Court quashes tax assessments for giving charity only 48 hours to respond

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

Case Name

Sree Narayana Dharma Sabha Sreyas Vs The Additional/Joint/Deputy/Assistant Commissioner of Income Tax, Income Tax Officer, National E-Assessment Centre (High Court of Kerala)

WP(C) No. 21524 of 2021

Date: 22nd November 2021

Key Takeaways

• Natural justice is non-negotiable: Even in tax matters, authorities must give reasonable time for taxpayers to respond
• 48 hours is not reasonable: The court found that giving only 48 hours to respond to complex tax notices violates basic fairness
• Section 144B(1)(xxii) compliance is mandatory: Tax authorities must follow proper procedures when conducting assessments
• Charitable organizations deserve fair treatment: Being a charity doesn’t exempt you from tax scrutiny, but you still deserve due process

Issue

Did the Income Tax Department violate principles of natural justice by giving the charitable society only 48 hours to respond to show cause notices before completing their tax assessments?

Facts

The petitioner is a charitable society registered under Section 12A of the Income Tax Act, 1961. For assessment years 2015-2016 and 2016-2017, they filed returns showing ‘Nil’ income, claiming everything went to charitable purposes. But here’s where things got complicated - the tax department decided to reopen these assessments under Section 148 of the Act.

The society was told their cases would be handled under the new Faceless Assessment scheme. Then came the problematic part:

For 2015-2016: They got a show cause notice on September 20, 2021, asking them to respond by 23:59 hours on September 21, 2021 - that’s barely 24 hours! When they didn’t respond by September 22, 2021, the assessment order was issued.

For 2016-2017: Similar story - show cause notice on September 17, 2021, response required by September 20, 2021. Again, when no response came, assessment order was issued on September 22, 2021.

Arguments

Petitioner’s Arguments (The Charity):

• The assessment orders should be quashed because they violated principles of natural justice
• They weren’t given sufficient time to respond to the show cause notices
• The extremely short timeframes (48 hours or less) made it impossible to prepare proper responses

Respondent’s Arguments (Income Tax Department):

The document doesn’t detail the department’s specific arguments, but they presumably argued that:

• Proper notices were served
• The assessee was aware of the proceedings
• The assessment was completed following due process

Key Legal Precedents

The judgment doesn’t cite specific case law precedents, but it relies heavily on:

• Section 144B(1)(xxii) of the Income Tax Act: This section mandates that sufficient opportunity must be granted to the assessee to respond
• Principles of natural justice: The fundamental legal principle that everyone deserves a fair hearing before decisions affecting them are made

Judgement

The court ruled in favor of the charitable society. Here’s what Judge Bechu Kurian Thomas decided:

The Court’s Reasoning:

The judge was quite critical of the tax department’s approach, noting it was “curious” that they proceeded with assessments when the assessee failed to respond within 48 hours. The court emphasized that:

1. Every order must be made only after granting reasonable opportunity for response and hearing
2. Reasonable opportunity to respond is an essential element of natural justice
3. Unless sufficient opportunity is given (as mandated by Section 144B(1)(xxii)), the assessee suffers prejudice
4. The show cause notices clearly failed to provide sufficient opportunity

Orders Made:

1. Assessment orders set aside: Both Ext.P10 and Ext.P18 dated September 22, 2021, were completely set aside
2. Fresh assessment ordered: The tax department must pass fresh assessment orders after granting reasonable opportunity
3. Timeline for response: The charity gets 15 days from receiving this judgment to file objections
4. Hearing mandated: The assessing authority must fix a hearing date
5. Penalty notices quashed: Consequential penalty notices (Exts.P19 & P20) were also set aside

FAQs

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

A: This judgment reinforces that tax authorities cannot rush through assessments. They must give reasonable time for taxpayers to respond, regardless of whether it’s an individual, company, or charity.

Q2: How much time is considered “reasonable” for responding to tax notices?

A: While the court didn’t specify an exact timeframe, it clearly indicated that 48 hours is insufficient. The court ordered 15 days for filing objections in this case, suggesting this might be more reasonable.

Q3: Can the Income Tax Department appeal this decision?

A: Yes, they can appeal to a higher court if they disagree with this judgment.

Q4: What happens to the original tax assessments now?

A: They’re completely wiped out. The tax department has to start fresh and follow proper procedures this time.

Q5: Does this affect the charity’s tax-exempt status?

A: The judgment doesn’t address the charity’s Section 12A registration status. It only deals with the procedural fairness of the assessment process.

Q6: What should taxpayers do if they receive similar short-notice demands?

A: They should respond as quickly as possible but can also challenge such notices in court if the timeframe is unreasonably short, citing this judgment as precedent.

Petitioner is a charitable society registered under Section 12A of the Income Tax Act, 1961 [for short, the Act]. For the assessment year 2015-2016 and 2016-2017, petitioner filed its return showing 'Nil' income, claiming

that the entire income was applied for charitable purposes. However, the assessments were reopened under Section 148 of the Act. Petitioner submits that subsequently it was informed that the assessments will be completed under the Faceless Assessment scheme, and that notices will be issued from the said authority.

2. For the assessment year 2015-2016, petitioner was served with show cause notice dated 20.09.2021 asking the petitiner to respond by 23.59 hours on 21.09.2021. On 22.09.2021, Ext.P10 assessment order was issued after observing that assessee had not responded even by 22.09.2021.

3. For the assessment year 2016-2017, assessee was issued

with a show cause notice dated 17.09.2021 asking it to

respond by 20.09.2021. On 22.09.2021, Ext.P18

assessment order was issued after observing that assessee

was aware of the proceedings all along.

4. The assessment orders Ext.P10 and Ext.P18 are under

challenge on the ground of violation of principles of

natural justice.

5.I have heard the arguments of Adv.Joseph Markos,

learned Senior counsel on behalf of the petitioner as

well as Adv.Christopher Abraham, the learned Standing

counsel for the respondents.

6. It is curious to note that the assessing officer

proceeded to assess the assessee by the orders impugned

in this case when they failed to respond within 48 hours

of serving the show cause notice. It is elementery that

every order must be rendered only after granting a

reasonable opportunity for responding as well as hearing.

The grant of a reasonable opportunity to file a response

is an element of the cherished principle of natural justice.

7. Consideration of the objections raised by an assessee

is the platform from which the rights and obligations of

the assessee depends. Therefore, unless sufficient

opportunity is granted to the assessee to respond which

is mandated by the explicit provisions of Section 144(B)

(1)(xxii) of the Act, the assessee will be put to prejudice.

8. It is clear from the circumstances that have transpired

in the instant case, from the time of show cause notice

till the date of assessment, for both the assessment

years, that the show cause notices failed to privide

sufficient opportunity to the petitioner to respond. The

violation of principles of natural justice in the orders

impugned is manifest.

9. Accordingly the orders of assessment produced as

Ext.P10 and Ext.P18 dated 22.09.2021 shall stand set

aside and the 1st respondent is directed to pass fresh

orders of assessment after granting a reasonable

opportunity of being heard after granting it sufficient

time to file an objection to the petition to show cause

notice. The objections, if any, to the show cause

notices shall be filed by the petitioner within a period

of 15 days from the date of receipt of a copy of this

judgment and the assessing authority shall thereafter, fix

a date for hearing of the petitioner. Since this Court

has, by this judgment set aside Exts.P10 & P18

assessment orders, the consequential notices of penalty

issued as Exts.P19 & P20 shall also stand set aside.

The writ petition is allowed as above.

Sd/-

BECHU KURIAN THOMAS,

JUDGE