Gujarat HC Quashed Income Tax Assessment Order for Ignoring Reply to SCN

Sharanam Square LLP Vs Assessment Unit (Gujarat High Court)

The writ petition before the Gujarat High Court challenged an assessment order dated 26 March 2024 passed under Section 143(3) read with Section 144B of the Income Tax Act, 1961 for Assessment Year 2022–23. The petitioner contended that the assessment order, which resulted in a tax demand of ₹38,13,93,748, was passed in gross violation of the principles of natural justice as the detailed reply dated 25 March 2024 to the show cause notice had not been considered at all.

The petitioner, engaged in the business of construction and incorporated during the year under consideration, had filed its return of income on 31 July 2022 declaring income of ₹23,200. The case was selected for scrutiny through notice under Section 143(2) dated 1 June 2023, followed by a notice under Section 142(1) dated 9 October 2023 seeking details, which were furnished on 24 October 2023. After a gap of several months, another notice under Section 142(1) dated 10 March 2024 sought further details regarding investments and unsecured loans. Subsequently, by a notice dated 18 March 2024, the compliance date was advanced due to impending limitation. A show cause notice dated 22 March 2024 proposed an addition of ₹39,43,27,000 under Section 69 in respect of property purchased by the petitioner.

The petitioner responded on 25 March 2024 with a detailed explanation stating that the land was purchased from Ashima Limited for construction of a commercial building in the ordinary course of its business, and that full details of the transaction, sources of funds, and supporting documents had been disclosed in the annual accounts. Despite this, the assessment order dated 26 March 2024 determined the petitioner’s income at ₹39,43,50,220, without dealing with or referring to the reply dated 25 March 2024.

Before the High Court, the petitioner argued that the assessment order was passed without application of mind and without considering the explanation furnished, thereby violating the principles of natural justice. The respondent, through an affidavit-in-reply, admitted that the reply dated 25 March 2024 was not considered due to technical glitches between the Income Tax Business Application (ITBA) system and the e-filing portal, which prevented the reply from being visible to the Assessing Officer as well as to the Review Unit. It was contended that the omission was due to circumstances beyond the control of the Assessing Officer and that sufficient opportunities had otherwise been granted.

The Court noted that it was an undisputed position that the reply dated 25 March 2024 had not been taken into account while framing the assessment. The Court held that once it is admitted that a reply filed by the assessee was not considered, the assessment order cannot be sustained, irrespective of the reasons cited for such non-consideration. The failure to consider the reply amounted to a clear breach of the principles of natural justice.

Accordingly, the High Court quashed and set aside the assessment order dated 26 March 2024 and remanded the matter to the respondent authorities. The Assessing Officer was directed to pass a fresh assessment order after considering the petitioner’s reply and after granting a proper opportunity of hearing, in compliance with the principles of natural justice, within a period of twelve weeks from receipt of the court’s order. The petition was allowed, and no order as to costs was made.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. Learned Senior Standing Counsel Mr. Dev Patel for the respondent has tendered affidavit on behalf of respondent No.2, the same is ordered to be taken on record.

2. The petitioner, by way of this petition under Article 226 of the Constitution of India, challenges the Assessment Order dated 26.03.2024, passed by the respondent under Section 143(3) read with Section 144B of the Income Tax Act, 1961 (for short “the Act”), for the Assessment Year 2022-23 (hereinafter referred to as “the year under consideration”) on the ground of gross violation of the principles of natural justice by completely overlooking the reply dated 25.03.2024, furnished by the petitioner in response to the Show Cause Notice, which, in turn, has resulted into demand of Rs.38,13,93,748/-.

3. RULE. Learned Senior Standing Counsel Mr. Dev Patel, waives service of notice of rule on behalf of the respondent No.2. Since short issue is involved, the petition is taken up for final disposal today.

4. The brief facts leading to filing of the present writ petition are as under:

4.1 The petitioner is engaged in the business of construction. The petitioner was incorporated during the year under consideration itself. The petitioner filed its return of income for the year under consideration on 31.07.2022 declaring total income at Rs.23,200/-.

4.2 The case of the petitioner for the year under consideration was selected for scrutiny by issuance of statutory notice dated 01.06.2023 under Section 143(2) of the Act. Later, the respondent vide notice dated 09.10.2023 issued under Section 142(1) of the Act, called upon the petitioner to furnish various details in relation to the assessment proceedings for the year under consideration. The petitioner, vide letter dated 24.10.2023, furnished all such details.

4.3 It is the case of the petitioner that for the period of five months, nothing was heard from the respondent and vide notice dated 10.03.2024 issued under Section 142(1) of the Act, the petitioner was called upon to furnish certain details in relation to the “investments” and “unsecured loans” duly reflected in the balance sheet.

4.4 Another notice dated 18.03.2024 was also issued, wherein, it was stated that “compliance date” prescribed in the earlier notice (i.e. compliance date being 25.03.2024) may be read as “20.03.2024” instead of “25.03.2024” as the issue was getting time barred on 31.03.2024. A Show Cause Notice dated 22.03.2024 was issued to the petitioner calling upon him to show cause as to why an addition of Rs.39,43,27,000/-should not be made under Section 69 of the Act in respect of “the property purchased by the petitioner”.

4.5 The petitioner, vide letter dated 25.03.2024, furnished a detailed response to the aforesaid Show Cause Notice issued by the respondent stating therein that the petitioner was engaged in the business of construction and hence had purchased land of Rs.39,43,27,500/- from Ashima Limited for the purpose of construction of a commercial building and the details of which were furnished by the petitioner in the annual accounts, including the source of payment of purchase consideration with other documentary evidences.

4.6 Thereafter, the respondent framed the assessment for the year under consideration vide order dated 26.03.2024 under Section 143(3) read with Section 144B of the Act, wherein, income of the petitioner for the year under consideration was determined at Rs.39,43,50,220/- as against the returned income of Rs.23,220/-.

5 At the outset, learned Senior Standing Counsel Mr. Tushar Hemani appearing with learned advocate Ms. Vaibhavi Parikh for the petitioner has submitted that the impugned Assessment Order is required to be quashed and set aside as the same is passed without application of mind to the material furnished by the petitioner in his reply dated 25.03.2024.

5.1 It is contended that it is well settled position of law that the principles of natural justice are always to be followed and that no adverse order must be passed against any person unless such person is afforded a reasonable opportunity of being heard, implying that whenever any adverse order is likely to be passed, the person concerned must be afforded a reasonable opportunity of being heard prior to passing of such adverse order. Thus, it is urged that the petition may be allowed by setting aside the impugned order.

6. Per Contra, learned Senior Standing Counsel Mr. Dev Patel for the respondent, while placing reliance on the affidavit-in-reply, has submitted that due to technical glitches between the Income Tax Business Application (ITBA) system and the e-filing portal, the reply filed by the petitioner on 25.03.2024 was not available and hence its contents were not taken into consideration and the case was returned to the Assessing Officer on 26.03.2024 for passing of the Assessment Order. Thus, it is urged that due to the circumstances beyond the control of the Assessing Officer, the reply filed by the petitioner was not considered.

7. We have heard the learned advocates appearing for the respective parties.

7.1 The case of the petitioner mentioned hereinabove is that the impugned order has been passed without concerning the reply dated 25.03.2024 filed by the petitioner explaining his income. We may, at this stage, incorporate the averments made in the affidavit-in-reply dated 20.12.2025 passed by the respondent – Assessing Officer. The same is as under:

“3 It is submitted that the main contention of the petitioner is with regards to the non-consideration of the reply filed on 25.03.2024 during the assessment proceedings. In this regard it is submitted that the dates and events leading to the passing of the Impugned Order dated 26.03.2024 is as under:

It is further submitted that the Assessment Order has reflected the details of the opportunity given at paragraph 2 thereto as under:

From the perusal of the aforesaid facts, it is submitted from 10.03.2024 onwards, the petitioner was given sufficient opportunity to explain the source of the transactions, however, the petitioner did not avail those opportunities within the stipulated time. It is submitted that the petitioner was fully aware of the issues under scrutiny since the selection of the case.

It is further submitted that during the end of March, the Assessing Officer is under statutory obligation to complete time-barring assessments by 31st March. It is submitted that as per ITBA system records, as per the show-cause notice dated 22.03.2024, the petitioner was required to furnish a reply on or before 25.03.2024 at 10:15 AM. It is submitted that despite being aware of the same, the petitioner chose to file the reply at the last moment

It is submitted that in normal circumstances, replies filed by assessee are duly examined before passing assessment orders. However, in the present case, due to technical glitches between the ITBA system and the e-filing portal, the reply filed by the petitioner on 25.03.2024 was not visible / reflected to the Assessing Officer. It is further submitted that technical glitch in accessing the reply is further indicative of the fact that even during the review proceedings, the Review Unit also did not flag the presence of the said reply. Consequently, the case was returned to < the Assessing Officer on 26.03.2024 for passing of the assessment order and till that time the reply was not available on the IT’BA system. Accordingly, the assessment order was passed.

4. In view of what is stated hereinabove, it is submitted that solely due to technical glitches beyond the control of the Assessing Officer, the reply was not visible / reflected to the Assessing Officer and therefore it could not be considered. It is submitted that otherwise, the Assessing Officer has granted sufficient opportunity of hearing to the petitioner and therefore there is no violation of the principles of natural justice as alleged by the petitioner.”

8. Thus, in view of the undisputed fact that the reply of the petitioner dated 25.03.2024 has not been considered, the impugned Assessment Order dated 26.03.2024, passed by the respondent under Section 143(3) read with Section 144B of the Income Tax Act,1961, is hereby quashed and set aside. The matter is remanded to the respondent authorities to pass a fresh order after considering the reply filed by the petitioner. Fresh order shall be passed by complying the principles of natural justice, after hearing the petitioner, within a period of 12 weeks from the date of receipt of copy of this order.

9. The petition is allowed, accordingly. Rule is made absolute to the aforesaid extent. No order as to costs.