Court voids tax assessment for failing to follow mandatory faceless assessment procedures

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

Case Name

Rani Promoter Private Limited vs Additional Commissioner of Income Tax (High Court of Delhi)

W.P.(C) 6662/2021 

Date: 19th July 2021

Key Takeaways

• Procedural compliance is mandatory: Tax authorities must strictly follow the faceless assessment procedures under Section 144B (of Income Tax Act, 1961)
• Timeline matters: After April 1, 2021, assessments can only be made under Section 144B (of Income Tax Act, 1961), not under the older provisions
• Natural justice principles: Taxpayers have a right to receive proper notices and draft assessment orders before final assessment
• Void assessments: Non-compliance with mandatory procedures renders the entire assessment void and “non est” (non-existent in law)

Issue

The central legal question was: Can a tax assessment order be valid when the authorities fail to comply with the mandatory procedural requirements under Section 144B(1)(xvi) (of Income Tax Act, 1961), specifically the non-service of prior notice and draft assessment order?

Facts

1. The Assessment: On April 6, 2021, the Income Tax Department issued an assessment order for Rani Promoter Private Limited for Assessment Year 2018-19
2. The Legal Framework: This assessment was made under Section 143(3) (of Income Tax Act, 1961) read with Sections 143(3A) & 143(3B) of the Income Tax Act
3. The Problem: The company received this assessment order without getting any prior notice or draft assessment order, which should have been served under the faceless assessment scheme
4. Additional Actions: Along with the assessment, the department also issued a demand notice under Section 156 (of Income Tax Act, 1961) and initiated penalty proceedings under Section 274 (of Income Tax Act, 1961) read with Section 270A (of Income Tax Act, 1961)

Arguments

Petitioner’s (Rani Promoter’s) Arguments:

• The assessment order was void ab initio (invalid from the beginning) because Sections 143(3A) and 143(3B) (of Income Tax Act, 1961) ceased to exist after April 1, 2021, due to Section 143(3D) (of Income Tax Act, 1961)
• The department failed to follow mandatory faceless assessment procedures under Section 144B(1)(xvi) (of Income Tax Act, 1961) by not serving prior notice and draft assessment order
• The assessment was without jurisdiction and “non-est in the eyes of law”

Respondent’s (Income Tax Department’s) Arguments:

• No prior notice or draft assessment order was required because “all the documents were already on record”
• The department’s counsel accepted notice and waived the opportunity to file a detailed counter affidavit

Key Legal Precedents

The court relied on one key precedent:

Gurgaon Realtech Limited v. National Faceless Assessment Centre Delhi, W.P. © 5849/2021 - This coordinate bench decision held that assessment orders could not be passed under Section 143(3A) (of Income Tax Act, 1961) and 143(3B) after March 31, 2021, due to Section 143(3D) (of Income Tax Act, 1961)

Key Statutory Provisions Analyzed:

1. Section 143(3D) (of Income Tax Act, 1961): “Nothing contained in sub-section (3A) and sub-section (3B) shall apply to the assessment made under sub-section 144 (of Income Tax Act, 1961), as the case may be, on or after the 1st day of April, 2021”
2. Section 144B(1)(xvi) (of Income Tax Act, 1961): Mandates that the National Faceless Assessment Centre must examine draft assessment orders and either:

• (a) Finalize assessment if no variation prejudicial to assessee is proposed, or
• (b) Provide opportunity to assessee by serving notice if variation is proposed

1. Section 144B(9) (of Income Tax Act, 1961): States that assessments made after April 1, 2021, “shall be non est if such assessment is not made in accordance with the procedure laid down under this section”

Judgement

The Court ruled in favor of the taxpayer and here’s their reasoning:

1. Procedural Violation: The court found that after April 1, 2021, assessment orders could only be passed under Section 144B (of Income Tax Act, 1961) alone, not under the older provisions
2. Mandatory Compliance: There was a clear failure by the tax authorities to comply with the mandatory obligation under Section 144B(1)(xvi) (of Income Tax Act, 1961) regarding non-service of prior notice and draft assessment order
3. Natural Justice: The assessment proceeding was completed in violation of principles of natural justice

Court’s Orders:

• Set aside the impugned assessment order dated April 6, 2021
• Set aside the notice of demand issued under Section 156 (of Income Tax Act, 1961)
• Set aside the notice for penalty proceedings under Section 274 (of Income Tax Act, 1961) read with Section 270A (of Income Tax Act, 1961)
• Allowed the revenue to proceed with fresh assessment under Section 144B (of Income Tax Act, 1961) procedures

FAQs

Q1: What does this judgment mean for other taxpayers?

A: This establishes that tax authorities must strictly follow faceless assessment procedures. Any assessment made without proper notices can be challenged and set aside.

Q2: Can the tax department start the assessment process again?

A: Yes, the court specifically allowed the revenue to proceed with fresh assessment, but they must follow the proper Section 144B (of Income Tax Act, 1961) procedures, including serving show cause notices and draft assessment orders .

Q3: What happens if there’s a variation in income proposed?

A: The taxpayer must be given an opportunity for personal hearing, and proper procedure under Section 144B (of Income Tax Act, 1961) must be followed .

Q4: Is this decision binding on other courts?

A: As a High Court decision, it’s persuasive authority and strengthens the legal position that procedural compliance in faceless assessments is mandatory.

Q5: What’s the significance of the April 1, 2021 date?

A: This is when the faceless assessment scheme became the exclusive method for making assessments, and the older provisions under Section 143(3A) (of Income Tax Act, 1961) and 143(3B) ceased to apply .

CM APPL. 20993/2021

2. Accordingly, the application stands disposed of.

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

W.P.(C) 6662/2021

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

and notice of demand dated 06th April, 2021 for the Assessment Year [AY]

2018-19 and seeking a stay on the operation of the impugned assessment

order and the consequential initiation of penalty proceedings.

5. Learned counsel for the Petitioner submits that the Assessment Order

dated 06th April, 2021 for assessment year 2018-19 under Section 143(3) (of Income Tax Act, 1961) of

the Income Tax Act, 1961 read with Sections 143(3A) & 143(3B) is void ab

initio as Sections 143(3A) and 143(3B) (of Income Tax Act, 1961) had ceased to exist with

effect from 01st April, 2021, in terms of Section 143(3D) of the Income Tax Act, 1961.

6. He further submits that the impugned Assessment Order also deserves

to be quashed for being illegal and bad in law because of the failure of the

Respondent to comply with the mandatory provision of the “Faceless

Assessment” under Section 144B(1)(xvi) of the Income Tax Act, 1961, by not serving a

Notice as well as the draft assessment order to the Petitioner.

7. According to learned counsel for petitioner, the impugned assessment

order was without jurisdiction and non-est in the eyes of law.

8. Issue notice, Mr. Ruchir Bhatia, learned counsel for respondent,

accepts notice and waives opportunity to file a counter affidavit.

9. Mr. Ruchir Bhatia states that no prior notice or service of draft

assessment order was required as all the documents were already on record.

10. Since the present case primarily pertains to interpretation and effect of Section 143(3D) (of Income Tax Act, 1961),the same is reproduced here in below :-

“(3D) Nothing contained in sub-section (3A) and sub-

section (3B) shall apply to the assessment made under sub-

section 144 (of Income Tax Act, 1961), as the case may be, on or after the 1st 2021.”

11. Keeping in view the mandatory language of Section 143(3D) (of Income Tax Act, 1961) of the

Act, this Court is of the view that after 01st day of April,

12. In any event, this issue is no longer res integra as a Coordinate Bench

of this Court in Gurgaon Realtech Limited v. National Faceless

Assessment Centre Delhi, W.P. (C) 5849/2021 has held that the Assessment

Order could not have been passed under Section 143(3A) (of Income Tax Act, 1961) and 143(3B) of the

Act by the Revenue after 31st March, 2021 having regard to Section 143(3D) (of Income Tax Act, 1961).

13. This Court also agrees with the submissions of the learned counsel of

the Petitioner that there was failure on the part of the Respondents to comply with the mandatory obligation laid down in Section 144B(1)(xvi) (of Income Tax Act, 1961) inasmuch as there was non-service of prior notice and draft assessment order. 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 here in below:-

“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)

14. Keeping in view the aforesaid, this Court is of the opinion that learned

counsel for the petitioner is correct in submitting that Section 144B (of Income Tax Act, 1961) of the

Act had been violated and the assessment proceeding had been completed in

the present case in violation of the principles of natural justice.

15. Consequently, this Court sets aside the impugned assessment order

dated 06th April, 2021 as also the notice of demand issued under Section 156 (of Income Tax Act, 1961)

of the Act and the notice for initiating the penalty proceedings under Section 274 (of Income Tax Act, 1961) read with Section 270A (of Income Tax Act, 1961).

16. However, the respondent/revenue will be at liberty to proceed with

the assessment process, albeit, under the provisions of Section 144B (of Income Tax Act, 1961) of the

Act. Needless to add, if a show cause notice-cum-draft assessment order is

served on the petitioner, an opportunity would be given to the petitioner to

file its response/objections to the same. Furthermore, if there is a variation proposed in the income of the petitioner, an opportunity of personal hearing will also be accorded. In sum, the procedure prescribed under Section 144B (of Income Tax Act, 1961) will have to be followed by the respondent/revenue.

17. The writ petition is disposed of in the aforesaid terms.

18. 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 19, 2021