Faceless Assessment Order Set Aside Due to failure to issue a show-cause notice and draft assessment order

Issue:

Whether a faceless assessment order is valid when the Assessing Officer fails to issue a show-cause notice and draft assessment order, as mandated by Section 144B of the Income-tax Act, 1961.

Facts:

The assessee, an HUF, filed a return of income declaring capital gains from the sale of land.
The Assessing Officer reopened the assessment under Section 148, believing that Section 50C was applicable and income had escaped assessment.
The AO completed a faceless assessment and made an addition to the capital gains.
After the Section 148 notice, the AO issued only two pre-assessment notices: one under Section 143(2) and another under Section 142(1), requesting details.
The AO did not issue a show-cause notice or a draft assessment order before passing the final assessment order.

Decision:

The court held that the faceless assessment order violated the mandatory procedure under Section 144B. The absence of a show-cause notice and a draft assessment order constituted a blatant violation. The assessment order was set aside, and the matter was remanded to the Assessing Officer. The AO was directed to issue a fresh show-cause notice and a draft assessment order, granting the assessee an opportunity for a final hearing as per Section 144B.

Key Takeaways:

Faceless assessments must strictly adhere to the procedures outlined in Section 144B.
Issuance of a show-cause notice and a draft assessment order is mandatory before passing a final assessment order in faceless assessments.
Failure to comply with procedural requirements invalidates the assessment order.
Assessees have the right to a fair hearing and an opportunity to respond to proposed assessments.

HIGH COURT OF GUJARAT

Saurabh Rohitbhai Modi HUF

ADDL/JOINT/DY./ACIT/ITO National Faceless Assessment Centre or His Successo

BHARGAV D. KARIA and D.N. Ray, JJ.

R/SPECIAL CIVIL APPLICATION NO. 6908 of 2022

DECEMBER 17, 2024

S.N. Divatia, for the Petitioner. Varun K. Patel, for the Respondent.

JUDGMENT

D.N. RAY, J.- Heard learned advocate Mr.S.N.Divatia for the petitioner and learned Senior Standing Counsel Mr. Varun Patel for the respondent No.2

2. Rule returnable forthwith. Learned Senior Standing Counsel Mr.Varun Patel waives service of notice of rule on behalf of the respondent No.2. With the consent of learned advocates for the respective parties, the matter is taken up for the final hearing, as the issue involved is very short.

3. This petition is filed under Article 226 of the Constitution of India with a prayer to quash and set aside the impugned order dated 12.03.2022 passed by the respondent. Accordingly, the following prayers have been made :-

“(a) to issue a writ of certiorari or in the nature of certiorari or any other appropriate writ, orders or directions quashing and setting aside the impugned order of assessment dated 12.3.2022 for A.Y.2014-15 passed by the respondent. [Annexure -A (Coll.)].

(b) to issue a writ of certiorari or in the nature of certiorari or any other appropriate writ, orders or directions quashing and setting aside the notice of demand issued u/s.156 of the Act on 12.03.2022 for Rs.1,79,61,567/- for A.Y.2014-15 [Annexure-A (Coll.)).

(c) to issue a writ of certiorari or in the nature of certiorari or any other appropriate writ, orders or directions quashing and setting aside the notice for penalty u/s.274 r.w.s 271(1)(C) of the Act issued on 12.03.2022 for A.Y.2014-15.

(d) to call for the records of the proceedings and look into them and be pleased to issue a writ of certiorari or any other appropriate writ, order or direction quashing the impugned notice and order.

(e) Pending the hearing and final disposal of this petition to maintain status quo in the matter and ask the Respondent and its subordinates not to take any action or to do anything in furtherance and pursuance of this impugned assessment order, notice of demand and penalty notice.

(f) To allow this Petition with cost.

(g) To pass any further or other orders as the Hon’ble Court may deem proper in the interest of justice and in the circumstances of the case.

4. The brief facts of the case are as under:-

4.1 The Petitioner is an individual and the Karta of HUF named-Saurabh Rohitbhai Modi and derives income from business, other sources & capital gains. He filed his return of income for A.Y.2014-15 on 17.03.2015 declaring total income at Rs.13,78,560/-. It was processed u/s 143(1). Later on, the Respondent initiated reassessment proceedings u/s 147 by issuing notice u/s 148 on 31.03.2021 on the basis of information that during the course of search u/s 132 on 17.08.2016 in the case of K- Star group at Surat, various incriminating documents were found which showed that the said group had purchased Block No.247 for Rs. 63,50,000/- and Block no. 243 for Rs. 5,60,00,000/- (which was held by Rohit C Modi HUF jointly with Smt. Poonam R. Modi). The Petitioner filed his ITR showing the same income of Rs. 13,78,560/- on 21.04.2021, in response to this notice.

4.2 During the course of assessment proceedings, the Respondent issued a notice u/s 143(2) read with Section 147 dated 21.05.2021 providing a “Gist” of reasons recorded for reopening which alleged that the provisions of Section 50C were attracted to both the transactions relating to the lands at Block no. 243 & 247, as a result of which income of Rs.3,43,50,000/- had escaped assessment. The Petitioner, vide reply dated 05.07.2021 pointed out that since the transaction in respect of land bearing Block no. 247 was made during the assessment year 2016-17, relevant to previous year 201516, the same was declared in the ITR for A.Y. 2016-17 as per the copy of ITR filed with it and there was loss of Rs.43,35,333/-. As far as transaction relating to land bearing Block no. 243 is concerned, it was stated that the same did not pertain to him and he had not entered into any such transaction. This reply was uploaded on 03.08.2021 along with the relevant documents, as stated in the acknowledgment slip.

4.3 Thereafter, another notice u/s 142(1) dated 15.02.2022 was issued by the Respondent, asking the Petitioner to furnish the details/documents as specified in its annexure by 18.02.2022. On 22.02.2022 the Petitioner uploaded his reply letter along with ITRs for two years, sale-purchase deeds etc., as described in the acknowledgment slip.

4.4 The Respondent, however, finalized the impugned assessment on 12.03.2022 after making the impugned addition of Rs.2,65,88,640/- without issuing any show cause notice or the draft assessment order.

4.5 The Respondent thus completed the faceless assessment, which has resulted into huge demand of Rs.1,79,61,567/-. It was apprehended that the Respondent may initiate recovery of the same by taking coercive actions, including the attachment of the bank accounts of the Petitioner. In these circumstances, the petitioner was constrained to file the present petition.

5. Learned Counsel Mr.S.N.Divatia for the petitioner, after taking this Court through the narration of the facts noted hereinabove, submitted that Section 144B of the Act is in mandatory terms and the failure on the part of the Respondent to supply the draft assessment order before passing impugned assessment order, coupled with the further failure of the respondent to provide an opportunity of hearing, vitiated the impugned assessment order as well as consequent impugned notices. The error on the part of the Respondent is of such a nature that the writ jurisdiction of this Court can be availed of, as the nature of the error, namely, the failure to comply with the statutory provisions and the failure to uphold the principles of natural justice would fall within the exceptions to the normal rule of alternate remedy. In that view of the matter, Mr.S.N.Divetia, learned Counsel submitted that the instant case was a fit case for exercising the discretionary jurisdiction of this Court and quash the impugned assessment order as well as the consequent impugned notices, as prayed for.

6. Learned Senior Standing Counsel Mr. Varun Patel for the Respondent No.2 submitted that the present petition challenging the assessment order u/s. 147 read with Section 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 12.03.2022, and demand notice dated 12.03.2022 and notice dated 12.03.2022 for the penalty u/s. 274 read with Section 271(1)(C) of the Act for the Assessment Year 2014-15 issued by the Assessing Officer, alleging it to be illegal, bad in law and without jurisdiction, does not deserve to be entertained, as the petitioner has failed to disclose violation of any of his fundamental and/or statutory and/or legal rights which can be enforced by the way of petition under Article 226 of the Constitution of India. It was submitted that the impugned order and impugned notices are not only legal, just and proper but also well within the jurisdiction of the Assessing officer. Moreover, there is no illegality or irregularity while issuing the impugned order and impugned notices.

6.1 He has further submitted that the assessee has an alternative remedy available in the form of appeal before the CIT(A) and then before the Hon’ble ITAT. In this regard, reliance is also placed in the case of Commissioner of Income-tax v. Chhabil Dass Agarwal reported in ITR 357 (SC)/[2013] 261 CTR, wherein, the Hon’ble Supreme Court has held that when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained by ignoring the statutory dispensation. It is also submitted that the assessee has an efficacious alternative remedy available to him, as it can approach the CIT(A) under Section 246A of the Act.

7. DISCUSSION & FINDINGS :-

7.1 The Faceless Assessment Scheme, 2019 (in short “FAS”) has been incorporated into the Income Tax Act, 1961 vide the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 whereby Section 144B has been inserted with effect from 01.04.2021. In pursuance of the said provision, Central Board of Direct Taxes, New Delhi, has laid down the Standard Operating Procedue (SOP) on this subject vide Circular F.No. Pr. CCIT/NeAC/ SOP/2020-21 dated 19.01.2020. This Circular deals with the procedure of faceless assessment, the scope of work to be done by different units such as the assessment unit, verification unit, technical unit, etc. The Parts S to U in this Circular relate to the show cause notice, draft assessment order and final assessment order. The relevant provisions of Section 144B(1) are reproduced under:

“(xiv)- The assessment unit shall after taking into account all the relevant material available on the record make in writing, a draft assessment order or in a case were intimation referred to in Clause (xiii) is received from the National Faceless Assessment Centre, make in writing a draft assessment order to the best of its judgment, either accepting the income or sum payable by or sum refundable to the assessee as per his return or making variations to the sald income or sum and send a copy of such order to the National Faceless Assessment Centre.

XXXXX XXXXXXXXXX XXXXXXXXX

(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-

(a) xxxxx xxxxxx xxxxxx

(b) Provide an opportunity to the assessee, in case any variation prejudicial to the interest of the assessee is proposed, by serving a notice calling upon him to show cause as to why the proposed variation should not be made or

(xxii) The assessee may in a case were a show cause notice has been served upon him as per the procedure laid down in sub-clause (b) of clause-(xvi), furnished his response to the National Faceless Assessment Centre on or before the date and time specified in the notice or within the extended time, if any.

(xxiii) The National Faceless Assessment Centre shall –

(a)

Where no response to the show cause notice is received as per clause – (xxii) –

xxxxxxx xxxxxxx xxxxxxx xxxxxxx

(b)

In any other case, send the response received from the assessee to the assessment unit

(xxiv) The assessment unit shall after taking into account, the Response furnished by the assessee make a revised draft assessment order and send it to the National Faceless Assessment Centre.

(xxv) The National Faceless Assessment Centre shall upon receiving the revised draft assessment order –

(a) xxxx

(b) In case the variations proposed in the revised draft assessment order are prejudicial to the interest of the assessee in comparison to the draft assessment or the final draft assessment order, provide an opportunity to the assessee, by serving a notice calling upon to him to show cause as to why the proposed variation should not be made.

(xxvi) The procedure laid down in clause (xxili), (xxiv) and (xxv) shall apply mutatis, mutandis to the notices referred to in sub-clause (b) of clause (xxv)……

(7) For the purposes of faceless assessment-

xxxxxxxxxx xxxxxxx

(vii) In a case where a variation is a 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 authorized 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”.

7.2 A combined reading of the above provisions, more particularly clause (xiv) and (xvi) would clearly show that :-

(a)

when any variation prejudicial to the interest of the assessee is proposed, the NFAC shall provide an opportunity to the assessee by serving a notice calling upon him to show cause as to why the proposed variation should not be made

(b)

The assessment unit shall, after taking into account all the relevant material available on the record, make in writing a draft assessment order and in case of prejudicial variation, call upon the assessee to show cause.

7.3 Thus, the entire faceless assessment scheme provides for an opportunity to be given to the assessee whenever there is a proposed variation from the earlier determination of assessment prejudicial to the interest of the assessee. Therefore, the absence of such a show cause notice would clearly be a violation of the principles of natural justice, rendering the Assessment Order passed as void. In the present case, the perusal of the e-proceeding sheet clearly indicates that, after having issued notice under Section 148, the Respondent issued only two notices; one under Section 143(2) dated 21.05.2021 and another issued on 15.02.2022 under Section 142(1), which simply called for the details, and as such, the same were preassessment notices as envisaged in clause (vi) of Section 144B(1). The entire procedure subsequent to obtaining further information, documents or evidence has not been gone through in case of the Petitioner, and straightaway, the impugned assessment has been finalized. Thus, there has been a blatant violation of the mandatory procedure prescribed under the Faceless Assessment Scheme as stipulated u/s.144B of the Act as held in case of Akashganga Infraventures Indi Ltd. v. Naional Faceless Assessment Centre by Delhi High Court, reported in 2021 (130) (Delhi) as under:-

“6. Since in the present case no prior show-cause notice as well as draft assessment order had been issued before passing the impugned assessment order, there is blatant violation of principles in “Facelss Assessment Scheme” as stipulated in Section 144B of the Act.

8 This Court, in the case of Kottex Industries Pvt. Ltd. v. National Faceless Assessment Centre, Government of India, reported in/[2023] 450 ITR 685 (Gujarat), has held as under :-

“6. Considering the rival submissions made by both the sides the only question which is required to be considered is that, whether the respondent authorities have followed the due procedure of law as envisaged under Section 144B(1) (xvi) read with Section 144B(7)(vii) and (xii) of the Act or not, while passing the impugned assessment order dated 26th September, 2021.

7. The answer to the above question are not res integra inasmuch as the provision of Section 144B of the Act which provides for Faceless Assessment for the assessment under Section 143(3) and 144 to be carried out as per the procedure contained therein and Sub-section (9) of Section 144B provides that notwithstanding anything contained in any other provision of the Act, the assessment made under Section 143(3) or Section 144 of the Act, shall be non-est if such assessment is not made in accordance with the procedure laid down under Section 144B of the Act. The opportunity of hearing as envisaged under Section 144B of the Act is also therefore, required to be scrupulously adhered to as the principles of natural justice are unfailingly ingrained in the procedure prescribed for Faceless Assessment. Moreover, in the facts of the case, it is not in dispute that the draft assessment order is not forwarded to the petitioner, which is required to be sent along with the show-cause notice as per the procedure prescribed under Section 144B(1) (xvi)(b) of the Act. This Court in case of Atulbhai Kantilal Mehta (supra) as well as in case of Agrawal JMC Joint Venture (supra) has held that it is no more res integra that any order passed in violation of statutory procedure prescribed under Section 144B of the Act, makes the order vulnerable as the same is passed in violation of principles of natural justice.

8. Apart from this Court, the Bombay High Court in case of M/s. Parimal Enterprise Ltd. v. Addl. Commissioner of Income Tax, reported in (Bombay)(Bombay) and the Delhi High Court in case of Sanjay Agrawal v. National Faceless Assessment Centre, Delhi, reported inITR 180 (Delhi) have also taken the same view.

9. The contention raised on behalf of the Revenue with regard to alternative and efficacious remedy available to the petitioner and preferring an appeal before the Commissioner of Income Tax is concerned, as the impugned order is passed in violation of principles of natural justice and is contrary to the procedure prescribed for Faceless Assessment as per Section 144B of the Act, we are of the opinion that the same can be challenged by invoking the extraordinary jurisdiction under Article 226 of the Constitution of India as per the decision of the Apex Court in case of Whirlpool Corporation v. Registrar of Trade Marks, Mumbai & Others, reported in (1998) 8 SCC 1.”

9. The Hon’ble Apex Court, in the case of Radha Krishan Industries v. State of Himachal Pradesh & Others, reported in (2021) 6 SCC 771, has held as under :-

“27 (iii) Exceptions to the rule of alternate remedy arise where (a) the writ petition has been filed for the enforcement of a fundamental right protected by Part III of the Constitution; (b) thee has been a violation of the principles of natural justice; (c) the order of proceedings ae wholly without jurisdiction; or (d) the vires of a legislation is challenged.

In view of the clear ratio of the Hon’ble Apex Court as laid down in Radha Krishan Industries (supra), once this Court comes to the conclusion that there is violation of the principles of natural justice, then the present case would fall within the exception of seeking an alternate remedy.

10. In view of the discussion hereinabove, the present petition succeeds and is accordingly allowed. The matter is remanded back to the Assessing Officer by quashing and setting aside the impugned assessment order dated 12.03.2022, as well as demand notice dated 12.03.2022 under Section 156 of the Act, as well as the notice for penalty dated 12.03.2022 under Section 271(1)(C) read with Section 274 of the Act. The Assessing Officer shall issue a fresh show cause notice along with the draft assessment order by granting an opportunity for a final hearing to the petitioner as per the procedure prescribed under Section 144B of the Act. The aforesaid exercise shall be completed within a period of three months from the date of receipt of copy of this order. Needless to add that as the impugned order and notices are quashed and set aside solely on the failure on the part of the Department to comply with the provisions of Section 144B of the Act, this Court has not entered into the merits of the case. Rule is made absolute to the aforesaid extent. No order as to costs.