2025 (6) TMI 1327 - HC - Income Tax

Officer conducting video hearing must pass penalty order, HC quashes Section 271AA penalty for violating natural justice

GFL Limited Versus Assessment Unit, Income Tax Department & Anr.

Gujarat HC quashed penalty order u/s 271AA(1) for violating natural justice principles. The court held that when one officer conducts video conferencing ... Penalty u/s 271AA (1) - allegation of denial of principles of natural justice as impugned penalty order was passed by the another officer who has not heard the Petitioner during the video conferencing - scheme for setting up the faceless procedure as Faceless Penalty (Amendment) Scheme, 2022. HELD THAT:- It is law of the land that the personal hearing before taking a final decision in the matter is no substitute for written arguments and personal hearing enables the authority concerned to watch the demeanour of the witnesses etc. and also clear up his doubts during the course of the arguments and as held in case of Gullapalli [1958 (11) TMI 28 - SUPREME COURT] if one person hears and other decides, then personal hearing becomes an empty formality. Penalty Unit or Assessment Unit, as the case may be, is empowered to levy the penalty after giving an opportunity of hearing to the Petitioner. Therefore, it is necessary that the person who hears the Assessee only is required to pass the order, being part of such penalty or assessment unit as the case may be. Respondent No. 3 is therefore directed to issue necessary instructions to all the Assessment Units/Penalty Units pursuant to the provision of Section 144B(3) of the Act or as per the Scheme 2021 as amended by Scheme of 2022 to ensure that the Assessing Officer who provides for the Video Conferencing to the Assessee only will require to pass such Assessment Order or Penalty Order as per the decision of Gallapalli Nageswara Rao [1958 (11) TMI 28 - SUPREME COURT] reiterated in the case of Automotive Tyre Manufacturers Association [2011 (1) TMI 7 - SUPREME COURT]. This petition is disposed of by quashing and setting aside the impugned Penalty Order passed u/s 271AA (1) by remanding the matter back to the Respondent - Assessment /Penalty Unit to provide a fresh opportunity of hearing to the Petitioner and thereafter pass the fresh order under the provisions of Section 271AA (1) 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this matter are:(a) Whether the imposition of penalty under Section 271AA(1) of the Income Tax Act, 1961, on the Petitioner was valid in light of the principles of natural justice, particularly regarding the requirement that the person who hears the party must also pass the order ('he who hears must decide').(b) Whether the procedure followed under the faceless assessment and penalty scheme, specifically the Faceless Penalty Scheme, 2021 and its 2022 amendment, complies with the principles of natural justice and statutory mandates under Sections 144B and 274 of the Income Tax Act.(c) Whether the penalty order passed by an officer who did not personally hear the Petitioner during the video conferencing hearing is legally sustainable.(d) The applicability and interpretation of the Faceless Penalty Scheme, 2021 and its amendments, including the roles and powers of Assessment Units and Penalty Units in passing penalty orders.(e) The procedural safeguards and requirements for personal hearing under the Income Tax Act and the extent to which written submissions may substitute for oral hearings.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (c): Validity of penalty order in light of principles of natural justice and the requirement that the person who hears must decideRelevant legal framework and precedents: The Court extensively relied on the Constitutional Bench decisions of the Hon'ble Apex Court in Automotive Tyre Manufacturers Association and Gallapalli Nageswara Rao. These decisions establish the salutary principle that 'he who hears must decide' and that personal hearing is an essential part of natural justice. The hearing enables the authority to observe demeanour, clarify doubts, and engage with the party's arguments effectively. Written submissions cannot substitute for oral hearings. If one officer hears and another decides, the hearing becomes a mere formality and violates natural justice.Court's interpretation and reasoning: The Court noted that the Petitioner was granted a video conferencing hearing on 13.03.2023 by an officer who subsequently proceeded on leave. The penalty order dated 29.03.2023 was passed by a different officer who had not personally heard the Petitioner. This factual matrix, as recorded in Paragraph 3.5 of the impugned order, demonstrated a breach of the principle that the person who hears must decide. The Court held that the final order passed by the successor officer who did not hear the Petitioner violates the fundamental principle of natural justice.Key evidence and findings: The record showed that the hearing was conducted by one officer and the order was passed by another relying on the former's notes. The Petitioner's submissions during the hearing were not directly considered by the officer who passed the penalty order.Application of law to facts: Applying the precedent, the Court found that the impugned penalty order was unsustainable as the hearing and decision-making functions were improperly divided.Treatment of competing arguments: The Respondents argued that the Petitioner was heard through video conferencing and the order was passed after considering those submissions, hence no violation of natural justice occurred. The Court rejected this argument, emphasizing the binding nature of the 'he who hears must decide' principle as held by the Apex Court.Conclusions: The penalty order passed by an officer who did not personally hear the Petitioner is quashed for violation of natural justice.Issue (b) and (d): Applicability and interpretation of Faceless Penalty Scheme, 2021 and amendments vis-`a-vis natural justiceRelevant legal framework: Sections 144B and 274 of the Income Tax Act provide the statutory basis for faceless assessment and penalty proceedings. Section 274(2A) empowers the Central Government to frame schemes for faceless penalty imposition to enhance efficiency and transparency. The Faceless Penalty Scheme, 2021 and its 2022 amendment govern the constitution and functioning of National Faceless Penalty Centres, Regional Centres, Penalty Units, and Penalty Review Units.Court's interpretation and reasoning: The Court analyzed the scheme provisions, noting that the Penalty Unit or Assessment Unit is empowered to impose penalty after giving an opportunity of hearing. The scheme envisages that the penalty unit which conducts the hearing must be the one to pass the penalty order. The amendments clarified that the term 'penalty unit' refers to an Assessing Officer with powers assigned by the Board.The Court observed that the faceless scheme, while technologically advanced, does not dilute the fundamental principle of natural justice. The scheme mandates that the officer who hears the assessee must pass the penalty order, consistent with the Apex Court's rulings.Key evidence and findings: The notifications dated 12.01.2021 and 27.05.2022 were examined, particularly paragraphs 3, 4, and 5 of the Scheme, which detail the constitution of penalty units and procedure for penalty imposition proposals and orders.Application of law to facts: The impugned penalty order was passed by the Assessment Unit which did not conduct the hearing, contrary to the scheme's procedural safeguards and statutory provisions. This procedural lapse rendered the penalty order invalid.Treatment of competing arguments: The Respondents contended that the scheme's faceless nature and centralized procedures justify the passing of orders by officers other than those who heard the assessee. The Court rejected this, holding that the scheme's provisions and the statutory mandate require adherence to natural justice principles, including the 'he who hears must decide' rule.Conclusions: The faceless penalty scheme must be implemented in a manner consistent with natural justice. The penalty order must be passed by the officer who heard the assessee, ensuring procedural fairness.Issue (e): Procedural safeguards and the role of oral hearing versus written submissionsRelevant legal framework and precedents: The Apex Court's decisions emphasize that written arguments cannot substitute personal hearings. Oral hearings allow the authority to assess credibility, clarify doubts, and engage dynamically with the party's contentions.Court's interpretation and reasoning: The Court reaffirmed that personal hearing is an indispensable component of natural justice. The Petitioner's right to be heard was compromised when the hearing officer went on leave and a different officer passed the order without conducting a fresh hearing.Key evidence and findings: The record of hearing conducted via video conferencing and subsequent passing of order by a different officer was critical in establishing the breach.Application of law to facts: The Court found that the Petitioner's right to a meaningful hearing was infringed, as the officer passing the order did not have the benefit of observing demeanour or clarifying doubts in person.Treatment of competing arguments: The Respondents' reliance on written submissions and hearing notes was held insufficient to cure the breach of natural justice.Conclusions: Oral hearing is essential and cannot be replaced by written submissions or hearing notes when the deciding officer is different from the hearing officer.3. SIGNIFICANT HOLDINGS'If one person hears and another decides, then personal hearing becomes an empty formality. We therefore hold that the said procedure followed in this case also offends another basic principle of judicial procedure.''The procedure prescribed ... imposes a duty on the ... authority to afford to all the parties ... a personal hearing before taking a final decision in the matter. Even written arguments are no substitute for an oral hearing. A personal hearing enables the authority concerned to watch the demeanour of the witnesses, etc. and also clear up his doubts during the course of the arguments.''The final order passed by the new [officer] who had no occasion to hear the appellants herein offends the basic principle of natural justice. Thus, the impugned notification ... cannot be sustained.''The Penalty Unit or Assessment Unit ... is empowered to levy the penalty after giving an opportunity of hearing to the Petitioner. Therefore, it is necessary that the person who hears the Assessee only is required to pass the order.''Respondent No. 3 is therefore directed to issue necessary instructions ... to ensure that the Assessing Officer who provides for the Video Conferencing to the Assessee only will require to pass such Assessment Order or Penalty Order as per the decision of the Hon'ble Apex Court.'Final determinations:(i) The impugned penalty order dated 29.03.2023 under Section 271AA(1) of the Income Tax Act is quashed and set aside for violation of natural justice.(ii) The matter is remanded to the Respondent Assessment/Penalty Unit to provide a fresh opportunity of hearing to the Petitioner and thereafter pass a fresh penalty order by the same officer who conducts the hearing via video conferencing.(iii) The Central Board of Direct Taxes is directed to issue necessary instructions to ensure compliance with the principle that the officer who hears the assessee must pass the penalty or assessment order under the faceless scheme.