Gujarat HC Quashes Income Tax Assessment for Giving Only One Day to Respond

Advance Realty Developers Vs National E – Assessment Centre Delhi (Gujarat High Court)

Summary: The petitioner, a registered partnership firm, challenged the Assessment Order dated 27.03.2021 passed under Sections 143(3), 143(3A) and 143(3B) of the Income Tax Act, 1961 for Assessment Year 2018-2019. The petitioner had electronically filed its return declaring total income of Rs.2,740/-. During scrutiny proceedings, notices under Sections 143(2) and 142(1) were issued and replies were filed. On 25.03.2021, a show cause notice under Section 143(3), together with a Draft Assessment Order, was served. The petitioner received the notice on 26.03.2021 and sought an adjournment until 10.04.2021, citing medical exigencies arising from the second wave of COVID-19 and difficulties in arranging resources to compile the required information.

Without responding to the adjournment request, the respondent passed the assessment order on 27.03.2021, making certain disallowances and determining total income at Rs.7,18,36,307/-. A demand notice under Section 156 and penalty proceedings under Section 274 read with Section 270A were also initiated. The petitioner subsequently submitted a grievance through the ITBA portal.

The Revenue contended that the petition was premature because an alternative remedy by way of appeal before the CIT(A) and thereafter the ITAT was available. It also contended that the adjournment request had not been received and that the assessment was completed as the limitation period was approaching. The petitioner disputed this and relied upon the ITBA records, also contending that the assessment limitation had been extended until 30.04.2021.

The Gujarat High Court examined whether the adjournment request had been responded to as required and whether the assessment could be sustained. The Court noted that the final show cause notice and Draft Assessment Order were received on 26.03.2021 and that the petitioner was expected to respond by the end of 27.03.2021. The Court found that only a day’s time had effectively been provided to respond to the proposed substantial variation.

The Court held that Section 144B required an opportunity to be provided to the assessee where a variation prejudicial to its interest was proposed. It observed that merely serving the notice was insufficient and that a reasonable period was necessary for responding to the final notice and Draft Assessment Order. The Court stated that, even where no specific response period was stipulated, a minimum reasonable period could be 15 days, and the request for adjournment also required a response.

The Court found that the respondent’s denial of having received the adjournment request was incorrect in light of the e-record produced before it. It also noted that the assessment limitation had been extended until 30.04.2021 and that the respondent had been aware of the extension. The Court therefore held that the assessment had been framed in violation of the procedure contemplated under Section 144B.

Consequently, the Gujarat High Court allowed the petition and quashed and set aside the Assessment Order dated 27.03.2021, the demand notice and the penalty proceedings. The Assessing Officer was directed to provide the petitioner an opportunity, including personal hearing if requested, and decide the matter in accordance with law.

Challenge to Assessment Order

The petitioner challenged the legality and validity of the Assessment Order dated 27.03.2021 rendered under Section 143(3) read with Sections 143(3A) and 143(3B) of the Income Tax Act, 1961.

The petitioner had filed its e-return for Assessment Year 2018-2019 declaring total income of Rs.2,740/-. The case was selected for scrutiny and a notice under Section 143(2) was issued on 23.09.2019. The petitioner filed its reply on 04.10.2019. Further notices under Section 142(1) were subsequently issued and replied to.

Show Cause Notice and Draft Assessment Order

On 25.03.2021, a show cause notice under Section 143(3), together with the Draft Assessment Order, was served upon the petitioner. The Draft Assessment Order proposed modification of the returned income and detailed the proposed additions. The proposed total assessed income was Rs.7,18,36,307/-. Proceedings for penalty under Section 270A and interest under Sections 234A, 234B and 234C were also proposed.

The notice provided a response deadline of 25.03.2021 at 23:59 hours, although the petitioner received it on 26.03.2021 and was expected to respond by the end of 27.03.2021.

Request for Adjournment

On receipt of the notice, the petitioner sought an adjournment until 10.04.2021. The reasons stated included the second wave of COVID-19, illness affecting the partner and the partner’s family, and difficulties in arranging human resources to compile the information and prepare the response. The petitioner also referred to the festival of Holi and requested that the response to the show cause notice be deferred until 10.04.2021.

The petitioner contended that the request was supported by an e-trail appearing on the ITBA portal. The respondent, however, stated in its affidavit that no such adjournment application had been received.

Revenue’s Stand on Alternative Remedy and Limitation

The Income Tax Officer, Ward-3(3)(1), Ahmedabad, contended that the petition was premature and that the petitioner had an effective alternative remedy before the CIT(A), followed by the Income Tax Appellate Tribunal.

On the adjournment request, the respondent contended that no letter had been received on 26.03.2021 and that the scrutiny assessment was finalised on 27.03.2021 because the period for completing the assessment was approaching its limitation date of 31.03.2021.

Petitioner’s Rejoinder

The petitioner disputed the Revenue’s assertion regarding non-receipt of the adjournment request and relied upon the screenshot and other material from the ITBA portal. According to the petitioner, the portal was a Government-run and operated platform which the petitioner could not manipulate.

The petitioner also stated that the CBDT had extended the relevant assessment limitation period until 30.04.2021 through Notification No.10 of 2021 in S.O.966 (E) dated 27.02.2021. On that basis, the petitioner questioned the justification for completing the assessment without responding to the adjournment request.

Gujarat High Court’s Observations

The Court considered whether the request for adjournment had been responded to as required and whether the assessment framed in the circumstances could be sustained.

The Court noted that several notices had previously been issued to the petitioner and replies had been filed. However, under the faceless assessment procedure introduced through Section 144B, the final show cause notice and Draft Assessment Order were required to be served and the assessee had to be given an opportunity to respond where a variation prejudicial to its interest was proposed.

Only One Day Given to Respond

The Court found that the notice was received on 26.03.2021 while the petitioner was expected to respond by the end of 27.03.2021. The Court regarded this as an extremely short period, particularly considering that substantial additions had been proposed.

The Court observed that the petitioner had sought additional time until 10.04.2021 and had furnished reasons relating to the prevailing COVID-19 circumstances and medical exigencies. The request was therefore not merely a request for delay without reasons, but was accompanied by circumstances explaining why further time was sought.

Section 144B and Opportunity to Respond

The Court referred to Section 144B(1)xvi(b), which provides for an opportunity to the assessee where any variation prejudicial to its interest is proposed, by serving a notice calling upon the assessee to show cause why the proposed variation should not be made.

The Court also referred to Section 144B(9), which contains a non-obstante provision concerning assessments made under Section 143(3) or Section 144 in the specified cases and states that such assessment would be non est if it was not made in accordance with the procedure laid down under Section 144B.

The Court emphasised that the opportunity contemplated by Section 144B required more than mere service of a notice. A reasonable period was necessary for responding to the final notice and Draft Assessment Order. In this context, the Court observed that a minimum reasonable period could be 15 days where the assessee needed to examine details and respond.

The Court also held that where an assessee makes a request for adjournment, the request needs to be responded to. The absence of a human agency in the faceless assessment system did not mean that the National Faceless Centre could simply leave such a request unanswered.

Finding on the Adjournment Request

The Court found the respondent’s statement that no adjournment application had been received to be incorrect. The documents produced by the petitioner, including the e-trail forming part of the e-record, were found to support the petitioner’s position.

The Court deprecated the conduct of denying receipt of the adjournment request despite the existence of the relevant electronic record. It also noted that the respondent was aware that the assessment time limit had been extended until 30.04.2021.

The Court held that framing the assessment without providing the required opportunity, particularly when a substantial variation was proposed and only a day’s time had been provided, constituted a breach of the procedure contemplated under Section 144B.

Final Decision

The Gujarat High Court allowed the petition and quashed and set aside the Assessment Order dated 27.03.2021 passed under Section 143(3) read with Sections 143(3A) and 143(3B) of the Income Tax Act, 1961.

The Court also quashed and set aside the demand notice and penalty proceedings.

The Assessing Officer was directed to provide the petitioner an opportunity, including an opportunity of personal hearing if requested, and to decide the matter in accordance with law. The Court further directed that the requirement of providing an opportunity contemplated under law be kept in view throughout the proceedings.

Direct service through speed post as well as e-mode was also permitted in addition to the regular mode of service.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. The petitioner has preferred this petition challenging the legality and validity of the Assessment Order dated 27.03.2021 rendered under Section 143 (3) read with Section 143(3A) and 143(3B) of the Income Tax Act, 1961 (‘the Act’ hereinafter).

2. The petitioner is a registered partnership firm, who had filed the e- return declaring the total income at Rs.2,740/- electronically for the Assessment Year 2018-2019. 2.1 The case of the petitioner was selected for scrutiny and a notice under Section 143(2) of the Act was issued on 23.09.2019 and reply came to be filed on 04.10.2019.

2.3 There are certain notices which have been thereafter issued under Section 142(1) of the Act and they had been replied to by the petitioner. After about a year, a show cause notice came to be issued on 25.03.2021 under Section 143(3) of the Act along with the same the Draft Assessment Order also had been served upon the petitioner.

2.4 Since a day’s compliance was noticed by the petitioner, it had sought the adjournment on 26.03.2021 till 10.04.2021. It also had given the reasons, which according to the petitioner, had been the genuine reasons of the second waive of COVID-19 virus where some partners had also fallen ill.

2.5 Without responding to the adjournment application, the respondent passed the Assessment Order dated 27.03.2021 under Section 143 (3) of the Act and on making certain dis-allowance, it had assessed the total income at Rs.7,18,36,307/-. Simultaneously, the demand notice also under Section 156 of the Act had been issued. Notice for penalty under Section 274 read with Section 270 A of the Act also had been issued on 28.03.2021.

2.6 A grievance report came to be tendered to the Income Tax Business Application (ITBA) on 30.03.2021 on application portal. However, the status remained pending till the petitioner approached this Court and therefore, aggrieved by this entire chronology, it has approached before this Court with the following prayers:

“12…

(a) Issue a writ of certiorari and/or a writ of mandamus and/ or any other writ direction or order to quash and set aside the impugned order dated 27.03.2021 issued under section 143(3), 143(3A) & 143(3B) of the Income-tax Act, 1961 annexed hereto at Annexure-’A’ for proceeding and completing Reassessment proceedings.

(b) Pending admission, hearing and disposal of this petition, ad-interim relief be granted and the Respondent be ordered to restrain from enforcing compliance of the impugned order dated 27.03.2021 at Annexure-’A’ and/or taking any other steps in this regard and further notices issued for the purpose reassessment.

(c)Award the cost of this petition.

(d) Grant such other and further reliefs as this Hon’ble Court deems fit.”

3.Affidavit-in-reply has been filed by the Income Tax Officer, Ward-3(3)(1), Ahmedabad, who is a jurisdictional Assessing officer. According to him, the petition is prematured, the challenge of the order dated 27.03.2019 can lie to the CIT (Appeals) and thereafter to the Income Tax Appellate Tribunal (ITAT) hence, the effective alternative remedy cannot be permitted to be bypassed. On the issue of non-response to the adjournment application, it has contended that there was no such letter received on 26.03.2021 and hence, on 27.03.2021, the scrutiny assessment was finalised and demand notice also had been issued as the period was getting time barred on 31.03.2021.

4. Affidavit-in-rejoinder has been filed by the petitioner questioning the non- receipt of the request for adjournment. It has also further said that the CBDT had made certain amendments for the assessment getting time barred on 31.03.2020 and extended the same till 30.04.2021 vide Notification No.10 of 2021 in S.O.966 (E) dated 27.02.2021. According to the petitioner, the justification made is unlawful. The respondent being a quasi judicial authority is required to adjudicate without suppressing any aspect.

4.1 The petitioner has also attempted to provide the proof including the screenshot from ITBA portal, which is Government run and operated portal that the petitioner cannot manipulate. The petitioner has shown the grievance by pointing out that there is a fairness which is expected from the authority concerned, more particularly, when the assessment was not getting time barred and from February, 2021 itself it was aware that the time limit has been extended.

5. This Court has heard extensively the learned advocate, Ms.Nupur Shah appearing for the petitioner and learned senior advocate, Mr.Manish Bhatt assisted by the learned advocate, Mr.Karan Sanghani.

6. The only question that this Court needs to examine is as to whether the request for adjournment made has been responded as required under the law and whether the assessment framed can therefore be permitted to be sustained. As the disputed facts narrated above are already on the record, they need not be reiterated. Couple of notices were issued to the petitioner, which he had replied to and sufficient time had gone. However, the Faceless Assessment after introduction of Section 144B of the Act, mandates the service of final show cause notice along with the Draft Assessment Order. Once served the same needs to be responded to. The question that has been raised is with regard to an extremely short period that had been given on service of the final notice and the Draft Assessment Order.

7. If one looks at the show cause notice dated 25.03.2021, it has noticed the anxiety and uncertainty faced by everyone in the time of COVID-19 virus and the communication expressed that the same was to assist the Assessee in ending such uncertainty, which was pending e-assessment in the case of the petitioner for the Assessment Year 2018-2019. It further provided a Draft Assessment Order proposing to modify the return of income and additions proposed also have been detailed. The total assessed income is Rs.7,18,36,307/- and proposed penalty proceedings under Section 270A (2A) and the interest under Section 234 A, 234 B and 234 C of the Act.

8.We notice that the time period given in the notice is of 25.03.2021 23:59 hours, which is received on 26.03.2021 and by the end of the day of 27.03.2021 the petitioner was expected to respond to the said proposal of addition of the huge amount.

9. At this stage, this Court needs to note that on receipt of this notice on 26.03.2021, the adjournment had been sought by the petitioner upto 10.04.2021. The detailed reasons which have been furnished to the respondent explain that the family of the partner including the partner himself is suffering from COVID-19 virus and again the notice had been issued on 25.03.2021, which was received on e-mail on 26.03.2021 and the time given was upto 27.03.2021. This being an extremely short period and due to the medical exigencies, petitioner needed some more time to comply with the information and furnish representation. Again, due to festival of Holly, he was unable to manage the human resources to compile the information and represent before the authority. Therefore, in the given situation, the request had been made by the petitioner to allow the time upto 10.04.2021 and furnishing the reply against the show cause notice also was requested to be differed till then.

10. Affidavit-in-reply says that no such adjournment application has been received. This unfortunately a wrong and incorrect statement made by the respondent. From the details furnished by the petitioner, there is hardly any dispute in respect of these documents which are at Annexure ‘C’ before this Court produced by the petitioner, there is no earthly reason as to why, when there is a specific e-trail of the documents, the respondent should deny to have received the same. The respondent, the tax authority of Union is expected be truthful in its approach and it not only needs to come out clearly with all the correct details, the least that is expected of it is to deny the true documents which are forming the part of the e-record. Not only it has chosen not to respond to the request of adjournment sent on 26.03.2021 being fully conscious of the fact that the time period for assessment had been extended till 30.04.2021, but it has also chosen to deny the very seeking of the application for adjournment. This conduct surely deserves to be deprecated in a period of National Faceless Assessment, which is brought with the laudable objectives of doing of the things with ease and using profusely the technology, Section 144B(1)xvi (b) provides thus:

“provide an opportunity to the assessee, in case any variation prejudicial to the interest of assessee is proposed, by serving a notice calling upon him to show cause as to why the proposed variation should not be made;”

10.1 Section 144B(1)xvi (b) of the Act is very clear that the opportunity needs to be provided to the assessee, in case of any variation prejudicial to the interest of assessee by serving the notice and calling upon him to show cause as to why the proposed variation should not be made.

10.2 Sub-section (9) of Section 144B of the Act starts with non-obstante clause this wise:

“Notwithstanding anything contained in any other provision of this Act, assessment made under sub-section (3) of Section 143 or under Section 144 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.”

11. Wherever, there is a clear breach in following the procedure under this provision, assessment made under Section 143 (3) or under Section 144 (other than those transferred under Section 144(8) after 01.04.2021) would be non-est. In the matter on hand, as is quite apparent by not providing the opportunity to the assessee when huge variation/addition was proposed by the authority, would naturally and obviously prove prejudicial to the interest of the assessee. The least expected of the respondent is to provide an opportunity, and that would mean that a reasonable time period would be necessary for responding to the final notice and the Draft Assessment Order. Mere service can never make revenue complacent. It is a case where only a day’s time was provided, which by no stretch of reasons could be said to be a reasonable time period. Even when no time period is stipulated for seeking the response from the petitioner/assessee, the minimum reasonable time could be of 15 days where the parties can examine the details and can respond again during that period if there is a request that comes, the least that the authority can do is to respond to the same just because there is no human agency that would not mean that the National Faceless Centre would not respond to the request.

11.1 Once the statute provides that there is an opportunity to be availed to the assessee when there is a variation prejudicial to its interest is proposed, his request for adjournment as well as for the hearing also needs to be responded to. It is a completely unacceptable and unpalatable proposition that once a request come from the assessee, the respondent chooses not to respond to the same and go ahead with the framing of the assessment, that too when the time period was not expiring. Even if the time period expires, it is for the respondent to workout a schedule in the manner as expected particularly when there is no human agency and when the assessee also has no one to turn to but to send a request through the e-portal.

12. Therefore, in the instant case when there was already a second surge of infection due to COVID-19 virus, the entire country was grappled with that second waive. If there is a categorical request that was made on account of such infection of the partner of the petitioner company and time was sought on 10.04.2021 when the time period for finalizing the assessment was getting over on 30.04.2021 as was known to the respondent from February, 2021, as extension had already come by virtue of the Circular, the framing of the assessment in clear defiance and in violation of this provision shall need to be interfered with.

13. Resultantly, we allow the present petition and quash and set aside the Assessment Order dated 27.03.2021 rendered under Section 143 (3) read with Section 143(3A) and 143(3B) of the Act, which has been framed by the authority. The penalty proceedings and the demand notice are also quashed and set aside. The assessing officer shall be availing an opportunity to the petitioner including the opportunity of personal hearing, if requested for and decide the matter in accordance with law. While so doing, it shall remember all along the requirement of availing of an opportunity to the parties as contemplated under the law.

14. Over and above the regular mode of service, direct service is permitted through speed post as well as e-mode.