2023 (2) TMI 863 - HC - Income Tax

Court sets aside assessment order, emphasizes statutory compliance in Income Tax Act proceedings.

DIPAK NATWARLAL DHOLAKIYA Versus ADDL/JT/DY/ASST COMMISSIONER OF INCOME TAX

The Court allowed the petition, setting aside the assessment order and all consequential actions and notices. The respondent can initiate further actions ... Revision u/s 263 - validity of Assessment u/s 144B - non-compliance of mandatory statutory provisions and for grant of less than four hours to respond to the notice - HELD THAT:- This is in gross violation of the principles of natural justice as to ask some one to respond to the same in less than four hours, amounts to nearly achieve impossible. When it is being terms as violation of principles of natural justice, it is mild expression to the conduct of the respondent. The least that could have been done was to regard the objective and very purport of introducing service of show-cause notice cum draft assessment order u/s 144B. Such Faceless Assessment Scheme 2019 has been incorporated under the Tax regime vide Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, whereby, Section 144B was inserted from 1st April 2021. The circular of Central Board of Direct Taxes (CBDT) deals with the procedure of faceless assessment, scope of work to be done by different units such as assessment unit, verification unit, technical unit etc. Non-compliance of sub-section (9) of Section 144B of the Act would render the issue non est. Our attention is drawn that the provisions of sub-section (9) of Section 144B of the Act though have been omitted from the statute book, there is no running away from the fact that the time given is in no manner can be said to be in due compliance of the statutory provisions or in satisfaction of fulfilling the objectives of newly introduced provisions. Resultantly, this petition is allowed quashing and setting aside the action of the respondent of passing the order of assessment for the Assessment Year 2016-2017 with all consequential actions and notices. ISSUES PRESENTED AND CONSIDERED 1. Whether the impugned assessment order under Section 143(3) read with Section 263 and Section 144B of the Income Tax Act, 1961 is vitiated for breach of the principles of natural justice by providing an unreasonably short time to respond to the show-cause notice cum draft assessment order. 2. Whether statutory requirements under Section 144B (including the scheme of faceless assessment and related procedural safeguards prescribed by CBDT) were complied with when the notice period granted was less than four hours, and what consequences follow from non-compliance. 3. Whether, on the facts shown, the remedy of quashing and setting aside the assessment order and consequential demand and penalty notices is appropriate, and whether the tax authority may re-open or re-initiate proceedings thereafter. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Breach of principles of natural justice by unreasonable short notice Legal framework: Principles of natural justice require adequate and reasonable opportunity of hearing before adverse action is taken. Section 144B(1)(xiv) mandates service of show-cause notice cum draft assessment order where there is variation from returned income; faceless assessment procedures (as introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and implemented by CBDT circulars) provide procedural safeguards and time for representation. Precedent treatment: Decisions relied upon by the parties (including earlier Supreme Court authorities recognizing fair opportunity and reasonable time to present case) were invoked by the petitioner to demonstrate that extremely short notice violates natural justice. The Court treated those precedents as applicable authorities endorsing the requirement of reasonable opportunity. Interpretation and reasoning: The Court examined the factual timeline: the draft assessment order was uploaded at 17:22 IST with a requirement to respond by 23:59 IST that same day, effectively providing under four hours on a working day and even shorter effective time on other instances where notice was uploaded with end-of-day deadlines and on a holiday. The Court held that asking the assessee to respond to proposed additions aggregating a substantial amount (Rs.39,87,750/-) within such a compressed period is 'nearly impossible' and constitutes a 'gross violation of the principles of natural justice.' The Court emphasized that the object and purport of introducing Section 144B and the faceless assessment scheme is frustrated if the statutory and procedural safeguards are reduced to formalities by giving manifestly unreasonable timelines. Ratio vs. Obiter: Ratio - an assessment process that does not afford a reasonable opportunity to respond to a show-cause/draft assessment notice is invalid for breaching natural justice. Obiter - observations on the moral character of the conduct being a 'mild expression' of violation are ancillary. Conclusions: The Court concluded that the service of the show-cause notice/draft assessment order with less than four hours' effective time to respond violated principles of natural justice and rendered the subsequent assessment process vitiated. Issue 2 - Compliance with Section 144B and faceless assessment procedures; consequences of non-compliance Legal framework: Section 144B governs faceless assessments and sets out requirements for issuance of show-cause/draft assessment orders, with the CBDT prescribing detailed procedures (role of assessment unit, verification unit, technical unit, timelines) by circular. Sub-section (9) of Section 144B, though noted as omitted from the statute book, was referenced as reflecting procedural intent and safeguards. Precedent treatment: The Court relied on the legislative scheme and CBDT circular to interpret procedural expectations under the faceless assessment regime. Prior authorities emphasizing adherence to statutory procedure and fair opportunity were followed to hold that non-compliance with essential procedural safeguards renders the process infirm. Interpretation and reasoning: The Court characterised the faceless assessment regime as designed to ensure fairness and adequate opportunity through structured timelines and multi-unit checks. Non-compliance with those procedural mandates - particularly in providing an unreasonable and inadequate timeframe to respond - defeats the legislative purpose. Even though certain sub-provisions had been omitted, the Court held that the essence of the procedural safeguard (reasonable time and adherence to prescribed steps) remains mandatory and its breach cannot be ignored by administrative convenience. The Court stated that non-compliance with the procedural requirement would render the issue non est (i.e., of no effect) insofar as it affects fairness of the assessment process. Ratio vs. Obiter: Ratio - procedural requirements under Section 144B and related CBDT prescriptions that ensure reasonable time to respond are mandatory in operation; failure to comply invalidates the assessment process. Obiter - specific comments on the omission of sub-section (9) as not permitting running away from the statutory purpose. Conclusions: The Court concluded that there was non-compliance with the procedural safeguards implicit in Section 144B and the faceless assessment scheme - particularly as to reasonable opportunity - and that such non-compliance vitiated the assessment process. Issue 3 - Remedy: quashing assessment, demand and penalty; scope for fresh proceedings Legal framework: Judicial power under Article 226 to quash administrative action which is arbitrary, procedurally unfair, or in excess of statutory authority; tax authorities retain power to reinitiate assessment in accordance with law where prior proceedings are set aside for procedural infirmity. Precedent treatment: The Court applied established remedial principles that a vitiated administrative order may be quashed but the authority may proceed afresh consistent with statutory requirements and fair procedure. Interpretation and reasoning: Given the finding of breach of natural justice and procedural non-compliance, the Court held the appropriate relief is to quash and set aside the impugned assessment order dated 31.03.2022 together with consequential demand notice and penalty proceedings, while leaving the tax authority free to initiate proceedings afresh from the stage where it is competent to proceed, provided statutory procedures and principles of natural justice are observed. The Court noted the petitioner should cooperate in any fresh proceedings. Ratio vs. Obiter: Ratio - quashing of the defective assessment and ancillary notices is the remedy for procedural breach; it does not bar the revenue from re-initiating proceedings, provided compliance with statutory procedure and natural justice. Conclusions: The Court allowed the petition, quashed and set aside the assessment order, demand notice and penalty proceedings; the revenue may recommence action from the point left, complying with the statutory and procedural safeguards including reasonable opportunity to be heard. Cross-reference Findings on Issues 1 and 2 are interlinked: the determination that statutory/procedural safeguards under Section 144B and the faceless assessment scheme were not complied with (Issue 2) is the basis for holding there was a breach of natural justice by providing an unreasonable and inadequate notice period (Issue 1), which in turn determines the remedial result (Issue 3).