Assessment order under Section 143(3) r/w 144B set aside for violating natural justice principles

The Orissa HC set aside an assessment order passed under Section 143(3) r/w Section 144B, finding violation of natural justice principles. The NFA unit granted the petitioner only four days to upload voluminous documents, which was deemed insufficient. Additionally, the Assessing Authority failed to consider documents uploaded on 14.03.2025 despite passing the assessment order on 18.03.2025, after considering earlier uploads from 01.03.2025 and 09.03.2025. The matter was remitted to the National Faceless Assessment Unit for fresh adjudication regarding AY 2023-24.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the National Faceless Assessment Unit complied with the principles of natural justice and the Standard Operating Procedure (SOP) under Section 144B of the Income Tax Act, 1961, particularly regarding the time granted for submitting documents in response to the show cause notice issued under Section 143(3).
• Whether the assessment order dated 18.03.2025 was validly passed, considering that documents uploaded by the petitioner after the stipulated deadline were not taken into account.
• Whether the failure to consider the documents uploaded on 14.03.2025 amounted to violation of natural justice and arbitrariness, warranting interference by the Court.
• The scope and applicability of the principles of natural justice in faceless assessment proceedings under the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Compliance with Principles of Natural Justice and SOP Timelines for Document Submission

Relevant legal framework and precedents: Section 143(3) read with Section 144B of the Income Tax Act, 1961 governs faceless assessment proceedings. Section 144B(6)(xi) empowers the Principal Chief Commissioner or Principal Director General in charge of the National Faceless Assessment Centre to lay down standards and procedures for its functioning. The Ministry of Finance, Central Board of Direct Taxes issued a Standard Operating Procedure (SOP) dated 03.08.2022, which mandates a response time of seven days from the issue of the show cause notice to afford reasonable opportunity and adherence to natural justice. Precedents cited include Basudeo Tiwary v. Sido Kanhu University (1998) and Nagarjuna Construction Co. Ltd. v. Government of Andhra Pradesh (2008), which emphasize that violation of natural justice leads to arbitrariness and courts presume a duty to observe natural justice rules when statutory powers affect rights.

Court's interpretation and reasoning: The Court noted that the show cause notice was issued on 26.02.2025 with a due date for submission of reply fixed as 01.03.2025, allowing only four days instead of the seven days prescribed by the SOP. The Court held that this was contrary to the SOP and thus a violation of the principles of natural justice.

Key evidence and findings: The petitioner uploaded voluminous documents in three phases: 01.03.2025, 09.03.2025, and 14.03.2025, citing limited portal space and scanning difficulties as reasons for delay. The Income Tax Department did not dispute the fact that documents were uploaded beyond the stipulated deadline.

Application of law to facts: The Court applied the SOP provisions and natural justice principles to conclude that the inadequate time granted for compliance was unreasonable and violated the petitioner's right to a fair opportunity to present its case.

Treatment of competing arguments: The Income Tax Department contended that the petitioner could have uploaded the documents within the stipulated time and that the Assessing Authority considered the available documents before passing the order. The Court rejected this argument, emphasizing the SOP's mandatory nature and the need for reasonable opportunity.

Conclusion: The Court found that the National Faceless Assessment Unit failed to comply with the SOP and natural justice by granting insufficient time for submission of documents.

Issue 2: Validity of the Assessment Order in Light of Non-Consideration of Documents Uploaded on 14.03.2025

Relevant legal framework and precedents: Section 143(3) of the Income Tax Act empowers the Assessing Officer to complete assessment after considering submissions made by the assessee. The SOP under Section 144B mandates adherence to natural justice, which requires consideration of all relevant material submitted by the assessee. The Supreme Court decisions cited reiterate that failure to consider relevant evidence can amount to arbitrariness and violation of natural justice.

Court's interpretation and reasoning: The Court observed that the assessment order was passed on 18.03.2025, after the last batch of documents was uploaded on 14.03.2025. However, the order only considered documents uploaded on 01.03.2025 and 09.03.2025, ignoring those submitted on 14.03.2025. The Court held that this omission was a flagrant violation of natural justice principles.

Key evidence and findings: The petitioner's reply dated 14.03.2025 explicitly stated the submission of additional documents on that date. The Income Tax Department did not dispute the existence of these documents but failed to consider them in the assessment order.

Application of law to facts: Given that the assessment was passed after the last submission, the Assessing Authority had the duty to consider all documents uploaded before passing the order. Ignoring the last submission rendered the assessment order procedurally flawed.

Treatment of competing arguments: The Department argued the petitioner had ample opportunity and that the order was appropriate based on available documents. The Court found this argument untenable in light of the procedural lapse.

Conclusion: The assessment order was invalid due to the failure to consider the documents uploaded on 14.03.2025, violating natural justice.

Issue 3: Applicability of Natural Justice Principles in Faceless Assessment Proceedings

Relevant legal framework and precedents: The Constitution of India under Articles 226 and 227 empowers High Courts to enforce natural justice. The Income Tax Act and SOP mandate procedural fairness. The Supreme Court decisions cited establish that natural justice is an essential ingredient in administrative and quasi-judicial proceedings, including tax assessments.

Court's interpretation and reasoning: The Court reaffirmed that faceless assessment proceedings, though mechanised and automated, cannot dispense with the fundamental principles of natural justice. It emphasized that the right to be heard and reasonable opportunity to present evidence are non-negotiable.

Key evidence and findings: The SOP itself incorporates natural justice safeguards by prescribing timelines and procedures to ensure reasonable opportunity.

Application of law to facts: The Court applied these principles to the facts, concluding that the faceless assessment process must still adhere to natural justice, which was not done in this case.

Treatment of competing arguments: The Department's reliance on procedural timelines and automated processes was rejected in favor of upholding natural justice.

Conclusion: Natural justice principles apply fully to faceless assessment proceedings and must be scrupulously observed.

3. SIGNIFICANT HOLDINGS

The Court held:

"To ensure adherence to the principles of natural justice and reasonable opportunity to the assesse, timelines to be given for obtaining response to the SCN shall be: Response time of 7 days from the issue of SCN. Response time of 7 days may be curtailed, keeping in view the limitation date for completing the assessment."

"On the face of the record, the time so specified by the Faceless Assessment Unit is not in consonance with the Standard Operative Procedure."

"The Assessing Authority though considered the documents uploaded on 01.03.2025 and 09.03.2025, omitted to consider the documents uploaded on 14.03.2025. This Court is of the view that there has been flagrant violation of the principles of natural justice."

"Violation of natural justice leads to arbitrariness and when right is affected by decision taken by statutory powers, the Court may presume existence of a duty to observe the rules of natural justice."

"In view of the aforesaid facts and the legal position, the Court... is inclined to set aside the Assessment Order dated 18.03.2025 passed under Section 143(3) read with Section 144B of the Income Tax Act and remit the matter... for fresh adjudication... The Assessing Authority shall afford reasonable opportunity to furnish required documents necessary for the purpose of assessment."

The core principles established include:

• The mandatory nature of the seven-day response time under the SOP to uphold natural justice in faceless assessments.
• The necessity to consider all relevant documents uploaded before passing the assessment order.
• The application of constitutional and statutory principles of natural justice to faceless assessment proceedings.
• The Court's power to set aside assessment orders where natural justice is violated and remit for fresh adjudication.

Final determinations:

• The assessment order dated 18.03.2025 was set aside due to violation of natural justice.
• The matter was remitted to the National Faceless Assessment Unit for fresh adjudication with directions to afford reasonable opportunity to the petitioner.

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