HC Quashes Assessment Order for Ignoring Assessee’s Replies on 194Q Disallowance.
Issue
Whether an assessment order passed under Section 144 (Best Judgment Assessment) is legally sustainable if the Assessing Officer (AO) completely ignores the assessee’s detailed replies and supporting documents submitted in response to the show-cause notices (SCN), particularly concerning a proposed disallowance under Section 40(a)(ia) for non-deduction of TDS under Section 194Q.
Facts
- The assessee’s case for Assessment Year 2023-24 was selected for scrutiny.
- The AO issued notices under Section 142(1) regarding:
- Discrepancies in sales/purchases between the books and GST returns.
- Alleged failure to deduct TDS under Section 194Q on purchases, including high sea purchases.
- The assessee filed detailed replies and comprehensive explanations to these notices.
- The AO then issued an SCN proposing a disallowance under Section 40(a)(ia) for the 194Q default and for non-substantiation of the high sea purchases.
- The assessee filed another detailed reply to this SCN.
- The AO, without considering any of the replies or supporting documents filed by the assessee, proceeded to pass a final assessment order under Section 144, confirming the additions.
Decision
- The High Court (implied) ruled decisively in favour of the assessee.
- The impugned assessment order was quashed and set aside as it was passed in “breach of the principles of natural justice.”
- The court found that the AO’s failure to consider the detailed replies on record before passing the order was a fatal procedural flaw.
- The matter was remanded back to the Assessing Officer with a direction to pass a fresh (de novo) order after properly considering all the detailed replies and documents filed by the assessee.
Key Takeaways
- Ignoring a Reply is a Breach of Natural Justice: An Assessing Officer is duty-bound to apply their mind to a reply filed by the assessee. An order passed in complete disregard of a submission that is on record is a violation of the principles of natural justice.
- Cannot Invoke Sec. 144 by Ignoring Compliance: An AO cannot pass a best judgment assessment under Section 144 (which is for non-compliance) by simply ignoring the assessee’s compliance. The failure here was on the AO’s part to consider the reply, not on the assessee’s part to file one.
- Orders Must Be “Speaking”: A valid assessment order must address the contentions and evidence submitted by the taxpayer. An order that fails to do so is a non-speaking order and is liable to be quashed.
- Remand is the Remedy: The correct remedy for such a procedural violation is to set aside the order and remand the case, forcing the AO to adjudicate the matter correctly after considering all facts and submissions.
HIGH COURT OF GUJARAT
Rajkamal Agro Industries
v.
National Faceless Assessment Centre, Delhi*
BHARGAV D. KARIA and Pranav Trivedi, JJ.
R/SPECIAL CIVIL APPLICATION NO. 4871 of 2025
SEPTEMBER 9, 2025
Hardik V. Vora for the Petitioner. Ms. Maithili D. Mehta for the Respondent.
JUDGMENT
Bhargav D. Karia, J.- Heard learned advocate Mr. Hardik Vora for the petitioner and learned Senior Standing Counsel Ms. Maithili Mehta for the respondent.
2. Having regard to the controversy involved which is in narrow compass, with the consent of the learned advocates for the parties, the matter is taken up for hearing.
3. Rule returnable forthwith. Learned Senior Standing Counsel Ms. Mehta waives service of notice of rule on behalf of the respondent-State.
4. By this petition under Article 227 of the Constitution of India, the petitioner has prayed for quashing and setting aside the Assessment Order passed under section 144 read with section 144D of the Income Tax Act, 1961 [for short ‘the Act’] for Assessment Year 2023-24 passed on 14.03.2025 making addition of Rs. 20,31,39,614/- without considering the submissions and documentary evidence filed by the petitioner.
5. Brief facts of the case are as under:
5.1 The Petitioner is a Partnership Firm engaged in the business of Import and Export of Agro-products and manufacturing of various types of sesame seeds. It had filed its Return of Income for A.Y. 2023-24 on 09.09.2023 declaring total income at Rs. 31,85,240/-. The return of income was duly processed u/s 143(1) of the Act.
5.2 The case of petitioner-company was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 19.06.2024. Thereafter, notices u/s 142(1) of the Act were issued on 30.09.2024 and 06.11.2024 asking the assessee to furnish various details and documents in response to which, the Petitioner filed reply along with supporting documents on 18.11.2024.
5.3 Subsequently, notice u/s 142(1) of the Act was issued on 06.12.2024 asking the assessee-petitioner to furnish documents and clarifications regarding difference in sales and purchases as per books of accounts and GST returns. In response to the same, the petitioner duly submitted a detailed reply on 13.12.2024.
5.4 Thereafter, notices u/s 142(1) of the Act were issued on 26.12.2024 and 11.02.2025 directing the petitioner to clarify certain discrepancies in sales and purchases as compared to the details furnished in the GST returns. Additionally, the respondent contended that while the petitioner had claimed TDS on sales made to parties where individual sales were less than Rs. 50 lakhs, the petitioner had allegedly failed to deduct TDS under Section 194Q of the Act on the purchases amounting to Rs. 60,66,36,517/-. In light of these observations, the petitioner was called upon to provide an explanation, along with documentary evidence, regarding non-deduction of TDS under Section 194Q of the Act on the purchases, particularly in the context of the claimed deduction of TDS on sales of less than Rs. 50 lakhs.
5.5 In response, the petitioner filed a detailed submission on 04.01.2025 and 24.02.2025, providing a comprehensive explanation regarding the discrepancies raised in the notice. With respect to the alleged non-deduction of TDS under Section 194Q of the Act on purchases, the petitioner clarified that TDS was not deducted only on the amount of Rs. 54,17,90,067/-, rather than Rs. 60,66,36,517/- as alleged by the respondent. The petitioner further explained that out of the total purchases of Rs. 54,17,90,067/- on which TDS was not deducted, the breakdown is as follows:
| a. | Rs. 46,64,01,413/- pertains to import purchases, and since Section 194Q of the Act applies only to resident sellers, TDS was not applicable. |
| b. | Rs. 2,47,90,395/- comprises purchases where the individual transaction value was less than Rs. 50 lakhs, thereby falling outside the purview of TDS deduction under Section 194Q. |
| c. | Rs. 1,84,31,280/- relates to purchases where TCS had already been collected by the sellers, and hence, TDS was not required to be deducted by the Petitioner. |
| d. | Rs. 1,56,19,684/- represents high-seas purchases, which are governed by international trade laws and are not considered domestic purchases under the Act, making the TDS provisions inapplicable. |
| e. | The remaining Rs. 1,65,47,294/-consists of purchases where TDS was not deducted, but the Petitioner has furnished CA Certificate, copies of the Income Tax Returns (ITR) and Computation of Income of the respective suppliers. The Petitioner contended that the non-deduction of TDS has not resulted in any loss to the Revenue, as the recipients have duly accounted for the income, filed their returns, and paid the applicable taxes. |
In support of the same, the petitioner has also provided Invoice-wise Purchase Chart, TDS Returns, acknowledgments and challans, ledger accounts and various other documents to substantiate the claim. The Petitioner also requested for hearing through video conferencing mode.
5.6 Without duly considering the replies and supporting documents, Respondent No. 1 issued a show-cause notice on 06.03.2025 at 08:25 p.m., directing the Petitioner to explain why disallowance under Section 40(a)(ia) of the Act, amounting to Rs.20,31,39,614/-, should not be made on the grounds that the Petitioner allegedly failed to furnish documentary evidence to substantiate high sea purchases and has allegedly not deducted TDS @ 0.1% on the gross purchases of Rs. 66,15,12,364/- as required under Section 194Q of the Act. The petitioner was also asked to submit the response on or before 08.03.2025 at 04:27 p.m., effectively allowing just one working day to submit a reply.
5.7 In response to the aforesaid notice, the petitioner filed a detailed reply on 08.03.2025 however, without considering the same, the impugned order was passed by the respondent on 14.03.2025.
Being aggrieved by the aforesaid order, the petitioner approached this Court by way of present petition.
6. This Court passed the following order on 16.04.2025:
“Heard learned advocate Mr. Hardik V. Vora for the petitioner through video conference and learned advocate Ms. Maithili D. Metha for the respondents who appears on advance copy.
Learned advocate Mr. Hardik Vora for the petitioner submitted that though the petitioner has filed a detailed reply to the show cause notice dated 06.03.2025 issued by the respondent Assessing Officer as to why proposed variation should not be made on 08.03.2025 i.e. time prescribed in the show cause notice dated 06.03.2025 but same is not considered and it is recorded by the respondent Assessing Officer that no reply is filed.
Learned advocate Mr. Vora invited the attention of the Court to page no. 41 of the paper book wherein it is recorded as under:
“In response to the Show Cause Notice, the assessee did not submit any reply nor documents to rebut the claim. Hence, an adverse decision is taken against the assessee and the assessment is concluded accordingly”
It was further submitted that the impugned order is passed under section 144 i.e. Best Judgment Assessment without considering the reply filed by the petitioner in response to the show cause notice for the proposed addition. It was therefore submitted that there is a clear breach of principles of natural justice as well as the provisions of section 144B of the Income Tax Act, 1961.
Considering the above submissions, issue Notice for final disposal returnable on 6th May, 2025. By way of ad interim relief, no coercive action shall be taken by the respondents during the pendency of this petition.
To be listed on top of the Board.
Direct service through email is permitted.”
7. The respondent has filed the affidavit-in-reply making the following averments:
“3. I state that after the perusal of the order sheet generated from the ITBA portal it was observed that the Income and Loss Determination Proposal (ILDP) was generated by the Faceless Assessment Unit on 08.03.2025 (Page 11 of the Order Sheet Details) i.e. on the due date given to the assessee for making compliance in response to the show cause notice dated 06.03.2025. After generation of ILDP, the case was shared with NaFAC and thereafter, it was assigned to Review Unit (Page 12 of the Order Sheet Details). (A copy of the said ordersheet is annexed and marked herein as annexure R1)
4. I further state that it was noted that the reply of the assessee was received on the same day 08.03.2025. Though the same was received after the ILDP was generated and after the case was assigned to Review Unit. Hence, the same could not be considered while preparing ILDP.
5. In light of the same, as the ILDP as already generated by the Faceless Assessing Officer, before the receipt of the submission of the assessee, the submission of the assessee could not be considered by the FAO. Therefore, it has rightly been stated in Para 13 of the affidavit submitted earlier, that the assessee had submitted the response on 08.03.2025 and the same is also reflecting the Order Sheet Details.”
8. From the above averments it is apparent that without considering the reply filed by the petitioner on 08.03.2025, Income and Loss Determination Proposal [ILDP] was generated by the Faceless Assessment unit on 08.03.2025 itself and on basis thereof, the impugned Assessment Order is passed. Therefore, it is not in dispute that the respondent- assessing officer, without considering the detailed reply filed by the petitioner on merits, has passed the impugned assessment order resulting into breach of principles of natural justice. In view of the aforesaid facts impugned Assessment Order dated 14.03.2025 is hereby quashed and set aside and the matter is remanded to the respondentFaceless Assessment Unit to pass fresh de novo order after considering the detail reply filed by the petitioner on 08.03.2025 after providing opportunity of hearing as per the provision of section 144B of the Act, if requested by the petitioner in accordance with law. Such exercise shall be completed within Twelve weeks from the date of receipt of copy of this order.
9. Rule is made absolute to the aforesaid extent. No order as to costs.
10. It is clarified that we have not entered into the merits of the matter. The impugned order is hereby quashed and set aside only on the ground of breach of principles of natural justice by the respondent-Assessing Officer by not considering detailed reply filed by the assessee-petitioner.