Delhi High Court Sets Aside Assessment Order for Violating Natural Justice

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Case Name:

Novelty Merchants Private Limited Vs. National Faceless Assessment Centre Delhi & Ors. (High Court of Delhi)

W.P.(C) 9429/2021

Date: 2nd September 2021

Key Takeaways:

1. Assessment proceedings under the Income Tax Act 1961 must adhere to the statutory procedure and principles of natural justice.

2. The issuance of a show-cause notice and draft assessment order before the final assessment order is mandatory under Section 144B(1)(xvi)(b) (of Income Tax Act, 1961).

3. Violation of principles of natural justice can render an assessment order, demand notice, and notice for penalty non est, leading to the setting aside of the same.

4. The availability of an appellate remedy does not bar the maintainability of a writ petition when there is a violation of principles of natural justice.

A judgment from the High Court of Delhi at New Delhi, dated 02.09.2021, regarding a writ petition filed by Novelty Merchants Private Limited against the National Faceless Assessment Centre Delhi and others. The petitioner challenged the Assessment Order, Demand Notice, and Notice for Penalty dated 23rd April 2021 passed by the respondents under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961), Section 156 (of Income Tax Act, 1961), and Section 274 (of Income Tax Act, 1961) read with Section 271AAC(1) (of Income Tax Act, 1961) for the AY 2018-19.

The petitioner argued that the impugned assessment order was passed without issuing the mandatory show-cause notice and draft assessment order under Section 144B(1)(xvi)(b) (of Income Tax Act, 1961), which they claimed violated the principles of natural justice and Section 144B (of Income Tax Act, 1961). The respondent argued that the writ petition was not maintainable as the petitioner had an alternative effective remedy by filing an appeal.

After hearing the arguments from both parties, the High Court held that the assessment by the National Faceless Assessment Centre, Delhi, must be in accordance with the statutory procedure prescribed for assessment by the said Authority and cannot be in accordance with the procedure prescribed under the earlier regime.

The Court also noted that Section 144B(1)(xvi)(b) (of Income Tax Act, 1961) mandatorily provides for the issuance of a show-cause notice and draft assessment order before issuing the final assessment order. Since in the present case, no prior show-cause notice as well as draft assessment order had been issued, there was a violation of principles of natural justice as well as the mandatory procedure prescribed under the “Faceless Assessment Scheme” and as stipulated in Section 144B (of Income Tax Act, 1961).

The Court further stated that when there is a violation of principles of natural justice, the availability of an appellate remedy does not operate as a bar to the maintainability of the writ petition. Therefore, the impugned Assessment Order, Demand Notice, and Notice for Penalty dated 23rd April 2021 were set aside, and the matter was remanded back to the Assessing Officer, who was directed to issue a show-cause notice as well as draft assessment order and thereafter pass a reasoned order in accordance with the law.

In conclusion, the High Court disposed of the writ petition along with pending applications with the aforementioned direction.

This judgment highlights the importance of following the statutory procedure and principles of natural justice in assessment proceedings under the Income Tax Act 1961.

FAQ:

Q1: What was the petitioner’s argument in the writ petition?

A1: The petitioner argued that the assessment order was passed without issuing the mandatory show-cause notice and draft assessment order under Section 144B(1)(xvi)(b) (of Income Tax Act, 1961).

Q2: What was the respondent’s argument in the case?

A2: The respondent argued that the writ petition was not maintainable as the petitioner had an alternative effective remedy by filing an appeal.

Q3: What was the outcome of the judgment?

A3: The High Court set aside the Assessment Order, Demand Notice, and Notice for Penalty and remanded the matter back to the Assessing Officer for further proceedings, directing the issuance of a show-cause notice and draft assessment order.

1. Present writ petition has been filed challenging the Assessment Order, Demand Notice and Notice for Penalty dated 23rd April 2021 passed by the respondents under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961), Section 156 (of Income Tax Act, 1961) and Section 274 (of Income Tax Act, 1961) read with Section 271AAC(1) (of Income Tax Act, 1961) (hereinafter referred to as the ‘Act’) for the AY 2018-19.

2. Learned counsel for the Petitioner states that the impugned assessment order has been passed without issuing the mandatory show-cause notice and draft assessment order under Section 144B(1)(xvi)(b) (of Income Tax Act, 1961). He states that the Respondent’s action is violative of the principles of natural justice and Section 144B (of Income Tax Act, 1961). He also states that in the absence of a show cause notice, the petitioner has been deprived of an opportunity to seek personal hearing.

3. Issue Notice. Mr. Ajit Sharma accepts notice on behalf of then Respondents.

4. Learned counsel for the respondent states that the present writ petition is not maintainable as the petitioner has an alternative effective remedy by filing an appeal.

5. Having heard learned counsel for the parties, this Court is of the view that once the assessment has been done by the respondent No. 1- National Faceless Assessment Centre, Delhi, it has to be in accordance with the statutory procedure prescribed for assessment by the said Authority and cannot be in accordance with the procedure prescribed under the earlier regime.

6. This Court is also of the view that Section 144B(1)(xvi)(b) (of Income Tax Act, 1961) mandatorily provides for issuance of a 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.”

7. Since in the present case no prior show cause notice as well as draft assessment order have been issued, there is a violation of principles of natural justice as well as mandatory procedure prescribed under “Faceless Assessment Scheme” and as stipulated in Section 144B (of Income Tax Act, 1961).

8. It is a settled law that when there is a violation of principles of natural justice, the availability of an appellate remedy does not operate

as a bar to the maintainability of the writ petition.

9. Keeping in view the aforesaid, the impugned Assessment Order, Demand Notice and Notice for Penalty dated 23rd April 2021 issued under Section 143(3) (of Income Tax Act, 1961), Section 156 (of Income Tax Act, 1961) and Section 274 (of Income Tax Act, 1961) read with Section 271AAC(1) (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 as well as draft assessment order and thereafter pass a reasoned order in accordance with law.

10. With the aforesaid direction, the present writ petition along with

pending applications stands disposed of.

MANMOHAN, J

NAVIN CHAWLA, J

SEPTEMBER 2, 2021