Income tax assessment under Sections 144 and 144B quashed for denying natural justice with inadequate response time

The HC set aside an income tax assessment order dated 24.03.2025 passed under Sections 144 and 144B of the Income Tax Act, 1961, finding it violated principles of natural justice. The Department issued a show cause notice on 13.03.2025 requiring response by 15.03.2025, providing only two days including a holiday (Holi Festival), effectively one working day. This breached the Standard Operating Procedure requiring minimum seven days response time and denied reasonable opportunity of hearing. The Court directed fresh assessment proceedings with adequate time for response, rejecting the Department's argument that alternative appeal remedies cured the procedural defect.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

- Whether the assessment order dated 24.03.2025 passed under Section 144 read with Section 144B of the Income Tax Act, 1961, was issued after providing the assessee a reasonable opportunity of hearing in accordance with the principles of natural justice.

- Whether the procedure mandated under Section 143(3) read with Section 144B of the Income Tax Act, 1961, and the relevant Standard Operating Procedure (SOP) was followed by the Department before passing the assessment order.

- Whether the short time frame provided for filing the response, particularly considering intervening holidays, amounted to a violation of natural justice and rendered the assessment order unsustainable.

- The availability and adequacy of alternative remedies, such as filing an appeal, against the impugned assessment order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Reasonable Opportunity of Hearing and Violation of Natural Justice

Relevant Legal Framework and Precedents: The principles of natural justice require that an assessee be given a fair and reasonable opportunity to present their case before an adverse order is passed. The Income Tax Act, 1961, particularly Sections 143(3), 144, and 144B, prescribe procedures for assessment and reassessment, including providing the assessee an opportunity to respond to notices and objections. The Standard Operating Procedure (SOP) issued by the Commissioner of Income Tax further elaborates on the timelines and procedures for faceless assessments, requiring a minimum response time of seven days from the date of issuance of the show cause notice, subject to curtailment only in exceptional circumstances.

Several High Courts have emphasized the necessity of affording reasonable opportunity before passing assessment orders. For instance, the High Court of Madras in Gemini Film Circuit held that five days' time for filing a reply was insufficient and resulted in deprivation of personal hearing opportunity, leading to setting aside the assessment order. Similarly, the High Court of Calcutta in Monika Jaiswal underscored the SOP's requirement of seven days' response time and held that curtailment must be justified. The Bombay High Court in Cheftalk Food and Hospitality Services Pvt. Ltd. found that granting only two days plus a two-day extension was arbitrary and insufficient, warranting setting aside the order. This Court in Rashmi Lakhotia reiterated that violation of natural justice and failure to provide reasonable opportunity renders the assessment order unjustifiable.

Court's Interpretation and Reasoning: The Court noted that the Department issued the second notice on 13.03.2025, requiring the petitioner to respond by 17:00 hours on 15.03.2025-a mere two days. The Court observed that 14.03.2025 was a declared holiday due to the Holi Festival, effectively reducing the available working days to one. The Court held that such a truncated timeline, especially encompassing a holiday and a Sunday, deprived the petitioner of a reasonable opportunity to respond, violating the principle of natural justice. The Court relied on the precedents cited, which uniformly held that such short notice periods without adequate justification are impermissible.

Key Evidence and Findings: The undisputed facts before the Court were that the petitioner filed the electronic return on 12.09.2023, received the initial notice under Section 142(1) on 01.08.2024, and responded on 05.08.2024. The second notice was issued on 13.03.2025 with a response deadline of 15.03.2025, which was unreasonably short and included holidays. The petitioner submitted a response on 17.05.2025, which was not considered. The Court found that the Department failed to provide reasonable time and disregarded the petitioner's belated response.

Application of Law to Facts: Applying the established legal principles and SOP requirements to the facts, the Court concluded that the Department's actions constituted a breach of natural justice. The short timeline and failure to consider the petitioner's response invalidated the assessment process. The Court emphasized that procedural fairness is a prerequisite for a valid assessment order and cannot be sacrificed for expediency.

Treatment of Competing Arguments: The Department argued that an effective alternative remedy of appeal was available, implying that the petitioner could challenge the order subsequently. The Court, however, did not accept this as a substitute for the fundamental right to be heard before passing the order. The Court underscored that procedural fairness at the assessment stage is mandatory and cannot be bypassed by post hoc remedies.

Conclusion: The Court held that the assessment order dated 24.03.2025 was passed in violation of the principle of natural justice due to the denial of reasonable opportunity of hearing and was therefore unsustainable.

Issue 2: Compliance with Standard Operating Procedure (SOP) under Faceless Assessment Scheme

Relevant Legal Framework and Precedents: The SOP issued by the Commissioner of Income Tax dated 3rd August 2022 mandates a minimum response time of seven days for filing replies to show cause notices under the faceless assessment scheme. Curtailment of this period is permissible only with justification, primarily to meet statutory deadlines.

Precedents from the High Courts of Madras, Calcutta, and Bombay have consistently held that failure to adhere to the SOP timelines, without sufficient cause, invalidates the assessment order.

Court's Interpretation and Reasoning: The Court observed that the Department failed to provide the stipulated minimum response time of seven days, instead allowing only two days, which was further compromised by intervening holidays. The Court found no justification for such curtailment in the record.

Key Evidence and Findings: The issuance of the second notice on 13.03.2025 with a deadline of 15.03.2025 was inconsistent with the SOP. The petitioner's response filed after the deadline was ignored, further contravening the procedural safeguards.

Application of Law to Facts: The Court applied the SOP's provisions and held that the Department's failure to comply with the mandated timelines constituted procedural impropriety. The faceless assessment scheme's procedural safeguards are designed to ensure fairness, and non-compliance undermines the legitimacy of the assessment.

Treatment of Competing Arguments: The Department's reliance on the availability of alternative remedies did not address the procedural lapses. The Court emphasized that adherence to SOP is integral to the assessment process and cannot be waived.

Conclusion: The assessment order was passed without compliance with the SOP, rendering it liable to be set aside.

3. SIGNIFICANT HOLDINGS

- "No reasonable opportunity has been given to the assessee particularly by providing the dates between Holi festival. Hence, this Court is of the view that the assessment order has been passed in violation of principle of natural justice."

- The Court set aside the assessment order dated 24.03.2025 and directed the Department to restore the matter and conduct a fresh hearing by providing reasonable opportunity to the assessee.

- The Court clarified that it has not entered into the merits of the assessment, leaving the assessing authority free to pass an appropriate order after hearing the petitioner.

- The Court emphasized that if any fresh notice is issued, sufficient time must be provided for filing response/reply in accordance with the SOP and principles of natural justice.

- The Court rejected the argument that availability of alternative remedies could cure the procedural defect, underscoring that procedural fairness at the assessment stage is mandatory.

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