Income Tax Order Invalid if SCN Lacks Response Time Limit & Shows Pre-determination

Varadarajaperumal Pradeepkumar Vs Income Tax Officer (Madras High Court)

Income Tax Assessment Order Invalid if SCN Lacked Time Limit for Response, Invalid Service of Assessment Order, & Order Suffers from Vice of Pre-Determination

In the case of Varadarajaperumal Pradeepkumar versus the Income Tax Officer, the Madras High Court dealt with a writ petition challenging an income tax assessment order dated December 29, 2019, for the assessment year 2017-18. The petitioner argued that the order was invalid due to lack of proper notice and pre-determination of the issue, making it unconstitutional.

Key Events and Background:

Business Operations:

• The petitioner, Varadarajaperumal Pradeepkumar, was a distributor for M/s. Bharathi Telemedical Ltd.’s Direct to Home (DTH) services under the trade name M/s. Accurate Enterprises during the relevant assessment year.
• During the financial year 2016-17, the Indian government demonetized Rs. 1000 and Rs. 500 currency notes on November 8, 2016, and allowed their exchange until December 30, 2016.

Scrutiny and Notices:

• For the assessment year 2017-18, the petitioner filed income returns on November 1, 2017.
• The petitioner’s case was selected for complete scrutiny under the Computer-Assisted Scrutiny Selection (CASS).
• On July 30, 2019, a notice under Section 142(1) of the Income Tax Act was issued, requiring the petitioner to provide various financial documents and bank statements.

Petitioner’s Compliance:

• The petitioner appeared before the tax authorities on August 22, 2019, and December 10, 2020, submitting the required documents, including cash deposit statements for the period during demonetization.

Assessment Order and Refund Adjustment:

• On March 17, 2021, the petitioner received an intimation under Section 245 of the Income Tax Act, indicating that a refund for the assessment year 2020-21 would be adjusted against an outstanding tax demand.
• The petitioner then discovered an assessment order dated December 29, 2019, had been issued and communicated only to the petitioner’s Chartered Accountant via email.

Grounds for Challenging the Order:

Improper Notice and Pre-determination:

• The petitioner argued that the show cause notice dated December 17, 2019, did not specify any proposal but was a pre-determined conclusion treating the cash deposits as unexplained income. This violated principles of natural justice and fairness as outlined in Article 14 of the Indian Constitution.
• The show cause notice also lacked a time limit for the petitioner to respond, rendering it defective.

Invalid Service of Order:

• The assessment order was sent only to the email address of the petitioner’s Chartered Accountant, which had not been actively used for a long time, resulting in the petitioner not being aware of the assessment order until much later.

Errors in Assessment:

• One of the bank accounts considered for unexplained income, Current Account No. 101697440267, was claimed to belong to the Electricity Board, not the petitioner.

Court’s Analysis and Decision:

Assessment of Show Cause Notice:

• The court reviewed the show cause notice and found it to be pre-determined, as it conclusively stated that the cash deposits would be treated as unexplained income, without offering a genuine opportunity for the petitioner to respond.
• The court cited the Supreme Court case Siemens Ltd. v. State of Maharashtra, which held that notices issued with pre-determined conclusions are arbitrary and violate due process.

Invalid Service of Order:

• The court deemed the service of the assessment order to the Chartered Accountant’s email as invalid, emphasizing that it was not properly communicated to the petitioner.
• It was highlighted that the petitioner was unaware of the assessment order until the intimation under Section 245 was received.

Court’s Directive:

• The court set aside the impugned assessment order dated December 29, 2019.
• The petitioner was instructed to submit objections within eight weeks from the date of receiving a copy of the court’s order, treating the assessment order as a show cause notice.
• If the objections were not filed within the specified period, the impugned order would be restored.
• No costs were imposed, and the connected miscellaneous petitions were closed.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

The present writ petition is filed challenging the impugned order dated 29.12.2019 for the assessment year 2017-18.

2. During the relevant assessment year the petitioner carried on business as a distributor of M/s. Bharathi Telemedical Ltd. of its Direct to Home (DTH) services, under the name and style of M/s. Accurate Enterprises, appropriator concern. During the financial year 20 16-17, the Central Government brought out the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 on 08.11.2016, cancelling the legal tender status of Rs. 1000 and Rs.500 denomination currency notes with effect from 31.12.2016. The Central Government enabled exchange of Demonetized Currency Notes between 09.11.2016 and 30.12.2016 in Banks and Post Offices. For the assessment year 2017-18, corresponding to the Financial Year 2016-17, the petitioner filed its return of income under the Income Tax Act, on 01.11.2017. The petitioner’s case was selected for Complete Scrutiny under CASS for the assessment year 2017-18. A notice dated 30.07.2019 was issued by the respondent under Sec. 142(1) of the Income Tax Act, calling upon the petitioner to furnish ce Sheet, Profit & Lost account, assessment orders passed under the Income Tax Act for the last three years, details of the various Bank Accounts maintained during the financial years 2015-16 and 2016-17, Bank statements, etc.

2.1. The petitioner appeared before the respondent on 22.08.2019 and furnished copies of purchase / sales books / accounts for 2015-16 and 2016-17, apart from details of Bank accounts in the name of M/s .Accurate Enterprises and in the name of the petitioner. The petitioner appeared before the respondent on 10.12.2020. The petitioner was required to furnish statements of the cash deposit effected during the financial year 20 16-17, in the bank account standing in the name of M/s. Accurate Enterprises and in the name of the petitioner with specific reference to cash deposits of demonetized currency during the period 09.11.2016 to 30.12.2016. The respondent also sought for explanation in relation to a Current Account No.101697440267. It is submitted that the petitioner appeared before the respondent on 23.12.2020 and submitted statements of cash deposit in the above two accounts namely M/s. Accurate Enterprises and the account in the name of the petitioner.

3. On 17.03.2021, the petitioner was served with an intimation under Sec.245 of the I.T. Act informing that the refund for assessment year 2020-21 is proposed to be adjusted against an outstanding demand. The petitioner then approached the respondent to enquire the reasons / basis for the adjustment demand. The petitioner was informed that an assessment order dated 29.12.2019 was passed for the assessment year 2017-18 and taxes dues in terms thereof was adjusted. When the respondent was questioned about the service of the order, it was informed that the assessment order was sent to the petitioner’s Chartered Accountant’s mail address, a copy of impugned order of assessment was handed over to the petitioner. The petitioner on perusal of the assessment order dated 29.12.2019 found that the respondent based on alleged information concluded that the petitioner had made cash deposits of a sum of Rs.4,22,84,000.00/- from midnight of 08.11.2016 to 30.12.2016 in the account held with State Bank of India, MKB Nagar Branch, Chennai – 39, which was treated as unexplained income and assessed under the Head “Income from Other Sources” in terms of Section 69 of come Tax Act. Enquiries with the Chartered Accountant revealed that the said e-mail address is not in use for a long time.

4. The challenge to the impugned order is inter-alia on the following grounds viz.,

a)Show cause notice dated 17.12.2019 though it is titled show cause notice, is really not in the realm of show cause notice for it does not contain any proposal but clearly reflects predetermination on the part of the respondent which would be evident from the fact that it has been conclusively found that the sale of the Equity Share would amount to unexplained income and taxed accordingly.

b) The impugned order dated 29.12.2019 was served only on the Chartered Accountant who had failed to communicate the same to the The petitioner became aware of the impugned assessment order only when the petitioner was served with an intimation dated 17.03.2021 under Section 245 of the Act proposing adjustment of the refund due to the petitioners with regard to the liability for the assessment year 2017-18. At no point of time in the course of assessment endings relating to 2017-18, Chartered Accountant had accompanied the petitioner before the respondent nor his e-mail address furnished for service of assessment order. Therefore the alleged service of the assessment order to the e-mail address of petitioner Chartered Accountant is invalid.

c) Importantly, it was submitted that one of the Bank Accounts , Current Account No.101697440267 of State Bank of India, MKB Nagar Branch, Chennai-39, which has been treated as unexplained income in the hands of the petitioner does not relate to the petitioner instead the said account is related to the Electricity Board. Thus, the impugned order of assessment suffers from error apparent on the face of the record.

5. To the contrary, the learned counsel for the respondent would submit that it is the address of the Chartered Accountant which is found in the assessee profile in the portal and therefore one cannot find fault with the service of the notice as well as the assessment order.

5.1. Further, even prior to the notice dated 17.12.2019 there were notices issued under Section 143(2) and only in view of the fact that the petitioner had not responded that the present show cause notice dated 17.12.2019 was issued in the manner in which it was done followed by the passing of the impugned order.

5.2. To appreciate the submission of the petitioner that the Show Cause Notice and the consequential order of assessment suffers from the vice of pre-determination, it would be relevant to extract the show cause notice which reads as under :

“It is noticed from the database of the department there exist an amount of Rs.4,22,83,715 and sale of equity share is Rs.37,000/- since there is no explanation offered why the same should not treated unexplained investment for the relevant period under consideration and taxed accordingly.”

5.3. From a reading of the above show cause notice it appears to me that though titled as Show Cause Notice the submission of the learned counsel for the petitioner that it is really not in the realm of show cause notice but one where it suffers from the vice of pre-determination has merit. Any order which suffers from the vice of pre-determination is arbitrary and would thereby fall foul of Article 14 of the Constitution of In this regard, it may be relevant to rely on the judgment in the case of Siemens Ltd v. State of Maharashtra and others reported in (2006) 12 SCC 33, wherein, it was held that whenever there is a demand, the same may no longer be in the realm of notice and would suffer from the vice of pre-determination. The relevant portions reads as follows:

”9. Although ordinarily a writ court may not exercise its discretionary jurisdiction in entertaining a writ petition questioning a notice to show cause unless the same inter alia appears to have been without jurisdiction as has been held by this Court in some decisions including State of Uttar Pradesh v. Brahm Datt Sharma and Anr. AIR 1987 SC 943, Special Director and Another v. Mohd. Ghulam Ghouse and Another, (2004) 3 SCC 440 and Union of India and Another v. Kunisetty Satyanarayana, 2006 (12) SCALE 262], but the question herein has to be considered from a different angle, viz, when a notice is issued with pre-meditation, a writ petition would be maintainable. In such an event, even if the courts directs the statutory authority to hear the matter afresh, ordinarily such hearing would not yield any fruitful purpose [See K.I. Shephard and Others v. Union of India and Others (1987) 4 SCC 431 : AIR 1988 SC 686]. It is evident in the instant case that the respondent has clearly made up its mind. It explicitly said so both in the counter affidavit as also in its purported show cause.

10. The said principle has been followed by this Court in V. C. Banaras Hindu University and Ors. v. Shrikant, stating:

”48. The Vice Chancellor appears to have made up his mind to impose the punishment of dismissal on the Respondent herein. A post decisional hearing given by the High Court was illusory in this case.

49. In K.I. Shephard & Ors. etc. etc. v. Union of India & Ors. [AIR 1988 SC 686], this Court held :

“It is common experience that once a decision has been taken, there is tendency to uphold it and a representation may not really yield any fruitful purpose.”

11. A bare perusal of the order impugned before the High Court as also the statements made before us in the counter affidavit filed by the respondents, we are satisfied that the statutory authority has already applied its mind and has formed an opinion as regards the liability or otherwise of the appellant. If in passing the order the respondent has already determined the liability of the appellant and the only question which remains for its consideration is quantification thereof, the same does not remain in the realm of a show cause notice. The writ petition, in our opinion, was maintainable.”

6. Further, the show cause notice does not even indicate the time limit within which the assessee / petitioner is required to respond to the The show cause notice is bad the order of assessment thus stands vitiated.

7. At this stage, the learned Senior Standing Counsel for the Respondent would submit that cost must be imposed to the petitioner, which was agreed to by the counsel for the petitioner.

8. Considering the submissions of both sides and the facts of the case, this Court is inclined to set aside the impugned order. The petitioner shall submit its objection within a period of 8 weeks from the date of receipt of a copy of this order by treating the assessment order as show cause notice. The Respondent shall thereafter proceed to complete assessment in accordance with law. If the objections are not filed within 8 weeks from the date of receipt of a copy of this order, the impugned order of assessment dated 29.12.2019 shall stands restored.

9. The writ petition is disposed of on the above terms. No Costs. Consequently, connected miscellaneous petitions are closed.