Income tax reassessment notices under Sections 148A and 148 quashed for violating mandatory faceless assessment mechanism

The Telangana HC allowed the writ petition challenging reassessment notices issued under Sections 148A and 148 of the Income Tax Act. The court held that notices issued by jurisdictional Assessing Officers instead of through the mandatory faceless assessment mechanism violated the Finance Act, 2021 and Section 151A read with Notification 18/2022. The decision followed the precedent in KANKANALA RAVINDRA REDDY case and aligned with similar rulings by Bombay, Gauhati, and Punjab & Haryana HCs, quashing the reassessment proceedings on jurisdictional grounds.

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The core legal questions considered in this judgment revolve around the validity and procedural correctness of notices and assessment proceedings initiated under Sections 148A and 148 of the Income Tax Act, 1961 (hereinafter 'the Act'), particularly in light of amendments introduced by the Finance Act, 2021. Specifically, the issues include:

• Whether the notices under Sections 148A and 148 of the Act were required to be issued and proceedings conducted in a faceless manner as mandated by the Finance Act, 2021 and related notifications.
• Whether the initiation of proceedings under these sections without following the faceless procedure violates the amended provisions of the Act, especially Section 151A read with Notification 18/2022 dated 29.03.2022.
• The legal effect of non-compliance with the faceless procedure on the validity of the notices and consequent assessment orders passed under Section 147.
• The impact of the pendency of Special Leave Petitions (SLPs) before the Supreme Court challenging various High Court decisions on this issue, and whether writ petitions on identical grounds should be entertained or disposed of pending the Supreme Court's decision.
• The obligation of the Income Tax Department to adhere to judicial precedents and the consequences of failure to do so, including the issue of judicial discipline and administrative propriety.
• The scope of the liberty granted to the Revenue to initiate fresh proceedings in compliance with the amended provisions and the consequences of the Department's failure to adopt such measures.

Issue-wise Detailed Analysis

1. Requirement of Faceless Proceedings under Sections 148A and 148 of the Act

The legal framework rests on the amendments introduced by the Finance Act, 2021, effective from 01.04.2021, which mandated that proceedings under Sections 148A and 148 must be conducted in a faceless manner. This is further reinforced by Section 151A of the Act and Notification 18/2022 dated 29.03.2022. The faceless assessment scheme aims at ensuring transparency, reducing human interface, and minimizing harassment.

Precedents from the Telangana High Court in Kankanala Ravindra Reddy vs. Income Tax Officer and multiple other High Courts (Bombay, Gauhati, Punjab & Haryana, Himachal Pradesh, Gujarat, Jharkhand, Rajasthan, Calcutta) have uniformly held that initiation of proceedings under Sections 148A and 148 without following the faceless procedure is illegal and void. These rulings have been consistently followed and form a strong binding precedent.

The Court interprets these provisions strictly, emphasizing that non-compliance with the faceless procedure renders the notices and consequent proceedings invalid. The key finding is that the procedural mandate is mandatory and not directory, and any deviation vitiates the proceedings.

The Department's argument that the matter is sub judice before the Supreme Court and that no interim order has been granted was acknowledged, but the Court noted that the pendency of SLPs does not justify continued violation of the law or repeated initiation of invalid proceedings.

2. Effect of Non-compliance and Validity of Notices and Assessment Orders

Applying the law to facts, the Court found that the notices issued under Sections 148A and 148 in the instant case were not issued in the faceless manner as required, thereby violating the amended provisions. The consequential assessment orders passed under Section 147 also stood vitiated as they flowed from the invalid notices.

The Court relied on the principle that when the initiation of proceedings itself is procedurally flawed, all subsequent orders are null and void. This principle was reiterated from the earlier judgment in Kankanala Ravindra Reddy and other High Court decisions.

Competing arguments by the Revenue that allowing the writ petitions would burden the Department and the exchequer were rejected as insufficient to justify non-compliance with statutory mandates. The Court emphasized the importance of adherence to judicial pronouncements and procedural law over administrative convenience.

3. Impact of Pending SLPs and Handling of Identical Writ Petitions

The Court acknowledged the existence of over 1200 SLPs pending before the Supreme Court challenging the High Courts' decisions. Despite this, the Court expressed concern over the continued filing of identical writ petitions and the Department's failure to take remedial steps to curb the issuance of invalid notices.

The Court noted that the Department's stance of awaiting the Supreme Court's decision without issuing any instructions to halt proceedings was causing docket explosion and unnecessary litigation. The Court observed that the Department should have at least deferred non-faceless proceedings pending the Supreme Court's verdict or issued appropriate instructions at the CBDT level.

To balance interests, the Court disposed of the writ petition in line with the precedent set by Kankanala Ravindra Reddy but made the disposal subject to the outcome of the pending SLPs. It allowed parties to seek revival of the writ petition depending on the Supreme Court's ruling, thereby preserving the rights of both Revenue and assesses.

4. Obligation to Follow Judicial Precedents and Judicial Discipline

The Court referred extensively to the Bombay High Court decision in Bank of India vs. Assistant Commissioner of Income Tax, which underscored the binding nature of appellate orders and judicial pronouncements on subordinate authorities. The Court highlighted that the Revenue's failure to accept binding High Court decisions and continuing to initiate proceedings contrary to such decisions constitutes a breach of judicial discipline and results in undue harassment of taxpayers.

The Court emphasized that the mere pendency of appeals or SLPs does not absolve the Department from following binding precedents unless stayed by a competent court. The Court criticized the Revenue's approach as detrimental to administrative efficiency and the rule of law.

5. Liberty Granted to Revenue for Fresh Proceedings and Department's Conduct

In the earlier Kankanala Ravindra Reddy decision, the High Court had granted the Revenue a one-time liberty to initiate fresh proceedings strictly in accordance with the amended provisions. The Court noted with concern that the Department has not availed itself of this liberty and instead persisted with the invalid mode of issuing notices.

The Court observed that this conduct appears to be a strategic attempt to prolong proceedings and circumvent limitation periods, thereby prejudicing the interests of taxpayers. The Court warned against such misuse of procedural liberties and emphasized the need for compliance with statutory amendments.

Conclusions

The Court concluded that the notices issued under Sections 148A and 148 in the instant case were invalid due to non-compliance with the faceless procedure mandated by the Finance Act, 2021 and related notifications. Consequently, the assessment orders passed under Section 147 also stood quashed.

The writ petition was allowed subject to the outcome of the pending SLPs before the Supreme Court, with liberty granted to parties to revive the petition based on the Supreme Court's decision.

The Court strongly admonished the Income Tax Department for its failure to adhere to judicial precedents and statutory mandates, highlighting the adverse impact on judicial resources and taxpayers. It urged the Department to take remedial steps and respect judicial discipline.

Significant Holdings

"The notices so issued and the procedure adopted being per se illegal, deserves to be and are accordingly set aside/quashed. As a consequence, all the impugned orders getting quashed, the consequential orders passed by the respondent-Department pursuant to the notices issued under Section 147 and 148 would also get quashed and it is ordered accordingly. The reason we are quashing the consequential order is on the principles that when the initiation of the proceedings itself was procedurally wrong, the subsequent orders also gets nullified automatically."

"The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not 'acceptable' to the department - in itself an objectionable phrase - and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court."

"Allowing of the instant writ petition is subject to outcome of the aforesaid SLP preferred by the Revenue against the decision of this High Court in the case of Kanakala Ravindra Reddy (1 supra). This, in other words, would mean that either of the parties, if they so want, may move an appropriate petition seeking revival of this writ petition in the light of the decision of the Hon'ble Supreme Court in the pending SLP on the very same issue."

Core principles established include the mandatory nature of faceless proceedings under the amended Income Tax Act provisions, the binding force of High Court decisions on subordinate tax authorities notwithstanding pending appeals or SLPs, and the necessity for the Department to respect judicial pronouncements to prevent harassment and administrative chaos.

Final determinations affirm the quashing of notices and consequential assessment orders issued without adherence to the faceless procedure, subject to the Supreme Court's decision in pending SLPs, with directions for the Department to take corrective steps and respect judicial discipline.

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