Court quashes tax assessment for skipping mandatory draft order procedure

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Case Name

RMSI Private Limited vs. National E-Assessment Centre, Delhi (High Court of Delhi)

W.P.(C) 6482/2021 & CM APPL. 20366/2021

Date: 14th July 2021

Key Takeaways

• Procedural compliance is mandatory: Tax authorities must strictly follow the E-Assessment Scheme, 2019 procedures, including issuing draft assessment orders when required
• Natural justice cannot be bypassed: Even in automated assessment systems, taxpayers have fundamental rights to be heard before adverse decisions
• Writ petitions remain available: Taxpayers can challenge jurisdictional violations through writ petitions even if they’ve filed appeals
• Scheme provisions are binding: The absence of certain penalty provisions doesn’t excuse non-compliance with mandatory procedural steps

Issue

The central legal question was: Can the Income Tax authorities pass a final assessment order under the E-Assessment Scheme, 2019 without first issuing a mandatory draft assessment order and providing the assessee an opportunity to respond?

Facts

1. The Assessment: RMSI Private Limited received an Assessment Order dated 31.03.2021 under Section 143(3) (of Income Tax Act, 1961) read with Sections 143(3A) and 143(3B) (of Income Tax Act, 1961) for Assessment Year 2017-18
2. The Problem: The company discovered that this final assessment order was passed directly without the tax authorities first issuing a ‘Draft Assessment Order’ followed by a ‘Revised Draft Assessment Order’ as required
3. Dual Action: The company filed both an appeal (to protect against limitation issues) and this writ petition challenging the assessment
4. The Hearing: The case was heard via video conferencing

Arguments

Petitioner’s (RMSI’s) Arguments:

• The assessment order should be set aside because it wasn’t preceded by the mandatory draft assessment order procedure
• The appeal was filed only to ensure limitation periods weren’t crossed, but since the order was passed without jurisdiction, a writ petition was the appropriate remedy
• The E-Assessment Scheme, 2019 was framed under Section 143(3A) (of Income Tax Act, 1961) and is mandatory for authorities to follow
• They relied on a similar case: Gurgaon Realtech Limited vs. National Faceless Assessment Centre Delhi – W.P.© No. 5849/2021

Respondent’s (Tax Department’s) Arguments:

• The writ petition wasn’t maintainable since the petitioner had already filed an appeal
• Without a provision similar to Section 144B(9) (of Income Tax Act, 1961), issuing a Draft Assessment Order couldn’t be considered mandatory
• Failure to issue such an order shouldn’t be treated as fatal to the assessment

Key Legal Precedents

The court relied on one key precedent:

Gurgaon Realtech Limited vs. National Faceless Assessment Centre Delhi (earlier National E-Assessment Centre Delhi) – W.P.© No. 5849/2021, decided on 04.06.2021

This case established that when challenging an assessment order on grounds of lack of jurisdiction, filing an appeal (even just to protect limitation) doesn’t prevent pursuing a writ petition. The court quoted: “To our minds, if the challenge to the assessment order is made on the ground that it was passed without jurisdiction, then, notwithstanding the fact that an appeal was filed, albeit, only to ensure that the limitation is not crossed, is not an impediment in proceeding ahead with the matter…”

Judgement

The Court ruled in favor of RMSI Private Limited. Here’s the court’s reasoning:

1. Mandatory Procedure Violated: The court examined Clause 5(1)(viii) and (x) of the E-Assessment Scheme, 2019 and found it clearly mandates that the National E-Assessment Centre must provide an opportunity to the assessee by serving a notice when modifications prejudicial to the assessee’s interest are proposed
2. Natural Justice Violation: The absence of such notice constitutes a clear violation of principles of natural justice, making the Assessment Order void
3. Scheme Compliance is Binding: The court emphasized that “Income Tax authorities have to remain bound by the Statutory Scheme of assessment,” regardless of whether certain penalty provisions exist
4. Writ Petition Maintainable: Since the assessment was passed without following proper procedure and violated natural justice, the writ petition was maintainable

Court’s Orders:

• The Assessment Order dated 31.03.2021 was set aside
• The Revenue was given liberty to pass a fresh Assessment Order in accordance with law
• The petitioner retained the right to challenge any future action if aggrieved

FAQs

Q1: What is the E-Assessment Scheme, 2019?

A: It’s a procedural framework under Section 143(3A) (of Income Tax Act, 1961) that governs how electronic assessments should be conducted, including mandatory steps like issuing draft assessment orders before final orders.

Q2: Why couldn’t the tax department just skip the draft assessment order?

A: The court found that Clause 5(1)(viii) and (x) of the scheme makes it mandatory to provide taxpayers an opportunity to respond to proposed modifications. Skipping this violates natural justice principles.

Q3: Can taxpayers file both appeals and writ petitions?

A: Yes, when the challenge is based on lack of jurisdiction or procedural violations. Filing an appeal to protect limitation doesn’t bar a writ petition for jurisdictional issues.

Q4: What happens to the original assessment now?

A: It’s completely set aside. The tax department can start fresh assessment proceedings, but they must follow the proper procedure this time.

Q5: Does this affect other similar cases?

A: Yes, this establishes that tax authorities cannot bypass mandatory procedural requirements in the E-Assessment Scheme, even in automated systems.

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

A: They can challenge such assessments through writ petitions while also filing protective appeals, as procedural violations that breach natural justice make orders void.

The petition has been heard by way of video conferencing.

1. This petition has been filed by the petitioner challenging the Assessment Order dated 31.03.2021 passed under Section 143(3) (of Income Tax Act, 1961) read with Sections 143(3A) and 143(3B) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) against the petitioner under the E-Assessment Scheme, 2019 for the Assessment Year 2017-18.

2. The learned counsel for the petitioner submits that the Impugned Assessment Order is liable to be set aside inasmuch as it is not preceded by the issuance of a ‘Draft Assessment Order’ followed by a ‘Revised Draft Assessment Order’.

3. Issue notice. Notice is accepted by Mr. Puneet Rai, learned

counsel for the respondent. He raises a preliminary objection on the

maintainability of the present petition, contending that the petitioner

has already challenged the impugned assessment order by way of an

appeal. He further submits that in absence of a provision akin to

Section 144B(9) (of Income Tax Act, 1961), issuance of a Draft Assessment Order

cannot be held to be mandatory and failure to issue such order cannot

be treated as fatal.

4. As far as the maintainability of the present petition is

concerned, the learned counsel for the petitioner submits that the said

appeal was filed only to ensure that the period of limitation is not

crossed. He submits that as the impugned order has been passed

without jurisdiction, the remedy of a writ petition would be available

to the petitioner. In support of his submission, he places reliance on

the judgment dated 04.06.2021 passed by the predecessor Bench of

this Court in Gurgaon Realtech Limited vs. National Faceless

Assessment Centre Delhi (earlier National E-Assessment Centre

Delhi) – W.P.(C) No. 5849/2021.

5. He further submits that absence of a provision akin to Section

144B (9) of the Act from the Scheme would not be of much relevance

in as much as the Scheme has been framed under Section 143(3A) (of Income Tax Act, 1961) of

the Act and is mandatory to be followed by the Authorities.

6. We have considered the submissions made by the learned

counsels for the parties.

7. It is not denied by the learned counsel for the respondent that

the Impugned Assessment Order was not preceded by the Draft

Assessment Order.

8. Clause 5 (1) (viii) and (x) of the E-Assessment Scheme, 2019

are reproduced here in under:

“5. Procedure for assessment.- (1) The

assessment under this Scheme shall be

made as per the following procedure,

namely:-

(viii) the assessment unit shall, after

taking into account all the relevant

material available on the record, make

in writing, a draft assessment order

either accepting the returned income of

the assessee or modifying the returned

income of the assesse, as the case may

be, and send a copy of such order to the

National e-assessment Centre;

(x) the National e-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

(a) finalise the assessment as per the

draft assessment order and serve a

copy of such order and notice for

initiating penalty proceedings, if

any, to the assessee, alongwith 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 a modification is

proposed, by serving a notice

calling upon him to show cause as

to why the assessment should not

be completed as per the draft

assessment order; or

(c) assign the draft assessment order

to a review unit in any one

Regional e-assessment Centre,

through an automated allocation

system, for conducting review of

such order;”

(Emphasis supplied)

9. A reading of the above provision would clearly show that it is

mandatory for the National E-Assessment Centre to provide an

opportunity to the assessee, by serving a notice calling upon him to

show cause as to why the variation proposed in the Draft Assessment

Order, which is prejudicial to the interest of the assessee, be not made.

10. Absence of such notice would clearly be a violation of the

principles of natural justice leading to the Assessment Order passed

being declared void.

11. Absence of a provision akin to Section 144B(9) (of Income Tax Act, 1961) in the E-

Assessment Scheme, 2019 would not make any difference to such

legal outcome in as much as violation of principles of natural justice

renders such decision void. Even otherwise, the Income Tax

authorities have to remain bound by the Statutory Scheme of

assessment.

12. As far as the objection on the maintainability of the present

petition on account of the petitioner having already availed of the

remedy of the appeal, the same is also liable to be rejected. In

Gurgaon Realtech Limited (supra), this Court had negatived a similar

objection observing as under:

“9.1 To our minds, if the challenge to

the assessment order is made on the

ground that it was passed without

jurisdiction, then, notwithstanding the

fact that an appeal was filed, albeit,

only to ensure that the limitation is not

crossed, is not an impediment in

proceeding ahead with the matter....

13. In the present case as well, the impugned Assessment Order

having been passed without complying with the procedure laid down

in the Scheme and in violation of principles of natural justice, the writ

petition would be maintainable.

14. Consequently, the Impugned Assessment Order dated

31.03.2021 passed under Section 143(3) (of Income Tax Act, 1961) read with Sections 143(3A)

and 143(3B) of the Act is set aside. However, the respondent/Revenue

is given liberty to pass a fresh Assessment Order in accordance with

law. The petitioner shall also have liberty to challenge any action of

the respondent/Revenue in accordance with law, in the event that it is

aggrieved by the same.

15. Accordingly, the present Writ Petition and the pending

application stand disposed of.

16. The order be uploaded on the website forthwith. Copy of the

order be also forwarded to the learned counsel through e-mail.

NAVIN CHAWLA, J

MANMOHAN, J

JULY 14, 2021