2024 (8) TMI 1436 - HC - Income Tax

Assessment order quashed for failure to issue mandatory show cause notice under section 143(3) despite transfer

Gujarat HC quashed assessment order u/s 143(3) for failure to issue show cause notice. Case was transferred from faceless AO to jurisdictional AO u/s ... Principle of natural justice - show-cause notice - faceless assessment - transfer under section 144B(8) to jurisdictional Assessing Officer - personal hearing in E-proceedings - CBDT instructions and circulars governing conduct of assessmentsShow-cause notice - principle of natural justice - CBDT instructions and circulars governing conduct of assessments - Whether the assessment order was vitiated for want of issuance of a show-cause notice indicating reasons for proposed additions and thereby breaching the principles of natural justice. - HELD THAT: - The Court examined the mandate in Instruction No.20/2015, Instruction No.3/2018, the prescribed draft for notice under section 143(2) and Circular No.27/2019 as well as the Circular dated 06.09.2021, which together require that where an Assessing Officer proposes additions or disallowances a show-cause notice indicating reasons and the basis for proposed additions be issued and that personal hearing may follow where an adverse view is contemplated and requested by the assessee through E-filing. Though notices under section 142(1) had been issued on multiple occasions, those notices relate to inquiry and requisition of documents and do not substitute for a show-cause notice detailing the reasons for proposed additions. The Court found that the Assessing Officer did not issue a show-cause notice indicating reasons for the proposed additions before passing the final order and that absence of such a notice deprived the petitioner of the opportunity of hearing guaranteed by the principle of natural justice. This failure amounts to a breach requiring interference. [Paras 14, 15, 16]Assessment order quashed for failure to issue show-cause notice and breach of the principle of natural justice; matter remanded for issuance of show-cause notice and opportunity for hearing.Transfer under section 144B(8) to jurisdictional Assessing Officer - faceless assessment - personal hearing in E-proceedings - Whether the procedural protections under the CBDT instructions and circulars continue to apply when a faceless assessment is transferred to the jurisdictional Assessing Officer under section 144B(8). - HELD THAT: - Section 144B(8) permits transfer of a case from the faceless assessment unit to the jurisdictional Assessing Officer. The Court held that while the specific faceless-assessment procedure in sub-sections (1) and (2) may not apply once a case is transferred under sub-section (8), the CBDT's instructions and Circular No.27/2019 and related guidance governing issuance of show-cause notices and entitlement to personal hearing in E-proceedings must be read harmoniously and continue to apply to transferred cases. In particular, when assessment proceedings are to be conducted electronically (including transferred cases covered by E-proceeding guidance), a show-cause notice contemplating an adverse view is a prerequisite to affording the assessee an opportunity for personal hearing as per the Board's directions. [Paras 8, 14, 15]CBDT instructions and circulars governing issuance of show-cause notices and personal hearings apply to cases transferred under section 144B(8); transfer does not dispense with the requirement to issue a show-cause notice before finalizing adverse additions.Remand for issuance of show-cause notice - personal hearing in E-proceedings - The appropriate relief and further course of action where the assessment is quashed for failure to issue a show-cause notice. - HELD THAT: - Given the identified breach, the Court directed that the impugned assessment order be set aside and the matter remanded to the Assessing Officer to issue a show-cause notice specifying the reasons and evidence forming the basis for proposed additions/disallowances. The assessee must be permitted to file written submissions and, if requested, seek personal hearing in accordance with the applicable CBDT circulars on E-proceedings. The Court imposed a timeline for completion of this exercise to ensure finality. [Paras 16]Assessment order quashed and matter remanded for issuance of show-cause notice with opportunity for submissions and personal hearing if sought; exercise to be completed within 12 weeks.Final Conclusion: The assessment order dated 29.12.2022 for Assessment Year 2021-22 is quashed and set aside for failure to issue a show-cause notice and consequent breach of the principle of natural justice; the matter is remanded to the Assessing Officer to issue the requisite show-cause notice specifying reasons and basis for proposed additions, permit written submissions and personal hearing in accordance with the applicable CBDT instructions and circulars, and complete the exercise within 12 weeks. Issues Involved:1. Validity of the assessment order under section 143(3).2. Compliance with principles of natural justice.3. Requirement of a show-cause notice before passing the final assessment order.4. Applicability of CBDT instructions and circulars.5. Opportunity for personal hearing.Issue-wise Detailed Analysis:1. Validity of the Assessment Order under Section 143(3)The petitioner challenged the assessment order dated 29.12.2022 for the Assessment Year 2021-22, passed by the respondent-Assessing Officer, under Articles 226 and 227 of the Constitution of India. The petitioner contended that the assessment order was invalid as it was passed without issuing a show-cause notice indicating the reasons for proposed additions/disallowances, which deprived the petitioner of the opportunity for a personal hearing.2. Compliance with Principles of Natural JusticeThe petitioner argued that the absence of a show-cause notice resulted in a breach of the principles of natural justice. The petitioner was not given a fair opportunity to explain its position on the proposed additions/disallowances before the final order was passed. The petitioner relied on Instruction No. 20/2015 and other related instructions and circulars issued by the Central Board of Direct Taxes (CBDT), which mandate the issuance of a show-cause notice before passing the final order.3. Requirement of a Show-Cause Notice Before Passing the Final Assessment OrderThe petitioner emphasized that the respondent-Assessing Officer was required to issue a show-cause notice indicating the reasons for proposed additions/disallowances along with necessary evidence/reasons forming the basis of the same. The petitioner cited various instructions and circulars, including Instruction No. 20/2015, Instruction No. 3/2018, and Circular No. 27/2019, which mandate the issuance of a show-cause notice to ensure compliance with the principles of natural justice.4. Applicability of CBDT Instructions and CircularsThe court noted that the provisions of section 144B(8) of the Income Tax Act, 1961, allow the Principal Chief Commissioner or the Principal Director General in charge of the National Faceless Assessment Centre to transfer the case to the Jurisdictional Assessing Officer. The court harmoniously construed the instructions and circulars issued by the CBDT, concluding that the requirement to issue a show-cause notice applies even when the case is transferred to the Jurisdictional Assessing Officer under section 144B(8).5. Opportunity for Personal HearingThe court observed that the Circular dated 06.09.2021 provides that the request for personal hearing shall generally be allowed to the assessee after the assessee has filed written submissions to the show-cause notice. The court held that the issuance of a show-cause notice is a prerequisite for granting a personal hearing to the petitioner-assessee. In the absence of a show-cause notice, the petitioner was deprived of the opportunity for a personal hearing, thereby violating the principles of natural justice.ConclusionThe court concluded that the Assessing Officer committed a breach of the principles of natural justice by not issuing a show-cause notice indicating the reasons for proposed additions/disallowances along with necessary evidence. Consequently, the impugned assessment order was quashed and set aside. The matter was remanded back to the stage of issuance of a show-cause notice by the Assessing Officer, duly indicating the reasons for proposed additions/disallowances, to enable the petitioner to request a personal hearing if required. This exercise was directed to be completed within 12 weeks from the date of receipt of the court's order. The rule was made absolute to the aforesaid extent, with no order as to costs.