2024 (2) TMI 1581 - HC - Income Tax

Assessment quashed and remitted after delayed second reply under Section 142(1); petitioner ordered to deposit Rs.10,000 for reconsideration

Vijayalakshmi Mohanakrishnan Versus The Assessment Unit/Verification Unit/Technical Unit/Review Unit, New Delhi, The Income Tax Officer, Non-Corporate Ward 6 (1) Chennai

The HC held that although the petitioner replied to the Section 142(1) notice, a second reply was slightly delayed and the petitioner failed to file ... Validity of assessment order - breach of principles of natural justice - petitioner submits that the petitioner was provided barely seven days to respond to notice - HELD THAT:- The documents on record disclose that the petitioner replied to the notice under Section 142(1) of the Income Tax Act, albeit the second notice was replied to with a short delay. The show cause notice reveals that the petitioner was called upon to respond thereto on or before 10.15 a.m. on 29.11.2022. It was no doubt possible for the petitioner to have requested for further time upon receipt of such show cause notice. Nonetheless, the fact remains that the petitioner endeavored to submit a reply on 03.12.2022 but could not do so because the portal was not accessible by that time. As a result, the petitioner was unable to place on record submissions to support the contention that the income from sale of property was only liable to capital gains and that it should not be treated as business income. For that reason, the impugned order calls for interference subject to putting the petitioner on terms. Therefore, the impugned order is quashed and the matter is remanded for reconsideration subject to the payment of Rs.10,000/-. ISSUES PRESENTED AND CONSIDERED 1. Whether issuance of a show cause notice calling for response within seven days and proceeding to make an assessment without affording a reasonable opportunity to reply amounts to breach of principles of natural justice. 2. Whether the assessee's illness and consequent inability to file a reply within the prescribed short timeframe justifies interference with the assessment order. 3. Whether prior opportunities and earlier notices under Sections 142(1) and 143(2) of the Income Tax Act cure any procedural infirmity in the impugned assessment based on the show cause notice. 4. Whether, on proof of procedural infirmity, the appropriate remedy is to quash and remit the assessment for fresh consideration and under what terms (including payment of costs and direction for a fresh hearing). ISSUE-WISE DETAILED ANALYSIS Issue 1: Breach of principles of natural justice by limited time to respond to show cause notice Legal framework: Principles of natural justice require that an assessee be given a reasonable opportunity to be heard before an adverse assessment order is passed; statutory notices (e.g., under Section 142(1) and show cause notices) must be met with adequate time and facility to file replies. Precedent Treatment: No specific precedents were cited or relied upon in the judgment; the Court applied ordinary principles of audi alteram partem to the facts. Interpretation and reasoning: The show cause notice required a response by 10:15 a.m. on 29.11.2022, effectively providing seven days; the petitioner attempted to reply on 03.12.2022 but was prevented by portal inaccessibility. The Court found that the petitioner was thereby deprived of an effective opportunity to place on record submissions contesting characterization of income as capital gains instead of business income. Ratio vs. Obiter: Ratio - A show cause notice that affords an inadequate or ineffective opportunity to file submissions, particularly where practical impediments prevent filing, constitutes a breach of principles of natural justice warranting interference. Conclusions: The Court held that the impugned assessment order required interference on grounds of denial of a reasonable opportunity to be heard. Issue 2: Effect of the assessee's illness and delay in responding Legal framework: The adequacy of opportunity under principles of natural justice is assessed in context; bona fide inability (e.g., illness) to respond within an otherwise short timeframe is a relevant circumstance in assessing fairness. Precedent Treatment: No specific case law applied; factual assessment guided the Court's exercise of supervisory jurisdiction. Interpretation and reasoning: The petitioner produced a medical certificate dated 30.11.2022 evidencing ill-health around the relevant time. The Court recognized that though an application for further time could have been made upon receipt of the show cause notice, the illness and subsequent technical inability to file on 03.12.2022 meant the petitioner could not place crucial submissions on record in time. The combination of short notice period and factual impediments rendered the opportunity ineffective. Ratio vs. Obiter: Ratio - Factual incapacity, corroborated by medical evidence coupled with practical obstructions to filing, can render a statutorily short response period inadequate, engaging natural justice rights. Conclusions: The petitioner's illness and failed attempt to file a reply supported the conclusion that a reasonable opportunity was not afforded, justifying interference. Issue 3: Relevance of prior notices and partial responses in curing procedural infirmity Legal framework: Repeated statutory opportunities (e.g., notices under Sections 142(1) and 143(2)) may be relevant in determining whether an assessee had notice of proposed variations; however, fairness demands that specific show cause proceedings afford a reasonable chance to address the specific grounds advanced. Precedent Treatment: No precedents cited; the Court weighed factual chronology and adequacy of responses. Interpretation and reasoning: The respondents relied on earlier notices and the fact that some information was furnished belatedly (reply to the second Section 142(1) notice was delayed). The Court noted these prior interactions but emphasized that the show cause notice raised the specific contentious issue and required a fresh, effective opportunity. The prior notices did not negate the requirement to afford a proper hearing on the show cause notice when the petitioner was, in practice, prevented from replying timely. Ratio vs. Obiter: Ratio - Prior notices and partial compliance do not automatically cure a subsequent denial of effective hearing on a discrete show cause; each notice and opportunity must be assessed for sufficiency in enabling the assessee to meet the case against them. Conclusions: The existence of earlier notices and partial responses did not absolve the assessing authority from providing a reasonable, effective opportunity in respect of the show cause notice; the procedural infirmity stood. Issue 4: Appropriate remedy - quashing and remanding assessment, conditions and directions Legal framework: Where an assessment is vitiated by breach of natural justice, the usual remedy is to quash the order and remit the matter for fresh consideration after affording a proper hearing; the Court may impose terms such as payment of costs and set timings for fresh action. Precedent Treatment: Not cited; the Court applied established remedial principles in supervisory jurisdiction under writ jurisdiction. Interpretation and reasoning: Given the procedural infirmity, the Court concluded that interference was warranted. Rather than directing an absolute recalculation, the Court quashed the impugned order and remitted the matter for fresh assessment, conditioning the remand on payment of Rs.10,000 to a public institute within ten days. The respondents were directed to provide a reasonable opportunity, including a personal hearing, and to pass a fresh assessment within two months of the cost payment. Ratio vs. Obiter: Ratio - When natural justice is breached, remand for fresh decision after affording a proper hearing is an appropriate remedy; courts may impose reasonable terms (including costs) to balance interests and ensure prompt reconsideration. Conclusions: The assessment order was quashed and matter remitted for fresh consideration subject to payment of prescribed costs and directions to afford a reasonable opportunity and personal hearing within a defined timeframe. Cross-references and ancillary findings 1. The Court acknowledged that the petitioner could have sought further time upon receipt of the show cause notice but weighed this against illness and technical inability to file, finding the latter sufficient to vitiate fairness. 2. The Court noted the petitioner had disclosed the sale proceeds as capital gains and claimed Section 54EC exemption and that the petitioner had earlier furnished responses under Section 142(1), albeit with a delay in the second instance; these factual points informed the conclusion that the petitioner had a arguable case on merits that deserved to be ventilated in a proper hearing. 3. The writ petition was disposed of on the terms stated; there was no separate order as to costs beyond the directed payment to the named institute.