Case Law Details
eShakti.com Private Limited Vs ACIT (Madras High Court)
The petitioner challenged two assessment orders dated 26 December 2019 for Assessment Years 2016-17 and 2017-18 passed under the Income-tax Act, 1961. Although several grounds were raised, the Court identified the principal legal issue as whether a show cause notice is required before finalising an assessment.
The Court noted that two pre-assessment notices had been issued and there had been exchanges of correspondence between the parties. However, no show cause notice was issued setting out the proposed additions or disallowances and the issues ultimately dealt with in the assessment orders, thereby denying the petitioner an opportunity to respond before completion of the assessments.
The petitioner relied on CBDT Instruction No. 20/2015 dated 29 December 2015, which states that in scrutiny assessments where additions or disallowances are proposed, the Assessing Officer should provide a fair opportunity to the assessee by issuing a show cause notice indicating the reasons and supporting material, consider the assessee’s response, and thereafter pass the assessment order.
The Revenue initially contended that the Instruction applied only to Assessment Year 2014-15 and therefore had no application to the assessments under challenge. Since the issue had wider implications, the Court impleaded the Central Board of Direct Taxes (CBDT) as a respondent.
The CBDT, through instructions dated 11 January 2021, reiterated that Instruction No. 20/2015 was specific to Assessment Year 2014-15 and also pointed out that section 143(3) of the Income-tax Act does not expressly require issuance of a show cause notice before completing an assessment. However, the CBDT also acknowledged that the principles of natural justice require issuance of a show cause notice prior to finalisation of an assessment order. In support of this position, it referred to Instruction No. 3/2018, the E-Proceeding facility guidelines, and Circular No. 27/2019, all of which emphasise adherence to the principles of natural justice during assessment proceedings.
The Court held that, although the Income-tax Act does not expressly mandate issuance of a show cause notice before completing scrutiny assessments, the Assessing Officer is expected, as a matter of procedure and good administration, to crystallise the issues arising from the return, notices under sections 142(1) and 143(2), and the assessee’s responses, issue a show cause notice identifying those issues, invite the assessee’s response, and only thereafter pass the assessment order after granting an opportunity of hearing.
Accordingly, the writ petitions were allowed. The Court directed that the impugned assessment orders be treated as show cause notices, permitted the petitioner to file replies within six weeks, and directed the Assessing Officer to pass fresh assessment orders within sixteen weeks after providing the petitioner with a hearing, either virtually or physically.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
The petitioner is a company which challenges two orders of assessment dated 26.12.2019 for the assessment years (AY) 2016-17 and 2017-18, passed by the Assistant Commissioner of Income Tax, Corporate Circle/first respondent in terms of the provisions of the Income Tax Act, 1961 (in short ‘Act’). Though the assessments are assailed on several grounds, after hearing Mr.R.Sivaraman, learned counsel for the petitioner and Mrs.Hema Muralikrishnan, learned Senior Standing Counsel for the respondents, the legal issue that emerge is whether a show cause notice has to be issued prior to finalisation of assessments under the Act.
2. In this case, admittedly, two pre-assessment notices have been issued leading to some exchange of communications inter se the parties. However, no show cause notice crystallizing the issues dealt with in the assessment orders have been crystallised as such and put to the petitioner for rebuttal, prior to completion of proceedings.
3. The petitioner had relied upon an Instruction issued by the Central Board of Direct Taxes (CBDT) bearing No.20 of 2015 dated 29.12.2015 dealing with the subjects ‘Scrutiny assessments – some important issues and scope of scrutiny in cases selected though Computer Aided Scrutiny Selection (CASS)‘ . The year of applicability of the Instruction is 2014-2015.
4. The Board has clarified therein that in the conduct of scrutiny assessments, a fair opportunity should be extended to the assessee to explain its position. It stipulates that the Assessing Officer shall issue a show cause notice duly indicating the reasons based on which additions/disallowance are proposed along with necessary evidence/reasons for the same. The reply of the assessee should be solicited on the show cause notice and decision should be taken thereafter.
5. Paragraph 4 of the Instruction reads as follows:
Instruction No. 20/2015
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi, the 29th of December, 2015
Subject: Scrutiny Assessments-some important issues and scope of scrutiny in cases selected through Computer Aided Scrutiny Selection (‘CASS’)-reg .-
The Central Board of Direct Taxes (‘CBDT’), vide Instruction No. 7/2014 dated 26 09.2014 had clarified the extent of enquiry in certain category of cases specified therein, which are selected for scrutiny through CASS. Further clarifications have been sought regarding the scope and applicability of the aforesaid Instruction to cases being scrutinized.
4. The Board further desires that in all cases under scrutiny, where the Assessing Officer proposes to make additions or disallowances, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principle of natural justice. In this regard, the Assessing Officer shall issue an appropriate show-cause notice duly indicating the reasons for the proposed additions/disallowances along with necessary evidences/ reasons forming the basis of the same. Before passing the final order against the proposed additions/disallowances due consideration shall be given to the submissions made by the assessee in response to the show cause notice.
6. The present Writ Petitions challenge orders of assessment for AY 2016-17 and 2017-18 and the initial stand of the revenue was that the aforesaid Instruction would touch upon only assessments specific to AY 2014-15 and the contents thereof would not impact assessments for other years.
7. This being a matter of some importance which would have ramifications in several matters, I had impleaded the Central Board of Direct Taxes as respondent No.2 and Mrs.Hema Muralikrishnan, learned Senior Standing Counsel had accepted notice on its behalf as well.
8. Instructions have been received from the CBDT dated 11.01.2021, placed before this Court on 19.04.2021. In the parawise comments, the CBDT reiterates that Instruction No.20 of 2015 dated 29.12.2015 is specific only to AY 2014-15. Reference is made to Section 143(3) of the Act, which also does not specify or require the issuance of a show cause notice prior to finalisation of assessments.
9. At paragraph 3 however, the CBDT has fairly concluded that principles of natural justice which are enshrined in the procedure for assessment mandate the issuance of a show cause notice prior to finalisation of an order of assessment. The Board refers to Instruction No.3 of 2018 dated 20.08.2018, specifically para 6(vi) thereof relating to AY 2016-17 and the ‘ E-proceeding’ facility available during 2018-19, specifically para (iv)d thereof as well as Circular Number 27 of 2019 dated 26.09.2019 that also reiterate the importance of adherence to the principles of natural justice in the finalisation of proceedings.
10. Thus and in view of the confirmation by the CBDT, an important issue stands settled. Though the Income Tax Act does not anywhere contemplate issuance of a show cause notice prior to finalisation of scrutiny assessments, as a matter of procedure and good office, the Assessing Authority is expected to crystalise the issues arising from the return of income filed by an assessee, the questionnaires issued under Section 142(1) and notices under Section 143(2) and responses thereto, issue a show cause notice setting out the issues, solicit the response of the assessee and pass orders only thereafter, after hearing the assessee concerned.
11. In the light of the discussion as aforesaid, these Writ Petitions are allowed. The orders of assessment in this case shall be treated as show cause notices and the petitioner shall file replies to the same within a period of six (6) weeks from today. After hearing the petitioner, either virtually or physically as may be mutually convenient to the parties, orders of assessment shall be passed within a period of sixteen (16) weeks from today.
12. These Writ Petitions are allowed. No costs. Connected Miscellaneous Petitions are closed.
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