Delhi High Court Sets Aside Assessment Order for Violating Procedural Requirements and Natural Justice Principles

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

Case Name:

Saawariya Impex Private Limited Vs National E-Assessment Center Delhi(High Court of Delhi)

W.P.(C) 5196/2021 & C.M.No.15967/2021

Date: 10th August 2021

Key Takeaways

1. The assessment order was set aside for non-compliance with the mandatory procedure prescribed in law.

2. The Court emphasized the importance of adhering to procedural requirements and principles of natural justice in the assessment process under the Income Tax Act, 1961.

3. The case highlights the significance of issuing a prior show cause notice and draft assessment order before issuing the final assessment order.

4. Once the assessment has been done in accordance with the relevant provisions of the Act, it has to be done in accordance with the procedure prescribed therein alone.

This is a case from the High Court of Delhi at New Delhi, with the date of decision being 10th August 2021. The case is W.P.(C) 5196/2021 & C.M.No.15967/2021, between SAAWARIYA IMPEX PRIVATE LIMITED (Petitioner) and NATIONAL E-ASSESSMENT CENTER DELHI (Respondent).

The petitioner challenged the Assessment Order dated 03rd April 2021, passed under Section 143(3) (of Income Tax Act, 1961) read with Section 143(3A) (of Income Tax Act, 1961) and 143(3B) (of Income Tax Act, 1961), as well as the disputed demand raised under Section 156 (of Income Tax Act, 1961), along with all consequent proceedings thereto.

The petitioner argued that the assessment order passed was jurisdictionally flawed and violated the principles of natural justice, as it did not comply with the mandatory and binding natural justice requirements stipulated in the faceless assessment scheme and relevant CBDT instructions. The petitioner emphasized that no valid show cause notice or draft assessment order had been issued before creating a tax demand of Rs. 92,14,550/-. The petitioner relied on the Central Board of Direct Taxes instruction no. 20/2015, dated 29th December 2015, which provides for a fair opportunity for the assessee to explain its case and mandates the issuance of a show cause notice.

On the other hand, the senior standing counsel for the respondent argued that the principles of natural justice had been complied with, as adequate notice for the tax demand had been given to the petitioner, who had also responded with an elaborate reply. The respondent relied upon the Constitution Bench judgment of the Supreme Court in Managing Director, ECIL, Hyderabad & Ors. Vs. B. Karunakar & Ors., (1993) 4 SCC 727.

After hearing the arguments, the Court held that Section 144B(1)(xvi)(b) (of Income Tax Act, 1961) mandatorily provides for the issuance of a prior show cause notice and draft assessment order before issuing the final assessment order. Since no prior show cause notice or draft assessment order had been issued in the present case, there was a violation of the mandatory procedure prescribed in law. The Court also emphasized that once the assessment has been done in accordance with Section 144B (of Income Tax Act, 1961), it has to be done in accordance with the procedure prescribed therein alone.

Consequently, the Court set aside the impugned assessment order dated 03rd April 2021 passed under Section 143(3) (of Income Tax Act, 1961) read with Section 143(3A) (of Income Tax Act, 1961) and 143(3B) (of Income Tax Act, 1961), and the disputed demand raised under Section 156 (of Income Tax Act, 1961). The matter was remanded back to the Assessing Officer, who was directed to issue a show cause notice and draft assessment order and thereafter pass a reasoned order in accordance with the law.

In conclusion, the Court disposed of the writ petition and pending application, setting aside the assessment order and remanding the matter back to the Assessing Officer for further proceedings in accordance with the law.

This case highlights the importance of adhering to the procedural requirements and principles of natural justice in the assessment process under the Income Tax Act, 1961.

FAQ

Q1: What was the main issue in the case?

A1: The main issue was the violation of procedural requirements and principles of natural justice in the assessment process under the Income Tax Act, 1961.

Q2: What was the outcome of the case?

A2: The assessment order dated 03rd April 2021 and the disputed demand raised under Section 156 (of Income Tax Act, 1961) were set aside, and the matter was remanded back to the Assessing Officer for further proceedings in accordance with the law.

Q3: What are the key principles highlighted in the case?

A3: The case emphasizes the importance of compliance with procedural requirements, including the issuance of a prior show cause notice and draft assessment order, and the adherence to principles of natural justice in the assessment process under the Income Tax Act, 1961.

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

2. Present writ petition has been filed challenging the Assessment Order dated 03rd April 2021 passed under Section 143(3) (of Income Tax Act, 1961) read with Section 143(3A) (of Income Tax Act, 1961) and 143(3B) of the Income Tax Act, 1961 [the Act] as well as the disputed demand raised under Section 156 (of Income Tax Act, 1961), along with all consequent proceedings thereto.

3. Learned counsel for the Petitioner states that the Impugned assessment order passed is jurisdictionally flawed and bad in law since it is violative of the mandatory and binding natural justice requirements stipulated in faceless assessment scheme and relevant CBDT instructions.

4. He emphasises that no mandatory valid show cause notice as well as draft assessment order had been issued to the Petitioner before drawing an adverse inference against it and creating a tax demand of Rs.92,14,550/-.

5. He relies on para 4 of the Central Board of Direct Taxes instruction no. 20/2015, dated 29th December 2015 which inter alia provides for a fair opportunity to an Assessee to explain its case and mandates issuance of a show cause notice. The relevant portion of the said instructions no.20/2015 is reproduced here in below:-

"4. The Board further desires that in all cases under scrutiny, where the Assessing Officer proposes to make additions or disallowances, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principle of natural justice. In this regard, the Assessing Officer shall issue an appropriate show-cause notice duly indicating the reasons for the proposed additions/disallowances along with necessary evidences/reasons forming the basis of the same. Before passing the final order against the proposed additions/disallowances, due consideration shall be given to the submissions made by the assessee in response to the show-cause notice. "

6. Per contra, Mr.Sunil Agarwal, senior standing counsel for the respondent states that principles of natural justice have been complied with in the present case as adequate notice for the tax demand of Rs.92,14,550/- had been given to the Petitioner, who had also responded to the same by way of an elaborate reply. In support of his submission, he relies upon the Constitution Bench judgment of the Supreme Court in Managing Director, ECIL, Hyderabad & Ors. Vs. B. Karunakar & Ors., (1993) 4 SCC 727. The relevant portion of the said judgment is reproduced here in below:-

“30.[v] The next question to be answered is what is the effect on the order of punishment when the report of the enquiry officer is not furnished to the employee and what relief should be granted to him in such cases. The answer to this question has to be relative to the punishment awarded. When the employee is dismissed or removed from service and the inquiry is set aside because the report is not furnished to him, in some cases the non-furnishing of the report may have prejudiced him gravely while in other cases it may have made no difference to the ultimate punishment awarded to him. Hence to direct reinstatement of the employee with back-wages in all cases is to reduce the rules of justice to a mechanical ritual. The theory of reasonable opportunity and the principles of natural justice have been evolved to uphold the rule of law and to assist the individual to vindicate his just rights. They are not incantations to be invoked nor rites to be performed on all and sundry occasions. Whether in fact, prejudice has been caused to the employee or not on account of the denial to him of the report, has to be considered on the facts and circumstances of each case. Where, therefore, even after the furnishing of the report, no different consequence would have followed, it would be a perversion of justice to permit the employee to resume duty and to get all the consequential benefits. It amounts to rewarding the dishonest and the guilty and thus to stretching the concept of justice to illogical and exasperating limits. It amounts to an “unnatural expansion of natural justice” which in itself is antithetical to justice.”

7. Having heard learned counsel for the parties, this Court is of the view that Section 144B(1)(xvi)(b) (of Income Tax Act, 1961) mandatorily provides for issuance of a prior show cause notice and draft assessment order before issuing the final assessment order. The relevant portions of Section 144B(1)(xvi)(b) (of Income Tax Act, 1961) as well as Section 144B(9) (of Income Tax Act, 1961) are reproduced here in below:-

“144B. Faceless assessment –

(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–

(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 (of Income Tax Act, 1961) 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.”

8. Since in the present case no prior show cause notice as well as draft assessment order had been issued, there has been a violation of the mandatory procedure prescribed in law.

9. This Court is also of the view that once the assessment has been done by the respondent No. 1 in accordance with Section 144B (of Income Tax Act, 1961), it has to be done in accordance with the procedure prescribed therein alone.

10. It is settled law that when power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and other methods of performance are forbidden. (See: Taylor vs. Taylor, (1875) 1 Ch.D. 426; Nazir vs. King Emperor, AIR 1936 PC 253; and Babu Verghese vs. Bar Council of Kerala, (1999) 3 SCC 422)

11. Consequently, even if it is assumed that the principles of natural justice have been complied with in the present case, then also the mandate of the statute would have to be complied with.

12. Keeping in view the aforesaid, the impugned assessment order dated 03rd April 2021 passed under Section 143(3) (of Income Tax Act, 1961) read with Section 143(3A) (of Income Tax Act, 1961) and 143(3B) (of Income Tax Act, 1961) and disputed demand raised under Section 156 (of Income Tax Act, 1961), are set aside and the matter is remanded back to the Assessing Officer, who shall issue a show cause notice and draft assessment order and thereafter pass a reasoned order in accordance with law.

13. With the aforesaid direction, the present writ petition along with pending application stands disposed of.

14. 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

AUGUST 10, 2021