Kerala High Court overturns Income Tax assessment and penalty due to procedural violations

The Kerala High Court set aside an assessment order and penalty notice under the Income Tax Act, 1961, due to a violation of natural justice principles. The court found that the assessment order deviated from statutory requirements by not serving a draft assessment order or show-cause notice, as mandated by section 144B. The court held that this failure infringed upon natural justice principles and referred to relevant judgments to support its decision. Consequently, the assessment order and penalty notice were both set aside, and the competent authority was directed to promptly serve the necessary documents to the petitioner to ensure compliance with the law.

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Issues: Alleged violation of principles of natural justice in assessment order and penalty notice under Income Tax Act, 1961.

The judgment by the Kerala High Court pertains to a writ petition challenging an assessment order issued under section 143(3) of the Income Tax Act, 1961, along with a consequential penalty notice. The primary contention raised in the petition is the alleged violation of the principles of natural justice, specifically the failure to serve the show-cause notice and the draft assessment order as required under section 144B(1)(xvi)(b) of the Act.

The court highlighted the introduction of the e-Assessment Scheme, later renamed as the 'Faceless Assessment Scheme,' through a notification in 2019, which was subsequently incorporated into the statute as section 144B with effect from 01.04.2021. Under this scheme, a draft assessment order is prepared by considering the relevant material on record, either accepting the income as per the assessee's return or making variations to it. If a variation prejudicial to the assessee is proposed, a show-cause notice must be served, ensuring adherence to principles of natural justice.

The petitioner argued that the assessment order issued by the respondents deviated from the requirements of section 144B, as the variation to the income return was made without issuing the draft assessment order or the show-cause notice. The court examined the documents submitted by the petitioner, which indicated that the assessing officer had varied the return filed by the petitioner, leading to a demand for income tax. This variation was made without following the necessary procedure of serving the draft assessment order and show-cause notice, as mandated by law.

Citing the provisions of section 144B and the principles of natural justice, the court held that the assessment order in question failed to comply with the statutory requirements, thereby infringing upon the principles of natural justice. The court referred to relevant judgments from the Delhi High Court in similar contexts to support its decision. Consequently, the assessment order was set aside, leading to the automatic setting aside of the penalty order as well.

In conclusion, the court directed the competent authority to serve the draft assessment order and show-cause notice to the petitioner promptly, ensuring the completion of proceedings in accordance with the law and without further delay. The writ petition was allowed in favor of the petitioner based on the above analysis.

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