The Union Budget 2026 was presented on 1^st February 2026 and introduces several changes across the taxation landscape, covering both direct and indirect taxes. In the sphere of direct taxation, particularly income-tax amendments, the Budget continues the Government’s recent trend of introducing clarificatory and retrospective amendments to address long-standing interpretational issues relating to income-tax assessment, reassessment, and other related proceedings. Although most of these proposals signal a pragmatic shift in tax administration that prioritises intent over inadvertent technical lapses, they also tend to reopen discussions on taxpayer rights, finality of proceedings, and the constitutional validity of retrospective taxation.

Against this backdrop, the article examines the genesis of the controversies surrounding the respective issues, analyzes key judicial precedents, and critically evaluates the potential challenges that may arise in implementing such retrospective amendments, particularly in light of already decided cases and pending litigation on these issues.

1. Retrospective Clarification of Limitation Period in Dispute Resolution Panel (“DRP”) Cases

[Sections 144C, 153 & 153B of the Income-tax Act, 1961]

One of the most significant and widely debated amendments introduced by the Union Budget 2026 relates to the retrospective clarification of the limitation period applicable to assessment proceedings in cases covered by the DRP mechanism.

• What is the controversy

Section 144C of the Income-tax Act, 1961 (“ITA, 1961”) prescribes a special assessment procedure for eligible assessees, including non-residents and cases involving transfer pricing adjustments, under which the Assessing Officer (AO) is required to first issue a draft assessment order before passing the final assessment order.

Historically, considerable ambiguity existed on whether the limitation period prescribed under Sections 153 or 153B of ITA, 1961 applied only up to the issuance of the draft assessment order, or whether it extended to the completion of the entire assessment, including the passing of the final order, in DRP cases. This ambiguity resulted in conflicting judicial interpretations across various High Courts, leading to prolonged litigation, uncertainty, and a significant backlog of appeals.

• High Court Judgements in Roca Bathroom and Shelf Drilling cases

In a series of landmark decisions, including Roca Bathroom Products Private Limited [TS-764-HC-2020(MAD)-TP] and Shelf Drilling Ron Tappmeyer Limited [TS-431-HC-2023(BOM)], the High Courts examined the interplay between Sections 144C, 153 and 153B and held that the limitation period under Sections 153/153B governs the entire assessment process. It was observed that mere issuance of a draft assessment order within the prescribed limitation period would not save the assessment if the final order was passed beyond such time-limit. The courts further held that Section 144C, being a procedural provision, does not independently extend or override the statutory limitation period unless expressly provided by law. [The matter is currently under review by the Supreme Court of India due to a split verdict regarding the interpretation of the interplay between Section 144C and Section 153].

Following these rulings, numerous final assessment orders in transfer pricing and non-resident cases were quashed as time barred. Several writ petitions were allowed solely on limitation grounds without examination of merits, while many revenue appeals were dismissed or remained pending awaiting legislative or authoritative clarification.

• Split verdict by Supreme Court

These rulings threatened to trigger a cascade of consequences. If upheld, numerous analogous cases would have failed on identical grounds, dealing a serious blow to the income tax department. Confronted with these implications, the department took the matter to the Supreme Court. However, despite prolonged anticipation that the dispute would reach a final resolution, the Court delivered a divided verdict. With the two judges on the Bench unable to arrive at a shared interpretation of the law, the controversy remained unsettled and was ultimately referred to a larger Bench.

• Changes in Union Budget 2026

The divergent views of the courts had clogged the tax administration for a considerable period. The ripple effect was such that, in the past few months, tribunals across nation had adjourned hundreds of cases involving DRP directions sine die pending the final decision of the Supreme Court.

To resolve these interpretational disputes and neutralise conflicting judicial views, the Budget 2026 has clarified that, in DRP cases, the limitation period under Sections 153 and 153B applies only up to the issuance of the draft assessment order. The time-limit for passing the final assessment order thereafter is governed exclusively by Section 144C of the ITA, 1961 [corresponding to Section 275 of the Income-tax Act, 2025 (“ITA, 2025”)]. Significantly, the amendment has been introduced with a non-obstante clause overriding any contrary judicial pronouncements, clearly reflecting the legislative intent to retrospectively validate the revenue’s position, particularly in light of pending litigation such as ROCA Bathroom and Shelf Drilling.

This clarification has been given retrospective effect from 1 April 2009 in respect of Section 153 [by insertion of sub-sections (4A) and (13A)] and from 1 October 2009 in respect of Section 153B [by insertion of sub-sections (4B) and (13B)]. This clarification has also been correspondingly incorporated through amendments in sections 153 (section 286 of ITA 2025) and 153B of ITA 1961.

1. Retrospective Clarification on Jurisdiction for Issuance of Reassessment Notices [JAO vs FAO] [Sections 147A, 148 & 148A of the ITA, 1961]

• What is the controversy

The controversy over Jurisdictional Assessing Officers (JAOs) and Faceless Assessing Officers (FAOs), most popular by name of “JAO vs FAO issue” or “Hexaware Riddle” arose in the aftermath of the faceless assessment and reassessment regime introduced with effect from 1 April 2021. Following the substitution of sections 147 to 151 of the Income-tax Act and the notification of faceless procedures, reassessment notices under sections 148 and 148A were issued in large numbers by JAOs. Taxpayers challenged these notices on the ground that, once the faceless scheme was operational, only the designated faceless units were competent to initiate reassessment proceedings. Divergent views emerged among High Courts on whether JAOs retained jurisdiction to issue such notices, ultimately leading to the issue reaching the Supreme Court.

• Changes in Union Budget 2026

The Union Budget, via newly inserted section 147A, has also clarified that the power to conduct pre-assessment enquiry and issue notices under sections 148A and 148 of ITA, 1961 [section 280 and 281 of ITA, 2025] for income escaping assessment rests solely with the Jurisdictional Assessing Officer (“JAO”) and not with the National Faceless Assessment Centre (“NFAC”) or its units. The clarification applies notwithstanding any court rulings, section 151A, or any faceless assessment scheme. This amendment aims to resolve conflicting judicial views, reduce litigation, and ensure certainty by clearly demarcating pre-assessment and faceless assessment functions, with retrospective effect from 1 April 2021 under the ITA 1961 and prospectively from 1 April 2026 under the ITA 2025. It may be noted that the assessment order would still be passed by NFAC.

The corresponding provisions have also been introduced in the section 279 (related to income escaping assessment) of the ITA 2025.

1. Retrospective Clarification on Time Limit for Passing Transfer Pricing Orders [Section 92CA of the ITA, 1961]

• What is the Issue

Section 92CA of the ITA, 1961 requires the Transfer Pricing Officer (“TPO”) to pass an order at least sixty days prior to the expiry of the assessment limitation period prescribed under Sections 153 or 153B. However, the statute did not clarify how this sixty-day period was to be computed. The computation differences had led to ambiguity in divergent interpretations by taxpayers and the tax authorities. In some of the cases, matter has already been decided in favour of taxpayers and accordingly the legal issue was pending at various courts for adjudication.

• Changes in Union Budget 2026

The Union Budget 2026 has addressed the ambiguity regarding the time limit for passing transfer pricing orders. To end this, a new sub-section (3AA) has been inserted in Section 92CA of the ITA, 1961, with retrospective effect from 1 June 2007.

The newly inserted sub-section (3AA) now provides a specific computation clarification for this purpose. Under this sub-section, where the limitation period for completing the assessment expires on 31 March, the TPO order must be passed by 30 January in a non-leap year and by 31 January in a leap year. Similarly, where the limitation period expires on 31 December, the TPO order is required to be passed by 1 November. This clarification seeks to bring uniformity and certainty to the computation of timelines for transfer pricing orders.

• Alignment with ITA, 2025

Corresponding amendments have also been made in Section 166(7) of the ITA, 2025, which now clarifies that the order of the TPO must be passed at least one month prior to the expiry of the month in which the limitation period for completing the relevant assessment or reassessment expires. For instance, where the assessment limitation expires on 31 March, the TPO order is required to be passed by 31 January and where the limitation period expires on 31 December, the TPO order is required to be passed by 31 October.

It is pertinent to note that while both enactments aim to align the timelines, there is a conceptual difference in their formulation. Under the ITA, 1961, the TPO order is required to be passed at least sixty days before the expiry of the limitation period under Sections 153 or 153B. In contrast, the ITA, 2025 prescribes that such order must be passed at any time before one month prior to the month in which the limitation period under Sections 286 or 296 expires. Despite the difference in drafting, both provisions effectively seek to standardize and clarify the time limit for passing transfer pricing orders.

1. Retrospective Validation of Orders Despite DIN Defects [Section 292BA of the ITA, 1961]

• What is the controversy

Earlier, the mandatory requirement of quoting a computer-generated Document Identification Number (“DIN”) was introduced by CBDT to ensure transparency and accountability in tax administration. Courts and tribunals consistently held that non-compliance with the DIN requirement rendered assessment orders invalid, leading to a substantial litigation.

In many cases, orders were quashed solely on technical grounds, such as incorrect quoting of the DIN, typographical errors, or improper reference to the DIN, even though the assessments were otherwise valid on merits. This resulted in significant revenue loss and procedural challenges for the tax authorities.

• Changes in Union Budget 2026

In a move to strengthen procedural certainty, the Budget has proposed a clarification, via Section 292BA of ITA, 1961/ Section 522 of ITA, 2025, that a tax assessment remains valid even if there is a mistake, defect, or omission in quoting of computer-generated DIN, provided the order references the DIN in any manner. This retrospective amendment from 1 October 2019 and the corresponding amendment in the ITA, 2025, effective 1 April 2026, ensures consistency and certainty in enforcement under the Act.

This amendment nullifies a large volume of litigation where orders were struck down for non‑compliance with the mandatory DIN requirement.

Way Forward and Likely Consequences

While the issues discussed above differ in nature, the common thread in placing all four within a uniform context lies in the Government’s intent to retrospectively amend the provisions with the objective of putting the corresponding litigation to rest and safeguarding potential tax revenues running into thousands of crores.

By retrospectively validating procedural defects and clarifying limitation mechanics, the amendments seek to curtail litigation founded primarily on technical objections. However, they also give rise to several broader legal and constitutional questions, including:

• Whether retrospective dilution or clarification of limitation provisions could be subjected to constitutional scrutiny, particularly on the question of whether the Government can retrospectively dilute limitation provisions;
• Whether retrospective legislative validation can revive proceedings that were earlier quashed solely on procedural defects or limitation-related grounds; and how the doctrine of finality of litigation and appellate proceedings would operate in such cases;
• Whether binding judicial precedents interpreting procedural and limitation provisions can be legislatively overridden with retrospective effect, and if so, to what extent; and
• Whether the retrospective amendment for issues already pending for adjudication by Apex court can tantamount to contempt of court as one of the parties to the issues before Apex court is Government itself.

From a practical standpoint, pending writ petitions and appeals that rely exclusively on procedural objections are likely to encounter heightened resistance, with the Revenue expected to rely heavily on retrospective amendments to defend past actions.

In our view, assessments invalidated purely on limitation ground following the ROCA Bathroom and Shelf Drilling rulings now stand statutorily validated, subject to the doctrine of finality of proceedings. However, this clarification would not extend to cases where even the draft assessment orders were issued beyond the prescribed limitation period of 153 or 153B. Consequently, pending writ petitions and appeals that rely exclusively on limitation objections are likely to face dismissal, with revenue authorities expected to strongly rely on the retrospective amendment to defend delayed final assessment orders passed under the DRP mechanism.

Further, assessments that were set aside exclusively due to an incorrect or defective mention of the DIN are, in our view, capable of being revived by virtue of the retrospective amendment. However, facts and the time limit of each case have to be evaluated separately whether the revival in these cases is possible. It is worth mentioning that cases involving a complete absence of a DIN would continue to remain invalid and cannot be reopened.

Going forward, to ensure uniform application, additional administrative guidance from the CBDT may be expected.

To conclude, the retrospective amendments proposed in Union Budget 2026 reflect the clear intention to minimize procedural litigation and safeguard revenue interests by validating the past actions of the tax authorities. Nevertheless, the lack of clarity in the carve-outs for concluded cases and the transitional provisions may give rise to a new wave of litigation.

From a taxpayer’s perspective, the above amendments require a re-evaluation of pending assessments, reassessments, and appeals.