Court quashes tax assessment for violating faceless assessment procedure

Get the full picture - access the original judgement of the court order here

Case Name

International Management Vs National Faceless Assessment Centre (High Court of Delhi)

W.P.(C) 6220/2021 & CM 19712-19713/2021 

Date: 8th July 2021

Key Takeaways

• Procedural compliance is mandatory: Tax departments must strictly follow the faceless assessment procedure laid down in Section 144B (of Income Tax Act, 1961)
• Natural justice principles: Even in faceless assessments, taxpayers have the right to be heard through proper show cause notices
• Non-compliance renders assessment void: Assessments made without following prescribed procedures are legally invalid
• Fresh assessment opportunity: Courts can set aside flawed assessments while allowing tax departments to restart the process correctly

Issue

The central legal question was: Can a faceless assessment order be upheld when the tax department failed to issue a mandatory draft assessment order and show cause notice before making additions to the taxpayer’s income?

Facts

• The National Faceless Assessment Centre, Delhi passed an assessment order on April 2, 2021 under Section 143(3) (of Income Tax Act, 1961) for assessment year 2017-18
• The tax department made additions to the taxpayer’s income without following proper procedure
• No draft assessment order was issued to the taxpayer, which is a mandatory requirement under the Faceless Assessment Scheme
• The taxpayer filed a writ petition challenging this assessment order and also sought a stay on the tax demand arising from it
• The case was heard through video conferencing

Arguments

Taxpayer’s Arguments:

• The tax department’s action in making additions to income was legally untenable because the basis for these additions wasn’t properly communicated
• No draft assessment order was issued, which is mandatory under the Faceless Scheme
• They cited a similar case - Smart Vishwas Society vs. National Faceless Assessment Centre Delhi, where the court had quashed the assessment order in comparable circumstances

Tax Department’s Arguments:

• Even though no show cause notice-cum-draft assessment order was issued, they claimed to have given several opportunities to the taxpayer to explain their case before the assessment date
• They essentially argued that multiple opportunities were provided, so the lack of formal notice shouldn’t matter

Key Legal Precedents

The court referenced:

• Smart Vishwas Society vs. National Faceless Assessment Centre Delhi (Earlier National E-Assessment Centre Delhi) & Ors, WP© 5348/2021 - where a similar assessment order was quashed by the court

The main legal provision analyzed was Section 144B (of Income Tax Act, 1961), specifically:

• Section 144B(1)(xvi)(a) (of Income Tax Act, 1961) and (b) - dealing with the examination of draft assessment orders and the requirement to provide show cause notices
• Section 144B(9) (of Income Tax Act, 1961) - which states that assessments not made in accordance with the prescribed procedure shall be “non est” (legally void)

Judgement

The Delhi High Court ruled in favor of the taxpayer. Here’s what they decided:

Court’s Reasoning:

• The court agreed that Section 144B (of Income Tax Act, 1961) had been violated
• The assessment proceeding was completed in violation of principles of natural justice
• The tax department’s argument about providing multiple opportunities was “contrary to the statutory scheme”

Court’s Orders:

1. Set aside the assessment: The impugned assessment order dated April 2, 2021 and the consequential demand notice were quashed
2. Fresh assessment allowed: The tax department was given liberty to pass a fresh assessment order in accordance with law
3. Taxpayer’s rights preserved: The taxpayer was given liberty to challenge any future action by the tax department if aggrieved

FAQs

Q1: What is a faceless assessment?

A: It’s a system where tax assessments are done without face-to-face interaction between taxpayers and tax officers, following specific procedures laid down in Section 144B (of Income Tax Act, 1961).

Q2: Why was the assessment order cancelled?

A: Because the tax department didn’t follow the mandatory procedure - they failed to issue a draft assessment order and show cause notice before making additions to the taxpayer’s income.

Q3: Does this mean the taxpayer is completely off the hook?

A: No, the tax department can still pass a fresh assessment order, but this time they must follow the proper legal procedure.

Q4: What does “non est” mean in Section 144B(9) (of Income Tax Act, 1961)?

A: It’s a legal term meaning the assessment is void or legally non-existent if not made according to the prescribed procedure.

Q5: Can the tax department appeal this decision?

A: While not explicitly mentioned in this judgment, typically such decisions can be appealed to higher courts, though the connected documents don’t provide information about any appeal.

Q6: What should taxpayers do if they face similar issues?

A: They should check if proper procedures were followed in their faceless assessments and can challenge non-compliant orders in court, as this case demonstrates.

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

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

dated 2nd April, 2021 passed by National Faceless Assessment Center, Delhi

under Section 143(3) (of Income Tax Act, 1961) read with Sections 143(3A) and 143(3B) (of Income Tax Act, 1961) [for short ‘the Act’] for assessment year 2017-18. Petitioner

further prays for a stay on the demand arising out of the aforesaid order.

3. Learned counsel for the petitioner states that the action of respondent

in passing the impugned assessment order and making additions to the

income is untenable in law inasmuch as the basis of addition was not

furnished to the petitioner. He emphasizes that no draft assessment order

was issued which is mandatorily required under the Faceless Scheme.

4. He 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.

5. Issue Notice. Ms.Vibhooti Malhotra, 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.

6. 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)

7. 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.

8. Consequently, the impugned assessment order dated 2nd April, 2021

issued under Section 143(3) (of Income Tax Act, 1961) read with Sections 143(3A) and 143(3B) of the

Act along with notice of demand arising therefrom 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.

9. Accordingly, the present writ petition along with pending applications

stands disposed of.

10. 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