Assessment quashed for ignoring assessee’s reply; Violation of Natural Justice
Issue
Whether an assessment order passed under the Faceless Assessment Scheme (Section 144B) is valid if the Assessing Officer (AO) completely overlooks the detailed reply and documents submitted by the assessee in response to a Show Cause Notice (SCN), thereby violating the principles of natural justice.
Facts
Assessee: A company engaged in the construction business.
Assessment Year: 2022-23.
Declared Income: The assessee filed a return declaring a total income of Rs. 0.23 lakhs.
Proposed Addition: The case was selected for scrutiny. The AO issued a Show Cause Notice proposing a massive addition of Rs. 39.43 crores under Section 69 (Unexplained Investments) regarding a property purchased by the assessee.
Assessee’s Defense: The assessee filed a detailed reply explaining the nature of the land purchase and the sources of payment, supported by relevant documents.
The Error: Despite the submission, the AO passed the final assessment order determining the income at Rs. 39.43 crores, effectively treating the investment as unexplained without considering or discussing the assessee’s explanation in the order.
Decision
Violation of Natural Justice: The Tribunal/Court held that the fundamental principle of audi alteram partem (no one should be condemned unheard) includes the duty to consider the defense presented. Merely allowing a filing on the portal is not enough; the reply must be applied to the decision-making process.
Procedural Failure: In the Faceless Assessment regime, the reliance on written submissions is paramount. Ignoring a detailed reply renders the assessment arbitrary.
Outcome: The assessment order framed under Section 143 read with Section 144B was quashed.
Remand: The matter was remanded back to the Revenue authorities to pass a fresh order strictly after providing an opportunity of hearing and considering the assessee’s reply on record.
Key Takeaways
Submission vs. Consideration: It is not enough for a taxpayer to simply upload a reply; the AO is legally bound to discuss why that reply is rejected in the final order. If the order is silent on your specific arguments, it is liable to be set aside.
Faceless Assessment Rights: Under Section 144B, the process includes a mandatory review of the assessee’s response to the Draft Assessment Order. Skipping this step is a jurisdictional error.
Section 69 Defense: For unexplained investment additions, if you can prove the “source of funds” (e.g., bank entries, loans) via documents, the addition cannot stand. The AO cannot simply ignore this evidence.
HIGH COURT OF GUJARAT
Sharanam Square LLP
v.
Assessment Unit, Income-tax Department*
A.S. Supehia and Pranav Trivedi, JJ.
R/SPECIAL CIVIL APPLICATION NO. 7151 of 2024
DECEMBER 22, 2025
Tushar Hemani, Sr. Counsel and Ms Vaibhavi K Parikh, Adv. for the Petitioner. Dev D Patel, Sr. Standing Counsel for the Respondent.
JUDGMENT
A.S. Supehia, J. – Learned Senior Standing Counsel Mr.Dev Patel for the respondent has tendered affidavit on behalf of respondent No.2, the same is ordered to be taken on record.
2 The petitioner, by way of this petition under Article 226 of the Constitution of India, challenges the Assessment Order dated 26.03.2024, passed by the respondent under Section 143(3) read with Section 144B of the Income Tax Act, 1961 (for short “the Act”), for the Assessment Year 2022-23 (hereinafter referred to as “the year under consideration”) on the ground of gross violation of the principles of natural justice by completely overlooking the reply dated 25.03.2024, furnished by the petitioner in response to the Show Cause Notice, which, in turn, has resulted into demand of Rs.38,13,93,748/-.
3 RULE. Learned Senior Standing Counsel Mr.Dev Patel, waives service of notice of rule on behalf of the respondent No.2. Since short issue is involved, the petition is taken up for final disposal today.
4 The brief facts leading to filing of the present writ petition are as under:
4.1 The petitioner is engaged in the business of construction. The petitioner was incorporated during the year under consideration itself. The petitioner filed its return of income for the year under consideration on 31.07.2022 declaring total income at Rs.23,200/-.
4.2 The case of the petitioner for the year under consideration was selected for scrutiny by issuance of statutory notice dated 01.06.2023 under Section 143(2) of the Act. Later, the respondent vide notice dated 09.10.2023 issued under Section 142(1) of the Act, called upon the petitioner to furnish various details in relation to the assessment proceedings for the year under consideration. The petitioner, vide letter dated 24.10.2023, furnished all such details.
4.3 It is the case of the petitioner that for the period of five months, nothing was heard from the respondent and vide notice dated 10.03.2024 issued under Section 142(1) of the Act, the petitioner was called upon to furnish certain details in relation to the “investments” and “unsecured loans” duly reflected in the balance sheet.
4.4 Another notice dated 18.03.2024 was also issued, wherein, it was stated that “compliance date” prescribed in the earlier notice (i.e. compliance date being 25.03.2024) may be read as “20.03.2024” instead of “25.03.2024” as the issue was getting time barred on 31.03.2024. A Show Cause Notice dated 22.03.2024 was issued to the petitioner calling upon him to show cause as to why an addition of Rs.39,43,27,000/-should not be made under Section 69 of the Act in respect of “the property purchased by the petitioner”.
4.5 The petitioner, vide letter dated 25.03.2024, furnished a detailed response to the aforesaid Show Cause Notice issued by the respondent stating therein that the petitioner was engaged in the business of construction and hence had purchased land of Rs.39,43,27,500/- from Ashima Limited for the purpose of construction of a commercial building and the details of which were furnished by the petitioner in the annual accounts, including the source of payment of purchase consideration with other documentary evidences.
4.6 Thereafter, the respondent framed the assessment for the year under consideration vide order dated 26.03.2024 under Section 143(3) read with Section 144B of the Act, wherein, income of the petitioner for the year under consideration was determined at Rs.39,43,50,220/- as against the returned income of Rs.23,220/-.
5 At the outset, learned Senior Standing Counsel Mr.Tushar Hemani appearing with learned advocate Ms.Vaibhavi Parikh for the petitioner has submitted that the impugned Assessment Order is required to be quashed and set aside as the same is passed without application of mind to the material furnished by the petitioner in his reply dated 25.03.2024.
5.1 It is contended that it is well settled position of law that the principles of natural justice are always to be followed and that no adverse order must be passed against any person unless such person is afforded a reasonable opportunity of being heard, implying that whenever any adverse order is likely to be passed, the person concerned must be afforded a reasonable opportunity of being heard prior to passing of such adverse order. Thus, it is urged that the petition may be allowed by setting aside the impugned order.
6 Per Contra, learned Senior Standing Counsel Mr.Dev Patel for the respondent, while placing reliance on the affidavit-in-reply, has submitted that due to technical glitches between the Income Tax Business Application (ITBA) system and the e-filing portal, the reply filed by the petitioner on 25.03.2024 was not available and hence its contents were not taken into consideration and the case was returned to the Assessing Officer on 26.03.2024 for passing of the Assessment Order. Thus, it is urged that due to the circumstances beyond the control of the Assessing Officer, the reply filed by the petitioner was not considered.
7 We have heard the learned advocates appearing for the respective parties.
7.1 The case of the petitioner mentioned hereinabove is that the impugned order has been passed without concerning the reply dated 25.03.2024 filed by the petitioner explaining his income. We may, at this stage, incorporate the averments made in the affidavit-in-reply dated 20.12.2025 passed by the respondent – Assessing Officer. The same is as under:
“3 It is submitted that the main contention of the petitioner is with regards to the non-consideration of the reply filed on 25.03.2024 during the assessment proceedings. In this regard it is submitted that the dates and events leading to the passing of the Impugned Order dated 26.03.2024 is as under:
| Date | Event |
| 31.07.2022 | Return of income was filed by petitioner |
| 01.06.2023 | Notice under section 143(2) was issued |
| 09.10.2023 | Notice under section 142(1) was issued |
| 24.10.2023 | Reply was furnished by the petitioner |
| 10.03.2024 | Notice under section 142(1) was issued whereby compliance date was fixed as 25.03.2024 |
| 18.03.2024 | Notice under section 142(1) was issued whereby compliance date was changed from 25.03.2024 20.03.2024 |
| 22.03.2024 | Show cause notices were issued whereby the petitioner was granted time till 25.03.2024 to furnish reply |
| 25.03.2024 | The petitioner furnished detailed reply to the aforesaid show cause notice on the compliance date itself. |
It is further submitted that the Assessment Order has reflected the details of the opportunity given at paragraph 2 thereto as under:
| Type of notice/ communication | Date of notice/ communicati on | Date of compliance given | Response of the Assessee received / not received | Date of Response if received | Response type (Full/part/adj ournment) |
| Intimation Letter | 01.06.2023 | Yes | 02.09.2023 | ||
| 143(2) | 01.06.2023 | 16.06.2023 | No | ||
| 142(1) | 09.10.2023 | 24.10.2023 | Yes | 24.10.2023 | NA |
| 142(1) | 10.03.2024 | 20.03.2024 | No | NA | NA |
| Letter | 18.03.2024 | 5 days | No | NA | NA |
| SCN | 22.03.2024 | 25.03.2024 | No | NA | NA |
From the perusal of the aforesaid facts, it is submitted from 10.03.2024 onwards, the petitioner was given sufficient opportunity to explain the source of the transactions, however, the petitioner did not avail those opportunities within the stipulated time. It is submitted that the petitioner was fully aware of the issues under scrutiny since the selection of the case.
It is further submitted that during the end of March, the Assessing Officer is under statutory obligation to complete time-barring assessments by 31st March. It is submitted that as per ITBA system records, as per the show-cause notice dated 22.03.2024, the petitioner was required to furnish a reply on or before 25.03.2024 at 10:15 AM. It is submitted that despite being aware of the same, the petitioner chose to file the reply at the last moment
It is submitted that in normal circumstances, replies filed by assessee are duly examined before passing assessment orders. However, in the present case, due to technical glitches between the ITBA system and the e-filing portal, the reply filed by the petitioner on 25.03.2024 was not visible / reflected to the Assessing Officer. It is further submitted that technical glitch in accessing the reply is further indicative of the fact that even during the review proceedings, the Review Unit also did not flag the presence of the said reply. Consequently, the case was returned to the Assessing Officer on 26.03.2024 for passing of the assessment order and till that time the reply was not available on the IT’BA system. Accordingly, the assessment order was passed.
4. In view of what is stated hereinabove, it is submitted that solely due to technical glitches beyond the control of the Assessing Officer, the reply was not visible / reflected to the Assessing Officer and therefore it could not be considered. It is submitted that otherwise, the Assessing Officer has granted sufficient opportunity of hearing to the petitioner and therefore there is no violation of the principles of natural justice as alleged by the petitioner.”
8 Thus, in view of the undisputed fact that the reply of the petitioner dated 25.03.2024 has not been considered, the impugned Assessment Order dated 26.03.2024, passed by the respondent under Section 143(3) read with Section 144B of the Income Tax Act,1961, is hereby quashed and set aside. The matter is remanded to the respondent authorities to pass a fresh order after considering the reply filed by the petitioner. Fresh order shall be passed by complying the principles of natural justice, after hearing the petitioner, within a period of 12 weeks from the date of receipt of copy of this order.
9 The petition is allowed, accordingly. Rule is made absolute to the aforesaid extent. No order as to costs.