Faceless Assessment in Income Tax Act and its impact on Principles of Natural Justice

I. INTRODUCTION

The introduction of the faceless assessment regime marks a paradigm shift in the administration of direct tax laws in India. Instituted through Section 144B of the Income Tax Act, 1961, by way of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, this scheme endeavours to create a transparent, efficient, and accountable tax administration system by eliminating the human interface between taxpayers and tax authorities. While the objectives are laudable, the implementation raises fundamental questions concerning the adherence to principles of natural justice, which form the bedrock of administrative law in India.

The Scheme aims at enhancing the efficiency, transparency and accountability in the income tax assessment procedure, and is a major step towards achieving ‘Transparent Taxation- Honouring the Honest’, a platform launched by the Prime Minister in 2020. Phase I of the Scheme was inaugurated in October, 2019 and the Scheme has been fully implemented from August, 2020.

II. THE FACELESS ASSESSMENT SCHEME:

2.1 Objectives

The faceless assessment scheme was born out of a recognition that the traditional assessment process was susceptible to corruption, harassment, and arbitrary exercise of power. The Central Board of Direct Taxes (CBDT), through Notification No. 51/2020 dated August 12, 2020, introduced the “Faceless Assessment Scheme, 2019,” which was subsequently given statutory recognition under Section 144B.

The stated objectives include:

• Elimination of physical interface between assessees and assessing officers
• Introduction of dynamic jurisdiction to prevent influence
• Team-based assessment with automated allocation of cases
• Enhanced transparency and accountability through centralized electronic communication

2.2 Salient Features

The scheme operates on the following fundamental principles:

Automated Allocation: Cases are assigned through a computer-generated system to National Faceless Assessment Centre (NaFAC) units across India, ensuring random allocation without regard to territorial jurisdiction.

Electronic Communication: All notices, responses, submissions, and orders are exchanged exclusively through electronic mode via the designated portal.

Multi-Layered Review: The assessment involves multiple functionaries-Assessment Unit, Verification Unit, Technical Unit, and Review Unit-working independently without knowledge of the assessee’s identity.

Dynamic Jurisdiction: Unlike the traditional system, there is no fixed territorial jurisdiction, and cases may be transferred to any unit anywhere in India.

III. CONCEPT OF PRINCIPLES OF NATURAL JUSTICE:

Natural justice, described as “fairness writ large and juridically” by Lord Denning, embodies two cardinal principles:

3.1 Audi Alteram Partem (Right to be Heard)

This principle mandates that no person shall be condemned unheard. It encompasses:

• The right to notice of the case against oneself
• The right to present one’s case effectively
• The right to rebut adverse material
• The right to a personal hearing where necessary

3.2 Nemo Judex In Causa Sua (Rule Against Bias)

This principle prohibits any person from being a judge in their own cause and ensures:

• Absence of personal or pecuniary bias
• Institutional independence
• Objective decision-making

In the seminal case of Maneka Gandhi v. Union of India (1978) 1 SCC 248, the Supreme Court held that Article 21 of the Constitution encompasses the right to fair procedure, and any procedure depriving a person of their rights must be “right, just and fair.”

IV. INTERFACE BETWEEN FACELESS ASSESSMENT AND NATURAL JUSTICE

4.1 Compromise of the Right to Effective Hearing

Limited Scope of Personal Hearing

Section 144B(7) provides for personal hearing “where a request is received from the assessee or otherwise.” However, the proviso restricts this right, stating that personal hearing may be granted through video conferencing or video telephony “to the extent technologically feasible.”

The Supreme Court in Andaman Timber Industries v. Commissioner of Central Excise (2015) 10 SCC 151 observed that personal hearing is not a mere formality but a substantive right that enables the party to effectively present their case. The faceless regime’s reliance on video conferencing, particularly given India’s digital infrastructure challenges, may substantially dilute this right.

Inability to Gauge and Address Concerns

Traditional assessment procedures allowed for interactive dialogue where an assessee could discern the assessing officer’s concerns, clarify misunderstandings promptly, and provide targeted explanations. The faceless system’s templated queries and standardized responses eliminate this nuanced communication, potentially leading to decisions based on incomplete understanding.

4.2 Opacity in Decision-Making Process

Multiple Anonymous Decision-Makers

The involvement of multiple units-Assessment, Verification, Technical, and Review-each contributing to the final order without the assessee’s knowledge of their identity or specific concerns, creates a layer of opacity. While this prevents corruption, it also makes it difficult for taxpayers to understand who is deciding their fate and on what specific basis.

In State of Orissa v. Dr. Binapani Dei AIR 1967 SC 1269, the Supreme Court held that “the affected party is entitled to know the reasons for the decision so that he may have the wherewithals to challenge the decision.”

Lack of Institutional Continuity

The dynamic jurisdiction model means different aspects of the same case may be examined by different officers across different locations. This fragmentation can result in:

• Loss of contextual understanding
• Repetitive queries
• Inconsistent approaches to similar issues
• Difficulty in maintaining a coherent narrative

4.3 Technological Barriers and Digital Divide

Access and Literacy Challenges

The presumption that all taxpayers possess adequate technological resources, digital literacy, and reliable internet connectivity is fundamentally flawed. The scheme disproportionately affects:

• Senior citizens unfamiliar with digital platforms
• Small taxpayers and professionals in rural or semi-urban areas
• Those without access to technological infrastructure

Technical Glitches and System Failures

Dependence on technology introduces risks of:

• Portal malfunctions preventing timely submissions
• Documents not uploading or being corrupted
• Notices not being properly delivered or received

In Kerala State Beverages (M&M) Pvt. Ltd. v. Assistant Commissioner (2022) 136 taxmann.com 217 (Kerala), the High Court recognized that technical difficulties on the portal should not prejudice taxpayers and extended time limits accordingly.

4.4 Inadequate Time for Response

The scheme prescribes fixed timelines for responses, which, while promoting efficiency, may be insufficient for complex cases requiring:

• Extensive documentation gathering
• Expert opinions
• Forensic analysis
• Cross-verification of voluminous records

The Supreme Court in Sahara India (Firm) v. Commissioner of Income Tax (2008) 14 SCC 151 emphasized that reasonable opportunity must mean adequate and effective opportunity, not merely technical compliance.

4.5 Standardization versus Individualization

Template-Based Queries

The system’s reliance on automated or standardized questionnaires may not capture the unique circumstances of individual cases. Tax matters often involve:

• Nuanced legal interpretations
• Industry-specific practices
• Complex factual matrices requiring detailed explanation

A one-size-fits-all approach may lead to generic responses that fail to address the actual issues or, conversely, to confusion about what is truly being questioned.

V. JUDICIAL RESPONSE TO FACELESS ASSESSMENT

5.1 Upholding the Scheme’s Validity

In Ashish Agarwal v. Deputy Commissioner of Income Tax (2022) 137 taxmann.com 90 (SC), the Supreme Court upheld the faceless assessment scheme as constitutionally valid, noting that it aimed to eliminate corruption and harassment.

Similarly, in Union of India v. Kamlesh Kumar Thakkar SLP (C) No. 13062/2022, the Court recognized the scheme as a beneficial reform intended to promote transparency.

5.2 Emphasizing Natural Justice Safeguards

However, courts have consistently emphasized that the scheme must operate within the constitutional framework of natural justice:

In ABC Papers Ltd. v. Deputy Commissioner of Income Tax (2021) 130 taxmann.com 213 (Delhi), the Delhi High Court held that despite the faceless nature, the assessing officer must provide a meaningful opportunity of hearing and consider all submissions made by the assessee.

The Madras High Court in Bharati Sharma v. National Faceless Assessment Centre (2021) 434 ITR 125 (Mad) observed that the faceless assessment cannot be used to bypass fundamental principles of natural justice and that adequate opportunity must be provided.

5.3 Corrective Measures

Courts have directed remedial actions where procedural fairness has been compromised:

• Extension of time limits due to technical difficulties
• Setting aside orders where representations were not considered
• Allowing additional opportunities for hearing where initial hearing was inadequate
• Directing personal hearings in complex matters

1. SAFEGUARDS AND MITIGATING MEASURES

6.1 Statutory Safeguards

The Income Tax Act provides certain protections:

Section 144B(6): Requires that before making any variation prejudicial to the assessee’s interest, a draft assessment order must be issued with an opportunity to respond.

Section 144B(7): Provides the right to request personal hearing.

Section 144C: For eligible cases, provides for reference to Dispute Resolution Panel (DRP).

Section 250: Right to appeal before the Commissioner (Appeals).

6.2 Administrative Guidelines

The CBDT has issued various circulars and instructions to ensure:

• Reasonable timelines for responses
• Technical support for portal-related issues
• Consideration of all submissions
• Recording of reasons for decisions

6.3 Recommended Enhancements

To strengthen natural justice compliance:

1. Mandatory Personal Hearing: In complex cases involving substantial factual disputes or significant tax demand, personal hearing should be mandatory, not discretionary.

2. Enhanced Timeline Flexibility: Provisions for extension of time on genuine grounds without requiring elaborate applications.

3. Improved Portal Infrastructure: Investment in robust technological infrastructure with 24/7 support.

4. Transparency in Communication: Clear identification of which unit is raising which query and why.

5. Speaking Orders: Detailed reasoning addressing each submission made by the assessee.

6. Digital Literacy Programs: Government-sponsored training for taxpayers, particularly senior citizens and rural taxpayers.

VII. BALANCING EFFICIENCY AND FAIRNESS

The faceless assessment scheme represents a genuine attempt to reform tax administration. However, efficiency cannot come at the cost of fairness. As observed by the Supreme Court in Union of India v. Tulsiram Patel (1985) 3 SCC 398, “Fairness in action is an essential part of the rule of law.”

The challenge lies in harmonizing the legitimate objectives of the scheme-eliminating corruption, reducing harassment, and improving efficiency-with the constitutional imperatives of natural justice. This requires:

Technological Inclusivity: Ensuring that digitalization does not become a barrier to justice.

Human Element: Recognizing that while systems can be faceless, justice cannot be mechanical.

Flexibility: Building discretion into the system to accommodate genuine cases requiring special consideration.

Accountability: Even in a faceless system, there must be mechanisms to hold decision-makers accountable for arbitrary or unreasoned decisions.

VIII. CONCLUSION

The faceless assessment scheme is a bold experiment in tax administration reform, driven by the laudable objective of creating a transparent, efficient, and corruption-free system. However, its implementation reveals inherent tensions with the fundamental principles of natural justice that have been the cornerstone of administrative law in India.

While the scheme has been judicially validated, its operation must be constantly monitored and refined to ensure that it does not become a tool for mechanical or unjust decision-making. The right to be heard is not merely a procedural formality but a substantive constitutional right that cannot be sacrificed at the altar of administrative convenience.

The true test of the faceless assessment regime will be whether it can deliver both efficiency and justice-whether it can be faceless in its mechanics while remaining human in its application. As the scheme evolves, continuous judicial oversight, administrative refinement, and legislative intervention may be necessary to strike the delicate balance between technological advancement and timeless principles of fairness.

The legal fraternity, tax administrators, and policymakers must work collaboratively to ensure that in creating a faceless system, we do not create a soulless one-that in eliminating human interface, we do not eliminate human consideration. Only then can the faceless assessment regime truly fulfil its promise of delivering tax justice in the digital age.