are to:

§  Repeal the Income Tax Act, 1961.

§  Preserve all actions taken under the repealed Act.

§  Ensure that pending proceedings continue under the old law.

§  Protect taxpayers’ vested rights and Government's powers.

§  Avoid legal uncertainty during the transition to the new Act.

 

Repeal of the Income Tax Act, 1961 [Section 536(1)]

Section 536(1) repeals the Income Tax Act, 1961 with effect from 01.04.2026. That repeal is prospective. This sub-section (1) simply provides that “The Income-tax Act, 1961 (43 of 1961) is hereby repealed”. Thus, from 01.04.2026, the Income Tax Act, 2025 becomes the governing legislation for income-tax in India.

Previous Operation of the Repealed Act Protected [Section 536(2)(a)]

Section 536(2)(a) ensures that the repeal of the Income Tax Act, 1961 does not disturb or invalidate anything that was validly done under the repealed law before the Income Tax Act, 2025 came into force. The expression “previous operation” covers the legal effect of the Income Tax Act, 1961 during the period it was in force.

Accordingly, all actions lawfully taken under the repealed Act - such as assessments, reassessments, searches, surveys, notices, approvals, registrations, exemptions, refunds, recovery proceedings, and judicial or appellate orders - continue to remain valid and enforceable. Likewise, any rights, obligations, liabilities, penalties, or legal consequences that had already arisen under the Income Tax Act, 1961 are preserved.

Suppose an assessment order for Assessment year 2025-26 was passed under the Income Tax Act, 1961 before 01.04.2026. Even after the Income Tax Act, 2025 comes into force, that assessment order continues to remain valid and enforceable. Its legality is not affected merely because the Income Tax Act, 1961 has been repealed.

Accrued Rights, Privileges, Obligations and Liabilities under the Income Tax Act, 1961 continue unaffected (Preserved) by its Repeal [Section 536(2)(b)]

The following shall continue to remain effective:

§  Rights – such as the right to claim a refund, carry forward eligible tax credits or other statutory entitlements accrued under the Income Tax Act, 1961.

§  Privileges – exemptions, approvals or benefits validly acquired under the repealed Act, subject to the other savings provisions.

§  Obligations – statutory duties such as furnishing information, maintaining records, or complying with conditions imposed under the Income Tax Act, 1961.

§  Liabilities – tax, interest, penalty or any other legal liability that arose under the repealed Act remains enforceable.

Continuation of pending and future proceedings under the repealed Income Tax Act, 1961[Section 536(2)(c)]

Section 536(2)(c) provides that the provisions of the repealed Income Tax Act, 1961 shall continue to apply to - any proceeding pending on the date the Income Tax Act, 2025 comes into force; and any proceeding initiated on or after 01.04.2026, if such proceeding relates to a tax year beginning before 01.04.2026. Such proceedings shall be conducted in accordance with the procedure prescribed under the repealed Income Tax Act, 1961.

Penalty Proceedings saved under the Repealed Act [Section 536(2)(d)]

Section 536(2)(d) provides that any proceeding for the imposition of a penalty in respect of any tax year beginning before 01.04.2026 may be initiated, and any such penalty may be imposed, under the repealed Income Tax Act, 1961, as if the Income Tax Act, 2025 had not been enacted.

Continuation of Pending Appeals, Revisions and Court Proceedings [Section 536(2)(e)]

Section 536(2)(e) provides that any proceeding pending on the commencement of the Income Tax Act, 2025 before any income-tax authority or any other authority constituted under the repealed Income Tax Act, the Appellate Tribunal, or any court, by way of application, appeal, reference, revision or by any other means, shall be continued and disposed of as if the Income Tax Act, 2025 had not been enacted.

Continuity of Elections, Declarations and Options [Section 536(2)(f)]

Section 536(2)(f) provides that any election, declaration or option validly made by an assessee under the repealed Income Tax Act, 1961, and remaining in force immediately before the commencement of the Income Tax Act, 2025, shall be deemed to have been made or exercised under the corresponding provision of the new Act.

Interest for the period commencing on or after 01.04.2026 shall be governed by the provisions of the Income Tax Act, 2025 [Section 536(2)(g)]

Section 536(2)(g) ensures that, in transitional cases, interest on refunds payable by the Government and interest for defaults committed by the assessee is governed by the Income Tax Act, 2025 for the period from 01.04.2026 onwards, even though the underlying proceedings relate to tax years governed by the repealed Income Tax Act, 1961.

Continuation of taxability of earlier deductions and exemptions [Section 536(2)(h)]

The clause (h) provides that where :

• any sum had been allowed as a deduction, or
• not included in the total income,

for any tax year before 01.04.2026, either -

• because specified conditions were fulfilled, or
• for any other reason,

and such amount would have become taxable in a later year under the repealed Income Tax Act had that Act continued to operate, then the amount shall:

1. be deemed to be the income of that subsequent tax year; and
2. be taxed under the same head of income under which it would have been taxed under the repealed Act.

Illustration

Suppose an assessee claimed a deduction of ₹ 20,00,000 in Year 2025-26 under the Income Tax Act, 1961. Under the 1961 Act, that deduction was required to be brought to tax in Tax Year 2028-29 because of a specified statutory event (such as cessation of the qualifying conditions or any other event prescribed by law).

Even though the Income Tax Act, 1961 has been repealed with effect from 01.04.2026, Section 536(2)(h) ensures that :

§  the ₹ 20,00,000 will be deemed to be the income of Tax Year 2028-29;

§  it will continue to be taxable under the Income Tax Act, 2025; and

§  it will be assessed under the same head of income under which it would have been taxed under the repealed Income Tax Act, 1961.

Repeal of the Income Tax Act, 1961 does not affect the recovery of outstanding tax demands [Section 536(2)(i)]

Section 536(2)(i) provides that any sum payable under the repealed Income Tax Act, 1961 may be recovered under the Income Tax Act, 2025, without prejudice to any action already taken for the recovery of such sum under the repealed Act.

Existing Approvals, Notifications, Circulars, Rules, etc. Continue to Remain Valid [Section 536(2)(j)]

Section 536(2)(j) provides that any agreement entered into, appointment made, approval given, recognition granted, circular, direction, instruction, notification, order, rule or scheme framed under the Income-tax Act, 1961 shall be deemed to have been made or issued under the corresponding provision of the Income-tax Act, 2025, so long as it is not inconsistent with the provisions of the Income Tax Act, 2025.

Expired limitation not revived [Section 536(2)(k)]

Section 536(2)(k) provides that where the statutory time limit for filing any application, appeal, reference, or revision under the repealed Income Tax Act, 1961 had already expired on or before the commencement of the Income Tax Act, 2025, such expired right is not revived merely because the new Act prescribes a longer limitation period or permits extension of time in certain cases. If the limitation period for filing an appeal, revision or application had already expired under the 1961 Act before commencement of the new Act, the taxpayer cannot take advantage of any longer limitation available under the new Act. The new Income Tax Act, 2026 does not revive barred remedies.

Carry Forward and Continuation of MAT/AMT Tax Credit under the Income Tax Act, 2025 [Section 536(2)(l)]

Section 536(2)(l) provides that any amount of tax credit eligible to be carried forward under section 115JAA (MAT credit) or section 115JD (AMT credit) of the repealed Income-tax Act, 1961, relating to a tax year beginning before 01.04.2026, shall be deemed to be the corresponding tax credit under the new Income Tax Act, 2025; and

Continue to be available for set-off under the new Act for the same balance period for which it would have been available under the repealed Act, provided the assessee continues to satisfy the conditions prescribed under the corresponding provisions of the Income Tax Act, 2025.

Thus, no accumulated tax credit is lost because of repeal.

Preserve the continuity of tax benefits relating to carried forward losses [Section 536(2)(m)]

Section 536(2)(m) ensures that the repeal of the Income Tax Act, 1961 does not extinguish the taxpayer's accrued right to carry forward and set off losses. It maintains continuity by allowing pre-2026 losses to be utilised under the Income Tax Act, 2025 in accordance with the corresponding provisions of the repealed Act.

Carry forward and Set-off of brought forward capital losses [Section 536(2)(n)]

Section 536(2)(n) of the Income Tax Act, 2025 is a transitional (saving) provision that ensures capital losses determined under the repealed Income-tax Act, 1961 are not lost merely because the 1961 Act has been repealed. Instead, such losses continue to be available for carry forward and set-off under the new Act, subject to the same conditions that applied under the repealed Act.

ILLUSTRATION

Suppose an assessee incurred a long-term capital loss in Financial year 2024-25, which remained eligible for carry forward on 01.04.2026. That loss can continue to be carried forward under the Income Tax Act, 2025 and set off against eligible capital gains in subsequent tax years, but only for the unexpired portion of the original eight-year period and in accordance with the rules contained in section 74 of the Income Tax Act, 1961.

Withdrawal of the benefit of carry forward and set-off of accumulated losses and unabsorbed depreciation allowed under section 72A of the Income Tax Act, 1961, where the prescribed conditions are subsequently violated [Section 536(2)(o)]

Section 536(2)(o) provides that

The provision applies where a set-off of accumulated business loss or unabsorbed depreciation was allowed under section 72A of the Income Tax Act, 1961, such set-off was availed in a tax year beginning before 01.04.2026; and after the commencement of the Income Tax Act, 2025, the beneficiary fails to satisfy any condition prescribed under section 72A –

In such a case, the benefit earlier allowed is withdrawn by treating the amount previously set off as the income of the successor entity in the year of default (i.e. for the tax year in which any of the conditions specified in section 72A are not complied with).

Taxability on breach of conditions for carry forward of Co-operative Bank Losses [Section 536(2)(p)]

Section 536(2)(p) provides that where a successor co-operative bank has been allowed the benefit of set-off of accumulated losses or unabsorbed depreciation under section 72AB of the repealed Income Tax Act, 1961, and subsequently fails to comply with any of the conditions prescribed under that section, the benefit earlier allowed will be withdrawn. The amount so withdrawn shall be deemed to be the income of the successor co-operative bank and shall be chargeable to tax under the Income Tax Act, 2025 in the year in which the breach of the conditions occurs.

ILLUSTRATION

Suppose a successor co-operative bank, pursuant to an approved business reorganisation, had claimed a set-off of ₹8 crore of accumulated losses under section 72AB of the Income Tax Act, 1961. If, after 01.04.2026, it breaches one of the mandatory conditions of section 72AB (for example, by failing to satisfy the prescribed continuity requirements), the ₹8 crore previously allowed as a set-off will be treated as the bank's taxable income in the year of such breach under the Income Tax Act, 2025.

Deemed Capital Gains on Breach of Exemptions - Taxability of Capital Gains on Subsequent Non-Compliance with Conditions of Tax-Neutral Transfers [Section 536(2)(q)]

Section 536(2)(q) is a transitional provision. It ensures that if a tax-neutral transfer took place under the repealed Income Tax Act, 1961 before 01.04.2026, and the conditions for that exemption are violated after the commencement of the Income Tax Act, 2025, the deferred capital gains will still become taxable under the Income Tax Act, 2025. The provision covers transfers that were exempt under the following provisions of the repealed Income Tax Act, 1961:

§  Section 47(iv) – Transfer of a capital asset by a holding company to its wholly-owned Indian subsidiary.

§  Section 47(v) – Transfer by a wholly-owned Indian subsidiary to its holding company.

§  Section 47(xiii) – Conversion of a partnership firm into a company.

§  Section 47(xiiib) – Conversion of a private company or unlisted public company into an LLP.

§  Section 47(xiv) – Succession of a sole proprietary concern by a company.

ILLUSTRATION

Suppose a partnership firm converted into a company in Financial year 2025-26 and claimed exemption under Section 47(xiii) of the Income Tax Act, 1961 because all prescribed conditions were initially satisfied.

If, in Financial year 2027-28, one of those conditions is violated (for example, the partners fail to maintain the required shareholding for the stipulated period), the exemption is withdrawn. Under Section 536(2)(q), the capital gains that were not taxed at the time of conversion will now become taxable under the Income Tax Act, 2025 in accordance with the transitional provisions.

Unabsorbed depreciation and scientific research expenditure continue as corresponding capital allowances under the Income Tax Act, 2025 [Section 536(2)(r)]

Section 536(2)(r) of the Income Tax Act, 2025 is a transitional (saving) provision that ensures continuity of tax benefits relating to:

§  Unabsorbed depreciation under section 32(2) of the repealed Income Tax Act, 1961; and

§  Unabsorbed capital expenditure on scientific research under section 35(4) of the repealed Act.

It provides that where any such allowance remains unabsorbed and is eligible to be carried forward to the tax year beginning on 01.04.2026, such allowance shall not lapse merely because the Income Tax Act, 1961 has been repealed. Instead:

§  it shall be added to the corresponding capital allowance under the Income Tax Act, 2025 for the tax year beginning on 01.04.2026; and

§  if there is no corresponding allowance for that tax year, it shall be deemed to be the allowance of that tax year and carried forward accordingly.

Thus, unabsorbed depreciation survives the repeal.

Preserves the continuity of amortised (deferred) revenue expenditure deductions [Section 536(2)(s)]

It provides that deductions relating to the following provisions of the repealed Income-tax Act, 1961 will continue to be available for tax years beginning on or after 1 April 2026, provided all the prescribed conditions continue to be satisfied:

§  Section 35ABA – Expenditure for obtaining a telecom licence;

§  Section 35ABB – Expenditure for acquiring the right to use spectrum;

§  Section 35D – Preliminary expenses;

§  Section 35DD – Expenditure on amalgamation or demerger;

§  Section 35DDA – Payments under voluntary retirement scheme (VRS);

§  Section 35E – Expenditure on prospecting, etc., for specified minerals; and

§  The first proviso to section 36(1)(ix) – Certain expenditure on family planning.

The balance deduction that would have been allowable under the 1961 Act is deemed to form part of the corresponding “deferred revenue expenditure allowance” under the Income Tax Act, 2025. If there is no corresponding allowance for that tax year, the balance amount is treated as the allowance for that year.

Preservation and Continuity of Provision for Bad and Doubtful Debts [Section 536(2)(t)]

Section 536(2)(t) is a transitional (saving) provision that ensures continuity of the provision for bad and doubtful debts on the repeal of the Income Tax Act, 1961. It provides that the credit balance standing in the provision for bad and doubtful debts account created under section 36(1)(viia) of the repealed Income-tax Act, as on the last day of the tax year beginning on 01.04.2025, shall not lapse on the commencement of the new Act. Instead, it shall be carried forward and treated as part of the corresponding provision under the Income Tax Act, 2025 for the tax year beginning on 01.04.2026. If no fresh amount is credited to such provision in that tax year, the carried-forward balance itself is deemed to be the amount credited for that year.

Existing faceless schemes shall continue in force [Section 536(2)(u)]

Any scheme notified under the Income Tax Act, 1961 for:

• Faceless assessment;
• Faceless appeal;
• Faceless penalty;
• Other digital proceedings

shall continue under the corresponding provisions of the Income Tax Act, 2025 even after the repeal of the Income Tax Act, 1961.

Search and Requisition Proceedings continue under the Repealed Act [Section 536(2)(v)]

Section 536(2)(v) provides that where a search under section 132 or a requisition under section 132A of the Income-tax Act, 1961 was initiated before the commencement of the Income Tax Act, 2025 (i.e., before 01.04.2026), all proceedings arising from such search or requisition shall continue to be governed by the Income Tax Act, 1961, as if that Act had not been repealed.

Reference to earlier Tax Years [Section 536(3)]

Wherever the Income Tax Act, 2025 refers to a tax year commencing on or before 01.04.2025, it shall be interpreted as referring to the corresponding previous year under the Income Tax Act, 1961. This bridges the terminology change from “Previous Year/Assessment Year” to “Tax Year.”

Suppose a provision of the Income Tax Act, 2025 refers to “Tax Year 2024-25.” By virtue of Section 536(3), this must be understood as Previous Year 2024-25 under the Income Tax Act, 1961, which corresponds to Assessment Year 2025-26. Thus, the legal consequences continue to be governed by the Income Tax Act, 1961 for that period, despite the new terminology.

Overriding Legal Backup [Section 536(4)]

Section 536(4) is an overriding legal safeguard that incorporates Section 6 of the General Clauses Act, 1897 (unless the repealing statute expressly provides otherwise) to ensure that, even beyond the specific savings in Section 536(2), all accrued rights, liabilities, proceedings, penalties, and legal consequences under the repealed Income-tax Act, 1961 continue unaffected unless the Income-tax Act, 2025 expressly provides otherwise.

The expression “all the provisions of this Act shall apply accordingly” in section 297(2)(d)(ii) means that, after a valid notice under section 148 is issued, the reassessment proceedings are to be conducted in the same manner as any reassessment ordinarily initiated under sections 147 and 148 of the Income Tax Act, 1961, subject only to the limitations and relaxations contained in sections 149 and 150.

Brief facts of the case

The case related to an assessment year governed by the repealed Income Tax Act, 1922. After the Income-tax Act, 1961 came into force, the Income-tax Officer sought to reopen the completed assessment by issuing a notice under section 148 of the 1961 Act. The assessee challenged the validity of the reassessment proceedings, contending that the notice and the subsequent proceedings were not maintainable because the assessment pertained to a period governed by the repealed 1922 Act.

The principal controversy was the interpretation of the saving clause contained in section 297(2)(d)(ii) of the 1961 Act, particularly the concluding words “and all the provisions of this Act shall apply accordingly.”

Core Issue

The core issue before the Supreme Court was :

Whether the concluding words of section 297(2)(d)(ii) of the Income-tax Act, 1961 – “and all the provisions of this Act shall apply accordingly” - mean that, once reassessment proceedings are initiated under section 148, the entire reassessment machinery of the 1961 Act, including the limitation provisions in sections 149 and 150, governs such proceedings, even though they relate to assessment years governed by the repealed 1922 Act ?

Revenue’s Arguments – Mahadeo Prasad Bais v. ITO

The Revenue advanced the following principal arguments before the Supreme Court:

1. Section 297(2)(d)(ii) expressly authorises reassessment under the 1961 Act.
   The saving clause permits the reopening of assessments relating to years governed by the repealed 1922 Act by issuing a notice under section 148 of the Income-tax Act, 1961.
2. The concluding words “all the provisions of this Act shall apply accordingly” must be given full effect.
   Once a notice under section 148 is issued, the reassessment proceedings are governed by the entire scheme of the 1961 Act, not by the repealed 1922 Act.
3. Sections 149 and 150 regulate limitation.
   The validity of a notice under section 148 must be examined with reference to the limitation provisions contained in sections 149 and 150 of the 1961 Act, including any statutory relaxations provided therein.
4. The reassessment machinery under the 1961 Act is a complete code.
   After proceedings are initiated under section 148, all procedural and substantive provisions relating to reassessment—including assessment, reassessment, appeal, and other consequential provisions—must operate as they would in an ordinary reassessment under the 1961 Act.
5. The repeal of the 1922 Act does not restrict the operation of the 1961 Act.
   Section 297 was enacted to ensure a smooth transition from the repealed Act to the 1961 Act. Therefore, reassessment proceedings relating to earlier assessment years should continue under the machinery of the new Act rather than under the repealed statute.

The Revenue contended that section 297(2)(d)(ii) incorporates the entire reassessment mechanism of the Income-tax Act, 1961, so that once proceedings are initiated under section 148, all provisions of the 1961 Act - including sections 149 and 150 - govern the reassessment proceedings.

Decision of the Supreme Court

The Supreme Court dismissed the assessee's appeal and upheld the validity of the reassessment proceedings, thereby deciding the case in favour of the Revenue.

The Court held that the concluding words of section 297(2)(d)(ii) – “and all the provisions of this Act shall apply accordingly” - must be given their plain and full meaning. Accordingly, where reassessment proceedings are initiated by issuing a notice under section 148 pursuant to the saving clause, the entire reassessment machinery of the Income-tax Act, 1961 applies, just as it would in an ordinary reassessment under that Act.

The Supreme Court further clarified that :

§  The validity of a notice issued under section 148 must be tested with reference to the provisions of the 1961 Act.

§  The reassessment proceedings are subject to the limitation provisions and statutory relaxations contained in sections 149 and 150 of the 1961 Act.

§  Once proceedings are validly initiated under section 148, all procedural and substantive provisions governing reassessment under the 1961 Act apply, notwithstanding that the assessment year relates to the repealed 1922 Act.

§  The words “all the provisions of this Act shall apply accordingly” incorporate the entire reassessment framework of the 1961 Act and are not confined merely to the issuance of the notice.

The saving provision in section 297(2)(d)(ii) requires that, after a valid notice under section 148 is issued, the reassessment proceedings must be conducted in accordance with the Income-tax Act, 1961 in all respects, subject only to the limitation and relaxation provisions contained in sections 149 and 150. Thus, the reassessment machinery of the 1961 Act applies in its entirety to such saved proceedings.

Relevance under the Income Tax Act, 2025

The principle is equally relevant while interpreting the saving provisions in section 536 of the Income-tax Act, 2025. Where the 2025 Act saves pending or future proceedings relating to earlier tax years, the phrase directing that proceedings shall be taken under the new Act generally indicates that the procedural machinery of the new Act applies, unless the saving provision expressly preserves the old law or provides otherwise. Thus, Mahadeo Prasad Bais v. ITO supports the proposition that a saving clause ordinarily carries with it the complete procedural framework of the new enactment.

- [In favour of Revenue] (Related Assessment years : 1953- 54 to 1961-62) - [Mahadeo Prasad Bais v. ITO (1991) 192 ITR 402 (1992) 60 Taxman 388 (SC)]

 

Vested rights relating to carry forward and set-off of losses validly acquired under the repealed Income Tax Act, 1922 is a vested right. Such right survives the repeal of the 1922 Act and cannot be taken away by the Income Tax Act, 1961 unless the new statute expressly or by necessary implication provides otherwise.

Brief facts of the case

Assessee was a registered partnership firm. During the years governed by the Income Tax Act, 1922, the firm had incurred speculation losses. Under section 24(1) of the 1922 Act, the firm itself was entitled to carry forward and set off such speculation losses against future speculation profits. Before those losses could be fully adjusted, the Income Tax Act, 1961 came into force with effect from 01.04.1962. Under section 75(2) of the 1961 Act (as it then stood), a registered firm was not entitled to carry forward and set off its own losses; instead, such losses were to be apportioned among the partners. For the assessment year 1963-64, the assessee claimed set-off of the speculation losses carried forward from the period governed by the 1922 Act. The Revenue rejected the claim on the ground that section 75(2) barred such set-off.

Core Issue

The core issue before the Supreme Court in CIT v. Shah Sadiq & Sons was:

Whether the assessee-firm was entitled to carry forward and set off speculation losses incurred under the repealed Income-tax Act, 1922 in the assessment year 1963-64, despite the prohibition contained in section 75(2) of the Income-tax Act, 1961, or whether such vested right stood extinguished on the repeal of the 1922 Act ?

Revenue’s Arguments

The Revenue contended that :

§  Once the Income-tax Act, 1961 came into force, the assessment had to be governed entirely by the provisions of the new Act.

§  Section 75(2) expressly prohibited a registered firm from carrying forward and setting off its losses.

§  Therefore, even losses that arose under the 1922 Act could not be set off by the firm after the commencement of the 1961 Act.

§  The assessee had no surviving right under the repealed Act once it stood repealed.

Assessee’s Arguments

The assessee argued that:

§  The right to carry forward and set off speculation losses had already accrued under the 1922 Act.

§  Such right constituted a vested or accrued right.

§  Section 297 of the 1961 Act repealed the 1922 Act but did not expressly or by necessary implication extinguish accrued rights.

§  By virtue of section 6(c) of the General Clauses Act, 1897, accrued rights survive the repeal of a statute unless a contrary intention appears.

§  Therefore, the firm remained entitled to set off the speculation losses.

Decision of the Supreme Court

The Supreme Court decided in favour of the assessee. The Court held that:

§  The right to carry forward and set off speculation losses under Section 24(2) of the 1922 Act was an accrued and vested right.

§  Such a vested right is preserved by section 6(c) of the General Clauses Act unless the repealing statute expressly or by necessary implication takes away that right.

§  Section 297 of the Income-tax Act, 1961 did not disclose any intention to destroy rights that had already accrued under the repealed Act.

§  Section 75(2) of the 1961 Act operated prospectively and did not affect rights that had vested under the 1922 Act.

§  Consequently, the assessee-firm was entitled to carry forward and set off the speculation losses in the assessment year 1963-64 notwithstanding section 75(2).

 Significance

The judgment is regarded as an important precedent on statutory interpretation and saving of accrued rights. It establishes that repeal of a statute does not automatically extinguish rights that have already vested. Courts will presume such rights continue unless the legislature clearly indicates otherwise.

The decision also overruled an earlier contrary view of the Allahabad High Court in CIT v. Mangiram Gopichand, reinforcing the principle that savings clauses are not exhaustive and that Section 6 of the General Clauses Act continues to protect accrued rights unless displaced by clear legislative intent. 

[In favour of assessee] – [CIT v. Shah Sadiq & Sons (1987) 166 ITR 102 : 61 CTR 269 : 31 Taxman 498 (SC)]

 

Section 297(2)(d)(ii) of the Income Tax Act, 1961 does not revive a reassessment power that had already become barred under the repealed Income Tax Act, 1922. In the absence of express legislative intent, a transitional provision cannot be construed retrospectively to revive a remedy extinguished by limitation.

Issue

Whether section 297(2)(d)(ii) of the Income Tax Act, 1961 permits the Income-tax Officer to issue a notice under section 148 to reopen an assessment where the power to reopen under section 34(1)(a) of the Income Tax Act, 1922 had already become barred by limitation before the Income Tax Act, 1961 came into force ?

The respondent was assessed to income-tax for the assessment year 1947- 48. Thereafter the Income-Tax Officer issued a notice under section 34(1)(a) of the Income Tax Act, 1922, for reassessment. There was no proper service of the notice, and despite the respondent’s objection, the Income-tax Officer determined the total income of the respondent at Rs. 89,000. The Appellate Assistant Commissioner allowed the respondent’s appeal by order dated 05.01.1963 on the ground that there is no valid service of the notice. On 01.04.1962, the Income Tax Act, 1922 was repealed and the Income-tax Act, 1961 came into force, and the time for taking action for reassessment was enlarged from 8 years to 16 years. By that date, the right of the Income-Tax Officer to reopen the assessment under section 34(1)(a) of the Income Tax Act, 1922 became barred. The Income-tax Officer however, issued a notice under section 148 of the Income Tax Act, 1961 for reopening the assessment. The respondent, thereupon filed a writ petitioning the High Court for quashing the notice and the petition was allowed. In appeal to this Court.

Held : On a proper construction of section 297(2)(d)(ii), the Income-tax Officer cannot issue a notice under section 148 in order to reopen the assessment of an assessee in a case where the right to reopen the assessment under the Income Tax Act, 1922 was barred at the date when the Income Tax Act, 1961 came into force. The reason is that unless the statute expressly so provides or there is a necessary implication, retrospective operation should not be given to it so as to affect, alter or destroy any right already acquired or to revive any remedy’ already lost by effluviums of time. The Income Tax Act, 1961 does not disclose in express terms or by necessary implication that there was a revival of the right of the Income-tax Officer to reopen an assessment which was already barred under the Income Tax Act, 1922 and if the section is construed as reviving such a right it would be tantamount to giving it retrospective operation which is not warranted by its language.

In our opinion, the principle of this decision applies in the present case and it must be held that on a proper construction of section 297(2)(d)(ii) of the new Act, the Income-tax Officer cannot issue a notice under section 148 in order to reopen the assessment of an assessee, in a ease where the right to reopen the assessment was barred under the old Act at the. date when the new Act came into force. It follows therefore that the notices dated 13.11.1963 and 09.01.1964 issued by the Income-tax Officer, Ahmedabad were illegal and ultra vires and were rightly quashed by the Gujarat High Court by the grant of a writ. For the reasons expressed, we hold that the judgment of the High Court of Gujarat dated 14th/15th December, 1964 is correct and this appeal must be dismissed with costs.

Principle Laid Down

The Court held that section 297(2)(d)(ii) is merely a transitional provision. It enables reassessment proceedings under the new Act only where the right to reopen the assessment was still subsisting on the date the 1961 Act came into force. It does not revive a power which had already become barred under the repealed 1922 Act.

 [In favour of assessee] (Related Assessment year : 1947-48) - [J.P. Jani, ITO, Ahmadabad v. Induprasad Devshankar Bhatt AIR (1969) 778, 1969 SCR (1) 714 - [TS-4-SC-1968] (SC)]

Assessment for relevant assessment years was completed under 1922 Act - 1922 Act was repealed by 1961 Act - Thereupon, Commissioner issued notice under section 33B of 1922 Act to revise those assessments – Notice issued by Commissioner under 1922 Act was valid

Core Issue before the Supreme Court :

Whether the Commissioner could exercise revisionary powers under the repealed 1922 Act after the commencement of the Income-tax Act, 1961 in respect of assessments completed under the repealed Act ?

Section 263, read with section 297 of the Income-tax Act, 1961 [Corresponding to section 33B of the Indian Income-tax Act, 1922] - The assessment for the relevant assessment years was completed under the 1922 Act. The 1922 Act was repealed by the 1961 Act. Thereupon, the Commissioner issued a notice under section 33B of 1922 Act to revise the assessments already made. The assessee filed a writ petition to quash the notice issued by the Commissioner. The High Court dismissed the petition. On appeal to the Supreme Court:

The word ‘assessment’ can bear a very comprehensive meaning: it can comprehend the whole procedure for ascertaining and imposing liability upon the taxpayer. Is there then anything in the context of section 297 which compels us to give to the expression “procedure for the assessment” the narrower meaning. The answer to this question must be in the negative. Section 297 is meant to provide as far as possible for all contingencies which may arise out of the repeal of the 1922 Act. It deals with pending appeals, revisions, etc. It deals with non-completed assessments pending at the commencement of the 1961 Act, and assessments to be made after the commencement of the 1961 Act, as a result of returns of income filed after the commencement of the 1961 Act. It is hardly believable in this context that Parliament did not think of appeals and revisions in respect of assessment orders already made or which it had authorised to be made under clause (a) of section 297(2).

It is true that whether a different intention appears or not, must depend on the language and content of section 297(2). If section 6 of the General Clauses Act is out of the way, there is no doubt that Parliament should not be credited with the intention of not providing for appeals and revisions, etc., against the assessment orders made under the 1922 Act. The expression “proceedings for the assessment of that person” in clause (a) of section 297(2) has a very comprehensive meaning. At any rate, if the Income-tax (Removal of Difficulties) Order, 1962, is valid, paragraph 4 of the said order clearly covers the instant case and would give jurisdiction to the Commissioner to issue the impugned notice. Consequently, instant appeal was to be dismissed. The Supreme Court upheld the Commissioner's action and ruled in favour of the Revenue.

Principle Laid Down

The repeal of an Income-tax Act does not extinguish the power of revision in respect of assessments made under the repealed law where the saving provisions preserve such jurisdiction. Revision proceedings are treated as part of the overall assessment process and may continue or be initiated after repeal if authorised by the transitional provisions.

The judgment reinforces the principle that repeal affects the form of the law, but not accrued rights, liabilities, or statutory proceedings unless the new legislation clearly provides otherwise.

[In favour of revenue]. (Related Assessment years : 1952-53 to 1960-61) - [Kalawati Devi Harlalka v. CIT (1967) 66 ITR 680 (SC)]

 

Relevance to Repeal and Savings under the Income Tax Act, 2025

The relationship of Section 6 of the General Clauses Act, 1897 and the Repeal and Savings clause was clarified to say that the Repeal and Savings Clause does not oust the jurisdiction of the former, and that Section 6 will follow unless a different intention appears in the new enactment. 

The principle relating to a savings clause was authoritatively explained by the State of Punjab v. Mohar Singh AIR 1955 SC 84. This is the leading Supreme Court decision on the effect of repeal of statutes and the role of saving clauses.

Repeal of a statute does not, by itself, destroy rights accrued, liabilities incurred, penalties imposed, or legal proceedings already commenced. Such matters continue to be governed by Section 6 of the General Clauses Act unless the repealing statute expressly or impliedly provides otherwise

Brief facts of the Case

Criminal proceedings had been initiated against the respondent, Mohar Singh, under the provisions of an existing criminal law. Before those proceedings were concluded, the statute under which the prosecution had been launched was repealed and replaced by a new enactment. The respondent contended that, because the original statute had been repealed and the new law did not contain an express saving provision preserving pending prosecutions, the criminal proceedings could not continue. The State of Punjab argued that the repeal did not invalidate pending proceedings because Section 6 of the General Clauses Act, 1897 automatically saved rights, liabilities, and legal proceedings unless the repealing statute disclosed a contrary intention.

The matter ultimately reached the Supreme Court to determine the legal effect of the repeal on the pending prosecution.

Core Issue before the Supreme Court was:

Whether the repeal of an enactment automatically extinguishes pending rights and proceedings initiated under the repealed law, or whether they continue by virtue of Section 6 of the General Clauses Act, 1897 unless the repealing statute expressly or impliedly provides otherwise ?

Decision of the Supreme Court

The Supreme Court held that the repeal of a statute does not, by itself, extinguish rights, liabilities, penalties, or legal proceedings that arose under the repealed law. Unless the repealing statute expressly or by necessary implication manifests a different intention, the consequences provided in Section 6 of the General Clauses Act, 1897 automatically apply.

The Supreme Court made the following important observations:

1. Section 6 applies automatically on repeal.
   When an enactment is repealed, Section 6 of the General Clauses Act preserves accrued rights, liabilities, pending investigations, legal proceedings, and remedies, unless the new law indicates a contrary intention.
2. A saving clause is not always essential.
   The Court observed that legislatures often insert a saving clause ex abundanti cautela (out of abundant caution) to remove doubts. However, even in the absence of such a clause, Section 6 ordinarily operates to save existing rights and pending proceedings.
3. Pending proceedings continue.
   Investigations, prosecutions, appeals, and other legal proceedings instituted under the repealed statute do not lapse merely because the statute has been repealed. They may continue as if the repealing Act had not been enacted, unless the new statute expressly provides otherwise.
4. Legislative intention is decisive.
   The Court emphasized that Section 6 applies only if the repealing statute does not disclose a “different intention.” Such intention may be expressed expressly or arise by necessary implication from the scheme and provisions of the new enactment.

 The Supreme Court laid down the following principle:

The effect of repeal is governed by Section 6 of the General Clauses Act. Therefore, repeal does not affect accrued rights, incurred liabilities, pending proceedings, or available remedies unless the repealing statute expressly or impliedly indicates a contrary legislative intention.

[State of Punjab v Mohar Singh in AIR 1955 SC 84]