Court quashes tax assessment for violating faceless assessment procedure rules

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

Case Name

Interglobe Enterprises Private Limited vs National Faceless Assessment Centre, Delhi (Earlier National E-Assessment Centre Delhi) & Anr (High Court of Delhi)

W.P.(C) 5249/2021 & CM APPL. 16131/2021

Date: 22nd July 2021

Key Takeaways

• Procedural compliance is mandatory: Tax authorities must strictly follow the procedures laid down in Section 144B (of Income Tax Act, 1961) when conducting faceless assessments
• Natural justice cannot be bypassed: Even in faceless assessments, taxpayers have fundamental rights to be heard and respond to proposed changes
• Writ petition maintainable: When there’s a violation of natural justice principles, taxpayers can directly approach the High Court even if alternative remedies exist
• Assessment becomes void: Under Section 144B(9) (of Income Tax Act, 1961), assessments not following prescribed procedures are “non est” (legally non-existent)

Issue

The central legal question was: Can a faceless assessment order be validly passed without issuing a prior show cause notice, draft assessment order, and providing an opportunity for hearing to the assessee as mandated under Section 144B(7) (of Income Tax Act, 1961)?

Facts

1. Assessment Year: 2018-19
2. Assessment Date: The National Faceless Assessment Centre, Delhi passed an assessment order 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) on April 9, 2021
3. Demand Notice: Along with the assessment, a demand notice was issued under Section 156 (of Income Tax Act, 1961)
4. The Problem: The tax authorities directly issued the final assessment order without:

• Issuing a prior show cause notice
• Providing a draft assessment order
• Giving the company an opportunity to be heard
• Allowing the company to file objections

1. Company’s Response: Interglobe Enterprises filed a writ petition challenging this assessment order

Arguments

Petitioner’s (Interglobe Enterprises) Arguments:

• The assessment order was “patently illegal, bad in law, passed without application of mind and against the principles of natural justice”
• The authorities violated the mandatory procedure under the faceless assessment scheme by not issuing a draft assessment order first
• No opportunity was given to respond to or object to the proposed assessment

Respondent’s (Tax Department) Arguments:

• The writ petition was not maintainable because the company had an “alternative effective remedy by filing an appeal”
• Essentially, they argued the company should have gone through the regular appeal process instead of directly approaching the High Court

Key Legal Precedents

While the judgment doesn’t cite specific case law precedents by name, it relies on well-established legal principles:

Statutory Provisions Referenced:

• Section 144B(7) (of Income Tax Act, 1961) of the Income Tax Act, 1961 - which mandatorily provides for issuance of prior show cause notice and draft assessment order
• Section 144B(9) (of Income Tax Act, 1961) - which makes assessments “non est” if not made in accordance with prescribed procedures
• Section 143(3) (of Income Tax Act, 1961), 143(3A) (of Income Tax Act, 1961), and 143(3B) - the assessment provisions under which the order was passed
• Section 156 (of Income Tax Act, 1961) - relating to demand notices

Legal Principles Applied:

• The principle that “an alternative statutory remedy does not operate as a bar to maintainability of a writ petition where the proceeding is carried out in violation of principles of natural justice”

Judgement

The High Court ruled in favor of Interglobe Enterprises. Here’s what the court decided:

Court’s Reasoning:

1. Procedural Compliance Required: Once assessment is done by the National Faceless Assessment Centre, it must follow the procedure prescribed for that authority, not the earlier regime
2. Mandatory Requirements Violated: Section 144B(7) (of Income Tax Act, 1961) mandatorily requires:

• Issuance of prior show cause notice
• Draft assessment order before final assessment
• Opportunity for personal hearing if requested

1. Natural Justice Violation: Since none of these steps were followed, there was a “blatant violation of principles of natural justice as well as mandatory procedure prescribed in ‘Faceless Assessment Scheme’”
2. Writ Petition Maintainable: The court held that when natural justice principles are violated, a writ petition is maintainable despite alternative remedies

Court’s Orders:

• Assessment Order Set Aside: The assessment order dated April 9, 2021, was set aside
• Demand Notice Cancelled: The accompanying demand notice was also set aside
• Matter Remanded: The case was sent back to the Assessing Officer with specific directions
• Fresh Process Ordered: The Assessing Officer must now:
• Issue a draft assessment order
• Grant opportunity of hearing via video conferencing
• Pass a reasoned order in accordance with law

FAQs

Q1: What is a faceless assessment?

A: It’s a new system where tax assessments are done electronically without face-to-face interaction between taxpayers and tax officers, designed to reduce corruption and increase efficiency.

Q2: Why was this assessment order cancelled?

A: The tax authorities skipped mandatory steps - they should have first issued a draft assessment order and given the company a chance to respond before finalizing the assessment.

Q3: Can taxpayers directly go to High Court for such issues?

A: Yes, when there’s a violation of natural justice principles (like not being given a fair hearing), taxpayers can approach the High Court directly through a writ petition, even if other appeal options exist.

Q4: What happens next for Interglobe Enterprises?

A: The tax authorities must start the assessment process again, this time following proper procedures - issuing a draft order first and giving the company a chance to respond.

Q5: Does this judgment affect other similar cases?

A: Yes, this sets a precedent that tax authorities must strictly follow Section 144B (of Income Tax Act, 1961) procedures in faceless assessments, or their orders can be challenged and set aside.

Q6: What is the significance of Section 144B(9) (of Income Tax Act, 1961)?

A: This section makes it clear that any assessment not following the prescribed faceless assessment procedure is legally void (“non est”).

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

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

under Section 143(3) (of Income Tax Act, 1961) read with Section 143(3A) (of Income Tax Act, 1961) and 143(3B) dated 09th

April, 2021 and the accompanying notice of demand under Section 156 (of Income Tax Act, 1961) of

the Income Tax Act, 1961 (for short ‘Act’) in the case of the petitioner for

Assessment Year [AY] 2018-19 passed by the Respondent.

3. Learned counsel for the Petitioner states that the impugned order and

the accompanying notice issued by the Respondents are patently illegal, bad

in law, passed without application of mind and against the principles of

natural justice. Learned counsel for petitioner submits that the impugned

assessment order has been finalized without issuing prior notice as well as

draft assessment order and without affording an opportunity of being heard

to the petitioner as well as without providing an opportunity to the petitioner to file its objections.

4. Per contra, 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

procedure prescribed for assessment by the said Authority and cannot be in

accordance with the procedure prescribed in the earlier regime.

6. This Court is also of the view that Section 144B(7) (of Income Tax Act, 1961) mandatorily

provides for issuance of a prior show cause notice and draft assessment

order before issuing the impugned assessment order. The said Section also

provides for an opportunity of personal hearing, if requested, by the

assessee. The relevant portion of Section 144B(7) (of Income Tax Act, 1961) and Section 144B(9) (of Income Tax Act, 1961) are

reproduced hereinbelow: -

“144B. Faceless assessment –

(7) For the purposes of faceless assessment—

(vii) in a case where a variation is proposed in the draft

assessment order or final draft assessment order or revised draft

assessment order, and an opportunity is provided to the assessee

by serving a notice calling upon him to show-cause as to why the

assessment should not be completed as per the such draft or final

draft or revised draft assessment order, the assessee or his

authorised representative, as the case may be, may request for

personal hearing so as to make his oral submissions or present his

case before the income-tax authority in any unit;

(viii) the Chief Commissioner or the Director General, in charge

of the Regional Faceless Assessment Centre, under which the

concerned unit is set up, may approve the request for personal

hearing referred to in clause (vii) if he is of the opinion that the

request is covered by the circumstances referred to in sub-clause

(h) of clause (xii);

(xii) the Principal Chief Commissioner or the Principal Director

General, in charge of the National Faceless Assessment Centre

shall, with the prior approval of the Board, lay down the

standards, procedures and processes for effective functioning of

the National Faceless Assessment Centre, Regional Faceless

Assessment Centres and the unit set up, in an automated and

mechanised environment, including format, mode, procedure and

processes in respect of the following, namely: —

(h) circumstances in which personal hearing referred to clause

(viii) shall be approved;....

(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 had been issued and no hearing had been given before

passing the impugned assessment order, there is a blatant violation of

principles of natural justice as well as mandatory procedure prescribed in

“Faceless Assessment Scheme” and stipulated in Section 144B (of Income Tax Act, 1961).

8. It is also settled law that an alternative statutory remedy does not

operate as a bar to maintainability of a writ petition where the proceeding is carried out in violation of principles of nature justice – like in the present case.

9. Keeping in view the aforesaid facts and mandate of law, the impugned

assessment order dated 09th April, 2021 and notice of demand for the

assessment year 2018-19 are set aside and the matter is remanded back to

the Assessing Officer, who shall issue a draft assessment order and grant an

opportunity of hearing to the petitioner by way of Video Conferencing and

thereafter pass a reasoned order in accordance with law. With the aforesaid

direction, the present writ petition along with pending application stands

disposed of.

10. 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 22, 2021