Karnataka HC Sets Aside Faceless Ex-Parte Assessment for Non-Service of 142(1) Notice

Yashaswini Gruha Nirmana Sahakara Sangha Niyamitha Vs ITO (Karnataka High Court)

Karnataka HC Sets Aside Faceless Ex-Parte Assessment for Non-Service of 142(1) Notice – Notice Sent to Wrong Email Invalid – Case Remanded for Fresh Hearing

The Karnataka High Court has quashed an ex-parte assessment order & consequential penalty proceedings after finding that the entire assessment was vitiated by lack of proper service of notice u/s 142(1). The decision reaffirms that assessment proceedings based on notices sent to an incorrect or inactive email ID violate principles of natural justice & cannot be sustained.

The petitioner, Yashaswini Gruha Nirmana Sahakara Sangha Niyamitha, a house building co-operative society, had not filed its return of income for AY 2017–18 on the ground that it had no taxable income, as formation of sites for its members was still in progress. However, the Department issued a notice u/s 142(1) through an old, inactive email ID recorded in departmental records. The petitioner did not receive this communication & hence could not file any response.

Subsequently, the ITO passed an ex-parte assessment order u/s 144 on 28.12.2019, treating cash deposits of ₹64.28 lakh made during the demonetisation period as unexplained money. Thereafter, penalty orders were successively issued u/s 271F, 272A(1)(d), & 271AAC(1), all based on the same ex-parte assessment.

Upon later discovering these orders, the petitioner approached the Court contending that all the proceedings were conducted behind its back & that it never received the statutory notices. It was submitted that the Society had updated its email only in July 2024 & therefore could not have responded earlier. The petitioner sought quashing of the assessment & penalty orders as being void for want of proper notice & opportunity.

The Department argued that notices had been validly sent to the email ID available in the income-tax database & that ignorance of such communication could not absolve the petitioner.

Justice M. Nagaprasanna, after perusing the records, observed that the entire chain of proceedings-from the 142(1) notice to assessment & penalties-remained ex-parte, & that the petitioner was never afforded an opportunity of hearing. The Court held that once it is established that the foundation notice was not properly communicated, all subsequent proceedings automatically stand vitiated. The learned Judge emphasized that ex-parte assessments, especially under the faceless scheme, must strictly comply with principles of due service & natural justice.

Accordingly, the Court allowed the writ petition, quashed the assessment order u/s 144 dated 28.12.2019, the penalty orders u/s 271F, 272A(1)(d), & 271AAC(1), & remitted the matter to the Assessing Officer to start afresh from the stage of submission of reply to the notice u/s 142(1). The petitioner was granted liberty to file its response, & the AO was directed to conclude proceedings afresh in accordance with law after providing full opportunity of hearing.

Assessment & penalty orders passed ex-parte without proper service of notice u/s 142(1) are invalid. The entire proceedings, including penalties u/s 271F, 272A(1)(d) & 271AAC(1), were quashed & the matter was remanded to the AO for fresh consideration after affording due opportunity to the assessee.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

Petitioner is before this Court calling in question, the actions of the respondent No.3 after issuance of notice under Section 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for short) on the score that they are notices without jurisdiction and all consequent actions taken thereto being illegal.

2. Heard Sri.Ravishankar S.V., learned counsel appearing for the petitioner, Sri.M.Tirumalesh, learned counsel appearing for the respondents and have perused the material on record.

3. Facts in brief germane are as follows:

(a) The petitioner is a House Building Cooperative Society carrying on the activity of providing residential sites to its members by collecting money from them. For the assessment year 2017-18, no return of income was filed by the petitioner. It is the case that no income had been accrued for the said assessment years, as the formation of sites were still underway. Notwithstanding the same, a notice is issued under Section 142(1), which is communicated to a particular mail id available at the office of the respondents. It is the case of the petitioner that said mail id was not in use and therefore, the petitioner did not file his response to the notice so issued.

(b) An order of assessment is then passed under Section 144 of the Act, making addition of cash deposits during the period of demonetization, to the tune of ₹64,28,500/-, terming it to be unexplained money. Taking the proceedings further, penalty orders are passed under Sections 271F and 272A(1)(d) of the Act and finally, penalty orders are now passed under Section 271AAC(1) of the Act. On 21.07.2024, the petitioner is said to have consulted the tax practitioner and updated the email on the website of the Income Tax Department. On all the said facts, the learned counsel appearing for the petitioner would contend that the petitioner had no opportunity to submit his reply or appear before the respondents which has led to the impugned proceedings being ex parte. Huge burden is now cast upon the petitioner by passing several orders, all in an ex parte proceeding.

4. Learned counsel appearing for the respondents Sri. Sri.M.Tirumalesh would contend that the notice was communicated to the mail id available at the Income Tax Department and therefore, the petitioner cannot now feign ignorance. Learned counsel would submit that this Court should not interfere with the impugned proceedings.

5. The afore-narrated facts link in the chain of events, are all a matter of record. It is not in dispute that the proceedings instituted right ‘from the word go‘ have remained ex parte as the genesis is a notice sent in the year 2019 for the assessment year 2017-18 and penalty orders passed subsequently. It is an admitted fact that the petitioner never replied to the notice owing to the fact that they did not get the notice to the appropriate mail and nor the notice was communicated through any other mode. In that light, the proceedings undoubtedly become ex parte. Being ex parte, the result would be obliteration of the proceedings and remitting the matter back to the hands of the authority to redo the exercise. Learned counsel for the Revenue would not oppose, if liberty is granted to redo the exercise.

6. For the aforesaid reasons, the following:

ORDER

[i] The petition stands allowed.

[ii] Order passed U/s 144 dated 28/12/2019 bearing DIN: ITBA/AST/S/144/2019-20/1023295536(1) passed by the Respondent No.2 for the assessment year 2017-18 vide Annexure A, stands quashed.

[iii] The penalty order dated 02/08/2021 issued u/s 271F of the Act bearing DIN and Notice No. ITBA/PNL/F/271F/2021-22/1034575783(1) by the Respondent No.4 for the assessment year 2017-18 vide Annexure – A1, stands quashed.

[iv] The penalty order dated 02/08/2021 issued u/s 272A(1)(d) of the Act bearing DIN and Notice No. ITBA/PNL/F/272A(1)(d)/2021-22/1034575782(1) by the Respondent No.4 for the assessment year 2017-18 vide Annexure – A2, stands quashed.

[v] The penalty order dated 19/01/2022 issued u/s 271AAC(1) of the Act bearing DIN and Notice No. ITBA/PNL/F/271AAC(1)/2021-22/1038858424(1) by the Respondent No.4 for the assessment year 2017-18 vide Annexure – AЗ, stands quashed.

[vi] The matter is remitted back to the hands of respondent No.1 from the stage of submission of reply to the notice issued under Section 142(1) of the Income Tax Act, 1961.

[vii] Petitioner is at liberty to furnish/submit his reply to the said notices and respondent No.1 shall take the proceedings to its logical conclusion, in accordance with law.