2025 (11) TMI 1869 - HC - Income Tax

Assessment under section 143(3) read with 144B quashed for denying natural justice, seven-day response, personal hearing

HC held that the assessment order u/s 143(3) r/w 144B was vitiated due to gross violation of principles of natural justice and breach of the statutory SOP ... Assessment order passed u/s 144B - non adherence to the principles of natural justice - minimum seven days response time not given - breach of statutory mandate and principles of natural justice - HELD THAT:- Firstly, the show cause notice was issued on 23.03.2024 which is a Saturday. Such notice is digitally signed at 20.07 hours. The said show cause notice granted the Petitioner time to reply by 26.03.2024 by 11.15 hours. It is noted that 24.03.2024 was a Sunday and 25.03.2024 was a holiday on account of Holi. This means that the Petitioner was not granted even one working day to reply to the show cause notice. This, itself demonstrates gross violation of principles of natural justice. The SOPs have been issued by Respondent No. 1, and paragraph N.1.3 thereof clearly specifies that to ensure adherence to the principles of natural justice, minimum seven days response time has to be given, and such time can be curtailed keeping in view the limitation date for completion of the assessment. Respondent No. 1 has not given any good reason to issue the show cause notice only at the fag end i.e., seven days before the limitation date and to grant not even one working day to file a reply. We, thus, find that the time given to the Petitioner to reply was inadequate. We also find that the Petitioner had sought a personal hearing. It is mandatory to provide a personal hearing in terms of section 144B(6)(viii) of the Act. The Petitioner has brought on record the email sent by Respondent No. 1 on 27.03.2024 at 11.30AM which stated that the virtual hearing was scheduled on the same day at 11.15AM. Thus, the notice of personal hearing was issued after the time for the personal hearing had lapsed. This was objected to by the Petitioner vide its reply dated 27.03.2024. The Petitioner has also attached screenshots of the portal, wherein it appears, that it had logged onto the portal, but the meeting was not started by the host. Thus, the Petitioner was clearly not granted a personal hearing. In fact, we also find force in the contention of the Petitioner that the notice of the personal hearing was itself issued on the same day of the hearing and it did not grant sufficient time to the Petitioner. We have no hesitation in quashing and setting aside the Assessment Order passed under section 143(3) read with section 144B of the Act dated 29.03.2024, the consequential Notice of Demand issued under section 156 of the Act dated 29.03.2024, as well as the consequential show-cause notices for levy of penalty issued under section 274 read with section 270A of the Act. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the assessment order under section 143(3) read with section 144B was vitiated by violation of principles of natural justice due to inadequacy of time granted for response to the show cause notice. (2) Whether denial of an effective personal hearing under section 144B(6)(viii) in the faceless assessment proceedings constituted a breach of statutory mandate and principles of natural justice. (3) Consequentially, whether the assessment order, demand notice, penalty show cause notices, and penalty order under section 270A were liable to be quashed and the matter remanded for a de novo assessment with appropriate safeguards. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Adequacy of time to respond to show cause notice and violation of principles of natural justice Legal framework (as discussed) The Court referred to section 143(3) read with section 144B of the Income-tax Act, 1961 and the internal Standard Operating Procedure (SOP) issued by the Revenue, particularly paragraph N.1.3, which stipulates that, to ensure adherence to principles of natural justice, a minimum of seven days' response time is to be granted, though curtailment is permissible having regard to the limitation date for completion of assessment. Interpretation and reasoning (a) The show cause notice was issued on 23.03.2024 (a Saturday) at 20:07 hours, calling upon the assessee to respond by 26.03.2024 at 11:15 hours. (b) In the interregnum, 24.03.2024 was a Sunday and 25.03.2024 was a public holiday (Holi), resulting in no working day being made available to the assessee to prepare and file a reply. (c) The Court held that granting time which did not even cover a single working day amounted, on its face, to 'gross violation of principles of natural justice'. (d) While the SOP permitted curtailment of the minimum seven-day period in view of limitation, the Court emphasized that Respondent No. 1 had not provided any 'good reason' for issuing the show cause notice at the 'fag end' (seven days before limitation) and, further, for effectively denying even one working day for response. (e) The Court found that the flexibility in the SOP could not justify such an extreme curtailment, absent a cogent explanation, and that the requirement of a reasonable opportunity was not satisfied. Conclusions The Court concluded that the time granted to reply to the show cause notice was inadequate and constituted a gross violation of principles of natural justice, thereby vitiating the assessment proceedings under section 143(3) read with section 144B. Issue (2): Denial of effective personal hearing under section 144B(6)(viii) Legal framework (as discussed) The Court noted that, in terms of section 144B(6)(viii) of the Act, where a personal hearing is sought, it is mandatory to provide such personal hearing through video conferencing in faceless assessment proceedings. Interpretation and reasoning (a) The assessee had specifically requested a personal hearing. The record showed an email from Respondent No. 1 sent on 27.03.2024 at 11:30 AM, stating that a virtual hearing had been scheduled for the same day at 11:15 AM. (b) The Court held that the notice for personal hearing was thus communicated after the time fixed for the hearing had already lapsed, which was objected to by the assessee in its reply dated 27.03.2024. (c) The assessee produced screenshots showing that it had logged into the portal, but the meeting was not started by the host. The Court accepted that the assessee was not effectively granted a personal hearing. (d) The Court further observed that even apart from the lapse in timing, issuing notice of hearing on the very same day, without any meaningful advance notice, did not constitute a reasonable or effective opportunity to be heard. (e) In these circumstances, the Court rejected the Revenue's contention that the assessee had failed to attend the hearing, and held that the statutory mandate of providing a personal hearing under section 144B(6)(viii) had not been complied with. Conclusions The Court held that the assessee was denied a mandatory and effective personal hearing under section 144B(6)(viii), which further amounted to a violation of principles of natural justice and independently vitiated the assessment order. Issue (3): Consequential validity of assessment, demand, penalty notices and penalty order; remand directions Interpretation and reasoning (a) Having found gross violation of principles of natural justice in the conduct of the assessment proceedings-both in terms of inadequate time for response and denial of effective personal hearing-the Court held that the assessment order under section 143(3) read with section 144B could not be sustained. (b) The consequent demand notice under section 156 and show cause notices for penalty under section 274 read with section 270A, being founded on the vitiated assessment order, were also held liable to be quashed. (c) The penalty order under section 270A dated 16.07.2024 and the corresponding demand notice, being consequential, were likewise set aside. The Court noted the grievance that the penalty order was passed despite an earlier stay, but the primary basis of quashing was the invalidity of the underlying assessment and breach of natural justice. (d) The Court decided to remand the matter to the Assessing Officer for a de novo assessment, with specific directions to ensure due compliance with principles of natural justice and statutory requirements. Conclusions and directions (a) The assessment order under section 143(3) read with section 144B, the demand notice under section 156, the penalty show cause notices under section 274 read with section 270A, the penalty order under section 270A dated 16.07.2024, and the related demand notice were quashed and set aside. (b) The matter was remanded to the Assessing Officer to consider the case afresh de novo, with the following mandated safeguards: * A fresh show cause notice to be issued, clearly bringing out the proposed additions and disallowances. * Reasonable opportunity of being heard to be granted, including sufficient time to file a reply; the reply to be filed within two weeks from the date of service of the fresh show cause notice. * A personal hearing to be granted before passing the fresh assessment order; notice of personal hearing to be given at least five working days in advance. * If any judicial decisions are to be relied upon by the Assessing Officer, the assessee is to be given adequate notice of not less than seven working days to meet and counter such decisions. * The fresh assessment order to be a speaking order, dealing with all submissions of the assessee, and to be passed on or before 31.03.2026. (c) The Court clarified that it had not expressed any opinion on the merits of the additions or disallowances made in the original assessment order, and that all rights and contentions of both parties on merits were kept open.