Court quashes tax assessment for skipping mandatory draft order - natural justice violated

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Case Name

Toplight Corporation Management Private Limited Vs National Faceless Assessment Centre (High Court of Delhi)

W.P.(C) 6223/2021 & CM APPL. 19717/2021

Date: 8th July 2021

Key Takeaways

• Procedural compliance is non-negotiable: Tax authorities must follow Section 144B (of Income Tax Act, 1961) procedures strictly when conducting faceless assessments
• Natural justice cannot be bypassed: Even if multiple opportunities were given earlier, the specific statutory procedure of issuing a draft assessment order with show cause notice must be followed
• Assessment becomes void: Under Section 144B(9) (of Income Tax Act, 1961), assessments not made according to prescribed procedures are “non est” (legally non-existent)
• Fresh assessment allowed: Courts will give tax authorities another chance to conduct assessments properly rather than dismissing cases entirely

Issue

The central legal question was: Can a faceless assessment order under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) be validly passed without issuing the mandatory draft assessment order along with a show cause notice as required by law?

Facts

• Assessment Year: 2018-19
• Date of Assessment Order: June 11, 2021
• Assessing Authority: National Faceless Assessment Centre, Delhi
• What went wrong: The tax department completed the assessment and issued the final order under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) without first issuing a draft assessment order with a show cause notice
• Consequences issued: Along with the assessment order, they also issued a demand notice under Section 156 (of Income Tax Act, 1961) and penalty notices under Section 270A (of Income Tax Act, 1961) and 271AAC(1) (of Income Tax Act, 1961)
• Taxpayer’s complaint: The company argued they were denied the opportunity to respond, submit documents, or be heard before the final assessment

Arguments

Petitioner’s (Taxpayer’s) Arguments:

• The assessment order was passed without following the mandatory procedure under Section 144B (of Income Tax Act, 1961)
• No draft assessment order with show cause notice was issued
• This denied them the opportunity to submit a response and supporting documents
• The procedure violated principles of natural justice
• They cited a similar case: Smart Vishwas Society vs. National Faceless Assessment Centre Delhi (WP© 5348/2021) where the court had quashed the assessment order

Respondent’s (Tax Department’s) Arguments:

• Although no show cause notice-cum-draft assessment order was issued, several opportunities had been granted to the taxpayer before the assessment date to explain their case
• They argued that multiple prior opportunities satisfied the requirement for natural justice

Key Legal Precedents

The court referenced one key precedent:

• Smart Vishwas Society vs. National Faceless Assessment Centre Delhi (Earlier National E-Assessment Centre Delhi) & Ors, WP© 5348/2021: In this similar case, the predecessor Division Bench of the Delhi High Court had quashed the assessment order and consequential notices for the same procedural violation

Key Statutory Provisions Analyzed:

• Section 144B(1)(xvi)(a) (of Income Tax Act, 1961) and (b): These subsections mandate specific procedures for faceless assessments
• Section 144B(9) (of Income Tax Act, 1961): This makes assessments “non est” (legally void) if not made according to prescribed procedures
• Section 143(3) (of Income Tax Act, 1961): General assessment provisions
• Section 156 (of Income Tax Act, 1961): Demand notice provisions
• Section 270A (of Income Tax Act, 1961) and 271AAC(1): Penalty provisions

Judgement

Winner: The taxpayer (Toplight Corporation) won completely.

Court’s Reasoning:

The court agreed with the taxpayer’s counsel and held that:

1. Section 144B (of Income Tax Act, 1961) was clearly violated - the mandatory procedure was not followed
2. Natural justice principles were breached - the assessment was completed without proper procedural safeguards
3. Prior opportunities don’t substitute statutory requirements - the tax department’s argument about giving earlier opportunities was “contrary to the statutory scheme”

Orders Made by the Court:

1. Complete quashing: The assessment order dated June 11, 2021 under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) was set aside
2. All consequential actions quashed: The demand notice under Section 156 (of Income Tax Act, 1961) and penalty notices under Section 270A (of Income Tax Act, 1961) and 271AAC(1) were also set aside
3. Fresh assessment permitted: The tax department was given liberty to pass a fresh assessment order in accordance with law
4. Taxpayer’s rights preserved: The company was given liberty to challenge any future action if aggrieved

FAQs

Q1: What does this mean for other taxpayers facing similar situations?

A: If you’re facing a faceless assessment where no draft assessment order with show cause notice was issued, you have strong grounds to challenge it. This judgment establishes a clear precedent.

Q2: Can the tax department just redo the assessment now?

A: Yes, but they must follow proper procedure this time - issue a draft assessment order, give you a show cause notice, allow you to respond, and then pass the final order.

Q3: What happens to the original demand and penalties?

A: They’re completely wiped out. The court set aside everything - the assessment, demand notice, and penalty proceedings. It’s like they never existed legally.

Q4: How important is Section 144B(9) (of Income Tax Act, 1961)?

A: It’s crucial - it makes any assessment that doesn’t follow Section 144B (of Income Tax Act, 1961) procedures legally “non est” (non-existent). This gives taxpayers a powerful tool to challenge procedurally flawed assessments.

Q5: Does this apply only to faceless assessments?

A: This specific ruling applies to faceless assessments under Section 144B (of Income Tax Act, 1961), but the principles of natural justice apply to all tax proceedings.

Q6: What should taxpayers do if they receive similar flawed assessments?

A: Challenge them immediately by filing a writ petition, citing this case and Section 144B(9) (of Income Tax Act, 1961). The law is clearly on your side if proper procedure wasn’t followed.

CM APPL 19718/2021

1. Allowed subject to all just exceptions.

2. Accordingly, the application stands disposed of.

W.P.(C) 6223/2021

3. The petition has been heard by way of video conferencing.

4. Present writ petition has been filed challenging the assessment order

dated 11th June, 2021 passed by respondent no.1/National Faceless

Assessment Centre, Delhi under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) and

the accompanying notice of demand issued under Section 156 (of Income Tax Act, 1961) as well as

notice for initiating penalty proceedings under Section 270A (of Income Tax Act, 1961) and

271AAC(1) of the Income Tax Act, 1961 [for short ‘the Act’] for

assessment year 2018-19.

5. Learned counsel for the petitioner states that the impugned assessment

order was passed without issuing mandatory draft assessment order along

with show cause notice, as contemplated under Section 144B (of Income Tax Act, 1961),

resulting in denial of opportunity to the petitioner to submit a response, to place documents on record in support thereof and to be heard before passing the final assessment order.

6. She points out that in a similar case being Smart Vishwas Society vs.

National Faceless Assessment Centre Delhi (Earlier National E-Assessment

Centre Delhi) & Ors, WP(C) 5348/2021, the learned predecessor Division

Bench of this Court had quashed the assessment order and consequential

notices.

7. Issue Notice. Mr. Puneet Rai, learned senior standing counsel for

respondents/revenue accepts notice. Learned senior standing counsel

appearing on behalf of respondents/revenue states that the record presently

placed before the Court would show that though no show cause notice-cum-

draft assessment order was issued, yet several opportunities had been

granted by the respondents/revenue to the petitioner, before the said date, to explain its case.

8. This argument of the respondents/revenue is contrary to the statutory

scheme, as provided in Section 144B (of Income Tax Act, 1961). The relevant portions of

Section 144B (of Income Tax Act, 1961) xvi (a) and (b) as well as Section 144B(9) (of Income Tax Act, 1961) are

reproduced hereinbelow:-

“144B. (1) Notwithstanding anything to the contrary contained in any

other provisions of this Act, the assessment under sub-section (3)

of section 143 (of Income Tax Act, 1961) or under section 144 (of Income Tax Act, 1961), in the cases referred to in sub-section

(2), shall be made in a faceless manner as per the following procedure,

namely:—...

(xvi) the National Faceless Assessment Centre shall examine the

draft assessment order in accordance with the risk

management strategy specified by the Board, including by way

of an automated examination tool, whereupon it may decide

to—

(a) finalise the assessment, in case no variation prejudicial

to the interest of assessee is proposed, as per the draft

assessment order and serve a copy of such order and

notice for initiating penalty proceedings, if any, to the

assessee, along with the demand notice, specifying the

sum payable by, or refund of any amount due to, the

assessee on the basis of such assessment; or

(b) provide an opportunity to the assessee, in case any

variation prejudicial to the interest of assessee is

proposed, by serving a notice calling upon him to show

cause as to why the proposed variation should not be

made; or.....

(9) Notwithstanding anything contained in any other provision of

this Act, assessment made under sub-section (3) of section

143 or under section 144 (of Income Tax Act, 1961) in the cases referred to in sub-

section (2) [other than the cases transferred under sub-section

(8)], on or after the 1st day of April, 2021, shall be non est if

such assessment is not made in accordance with the procedure

laid down under this section.”

(emphasis supplied)

9. In our opinion, learned counsel for the petitioner is correct in

submitting that Section 144B (of Income Tax Act, 1961) has been violated and the

assessment proceeding has been completed in the present case in violation of

the principles of natural justice.

10. Consequently, the impugned assessment order dated 11th June, 2021

issued under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) along with

accompanying notice of demand issued under Section 156 (of Income Tax Act, 1961) as well

as notice for initiating penalty proceedings issued under Section 270A (of Income Tax Act, 1961) and

271AAC(I)of the Act are set aside. However, the respondents/revenue is

given liberty to pass a fresh assessment order in accordance with law. The

petitioner is also given liberty to challenge any action of the

respondents/revenue in accordance with law, in the event it is aggrieved by

the same.

11. Accordingly, the present writ petition along with pending application

stands disposed of.

12. The order be uploaded on the website forthwith. Copy of the order be

also forwarded to the learned counsel through e-mail.

MANMOHAN, J

NAVIN CHAWLA, J

JULY 8, 2021