Faceless Assessment: failure to serve statutorily mandated show cause notice leads to quashing of assessment and demand.

Faceless assessment under the Income-tax Act requires that where a draft assessment proposes a variation prejudicial to the assessee, the National Faceless Assessment Centre must serve a show-cause notice and consider any response before finalising the assessment; omission of that mandated show-cause step constituted breach of the statutory procedure and, on that basis, the High Court quashed the assessment order and the notice of demand dated 9 June 2021 for failure to afford the required opportunity to reply.

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Issues: Whether the assessment order dated 9th June 2021 and the notice of demand dated 9th June 2021 could be sustained where, despite a draft assessment order having been made, no notice was served on the assessee to show cause as required by Section 144B(1)(xvi) of the Income-tax Act, 1961.

Analysis: Section 144B(1) provides the faceless assessment procedure and, in particular, requires the assessment unit to prepare a draft assessment order (Section 144B(1)(xiv)) and the National Faceless Assessment Centre to examine that draft and, if any variation prejudicial to the assessee is proposed, to provide an opportunity to the assessee by serving a notice calling upon the assessee to show cause (Section 144B(1)(xvi)). The statutory scheme mandates that only after serving such notice and considering any response can a final assessment be passed. In the present matter the Revenue accepts that although a draft assessment order was prepared, no show-cause notice was communicated to the assessee and no opportunity to reply was afforded prior to passing the final assessment and issuing the demand notice. This absence of the mandated procedural step constitutes a breach of the specific statutory procedure set out in Section 144B(1)(xvi).

Conclusion: The assessment order dated 9th June 2021 and the notice of demand dated 9th June 2021 are quashed and set aside for failure to comply with the mandatory show-cause requirement under Section 144B(1)(xvi) of the Income-tax Act, 1961. The writ petition is allowed in these terms.

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