Satpal Sethi Vs ITO (ITAT Raipur)
No Show-Cause Notice, No Valid Assessment: ₹52.97 Lakh Disallowance Falls With the Order
Faceless Assessment Cannot Bypass a Fair Hearing
The Raipur Bench of the Income Tax Appellate Tribunal declared an assessment order non-est because the Assessing Officer had made a prejudicial variation without issuing the mandatory show-cause notice under Section 144B.
The disputed adjustment was a disallowance of ₹52,96,834 towards cost of acquisition/construction. The Tribunal found that the assessee had not been given an opportunity to explain why that variation should not be made.
Significantly, the Departmental Representative conceded that the record contained no show-cause notice concerning the proposed disallowance. The appeal was allowed on this procedural and legal ground, leaving the remaining issues academic.
Cost Disallowance Substantially Increased Assessed Income
The assessee appealed against the CIT(A), NFAC order dated 17 April 2026 for Assessment Year 2018-19.
The assessment computation reproduced in the Tribunal’s order showed returned income of ₹37,56,750. The AO disallowed cost of acquisition/construction amounting to ₹52,96,834, increasing the assessed income to ₹90,53,584.
In an additional ground, the assessee contended that the AO had rejected the valuation report without issuing a show-cause notice identifying the point on which it was ultimately rejected.
The challenge therefore concerned the absence of an effective opportunity to meet the basis of the adverse adjustment, together with non-compliance with the prescribed faceless assessment procedure.
A Separate Reopening Ground Was Not Pressed
The assessee had also raised an additional ground alleging that the reassessment was invalid because the AO had made no addition on the issues forming the reasons for reopening.
However, the representative expressly stated that this ground was not being pressed. The Tribunal dismissed it accordingly.
This distinction matters when citing the decision. The assessment was not invalidated on the ground that the original reopening issue resulted in no addition. The relief rested on failure to issue the mandatory show-cause notice before making the prejudicial variation.
Section 144B Requires Disclosure of the Proposed Variation
The Tribunal examined the procedure under Section 144B, including Section 144B(1)(xii)(b) as reproduced in the order.
Where a variation prejudicial to the assessee is proposed, the assessment unit must prepare and serve a show-cause notice stating that variation and calling upon the assessee to explain why it should not be made.
The Tribunal treated this requirement as mandatory. The proposed adjustment must be communicated before it becomes part of the final assessment.
In the present case, the assessee specifically demonstrated that no such notice had been issued concerning the ₹52,96,834 cost disallowance. The Revenue neither refuted the factual position nor produced evidence showing compliance.
Revenue Conceded the Absence of Notice
The Departmental Representative acknowledged that, according to the record, no show-cause notice had been issued before making the addition relating to cost of acquisition/construction.
That concession established the factual foundation of the assessee’s challenge.
The Tribunal held that whenever a proposed variation is prejudicial, the AO must give the assessee an opportunity to answer it. Failure to follow that obligation breached both Section 144B and the principles of natural justice.
The decision consequently turned on an admitted procedural omission rather than a contested question about whether a particular notice was sufficiently detailed.
High Court Decisions Reinforced the Hearing Requirement
The Tribunal relied upon Dhvanil Hamendra Reshamwala v. ITO, (2024) 8 NYPCTR 16, in which the Gujarat High Court addressed an assessment made without complying with the required faceless procedure and opportunity concerning adverse variations.
It also referred to Vivek Jaisingh Asher v. ITO, 162 taxmann.com 127 (Bom.). That decision emphasised that issuing a show-cause notice is not an empty formality: the affected person must know the grounds of the proposed action to answer them effectively.
Further reliance was placed on Piramal Enterprises Ltd. v. Addl./Joint/DCIT/ACIT/ITO, (2021) 129 taxmann.com 18 (Bom.), concerning observance of the hearing safeguards within the faceless assessment framework.
These authorities supported the Tribunal’s conclusion that procedural safeguards cannot be bypassed while imposing an adverse assessment.
Assessment Declared Non-est
The Tribunal held that the assessment had not been made in accordance with the mandatory procedure under Section 144B.
It concluded that the AO had failed to observe natural justice and declared the assessment order non-est in law. Once the assessment itself failed, the Tribunal treated the other grounds as academic and allowed the appeal.
The operative order did not expressly remand the matter to the AO, although some of the High Court decisions reproduced in it contained directions permitting further proceedings according to law.
Author’s Comments
The practical importance of the decision lies in the distinction between seeking information and notifying a proposed adverse adjustment. An assessee must receive an opportunity to address the actual basis on which a claim is proposed to be rejected.
Here, the complete absence of the relevant show-cause notice was admitted by the Revenue. That makes the factual foundation particularly clear.
The result should nevertheless be described accurately. The Tribunal did not uphold the valuation report or decide that the entire cost claim was allowable on merits. The assessment failed because the mandatory opportunity had not been provided. For practitioners, reviewing the notices against the final additions can therefore be as important as examining the substantive computation.
Cases Discussed
1. Vivek Jaisingh Asher v. ITO, 162 taxmann.com 127 (Bombay High Court)
2. Dhvanil Hamendra Reshamwala v. ITO, (2024) 8 NYPCTR 16 (Gujarat High Court)
3. Piramal Enterprises Ltd. v. Addl/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, (2021) 129 taxmann.com 18 (Bombay High Court)
FULL TEXT OF THE ORDER OF ITAT RAIPUR
The present appeal preferred by the assessee emanates from the order of the Ld.CIT(Appeals)/NFAC, NFAC dated 17.04.2026 for the assessment year 2018-19 as per the grounds of appeal on record.
2. That along with the Grounds of appeal, the assessee had filed additional grounds of appeal which reads as follows:
“Additional Ground of Appeal:
Ground No 1
“The reassessment order passed by the A.O is illegal, ab initio void inasmuch as no addition was made by the A.O on the issues forming part of reason for reopening, on the basis of which notice u/s.148 was issued. Ld.CIT(A) erred in confirming addition on the basis of illegal order.”
The very basis on which the Assessing Officer has formed his belief is legally unsustainable.
Ground No 2
“The Ld.CIT(A)/NFAC erred in upholding the disallowance when the AO had not issued any show cause notice challenging the point on which the valuation report was ultimately rejected -Violating principles of natural justice and the mandate of faceless assessment u/s.144B.”
3. At the very outset, the Ld. Counsel for the assessee submitted that he is not pressing additional ground of appeal No.1. Having heard the submissions, the additional ground of appeal No.1 is dismissed as not pressed.
4. The Ld. Counsel challenging the validity of the additions made in the assessment order, as per additional ground of appeal No.2 submitted that the mandate of Section 144B of the Income Tax Act, 1961 (for short ‘the Act’) had not been complied with. The relevant provisions of Section 144B of the Act is extracted as follows:
“144B. (1) Notwithstanding anything to the contrary contained in any other provision of this Act, the assessment, reassessment or recomputation under sub-section (3) of section 143 or under section 144 or under section 147, as the case may be, with respect to the cases referred to in sub-section (2), shall be made in a faceless manner as per the following procedure, namely:—
(i) the National Faceless Assessment Centre shall assign the case selected for the purposes of faceless assessment under this section to a specific assessment unit through an automated allocation system;
(ii) the National Faceless Assessment Centre shall intimate the assessee that assessment in his case shall be completed in accordance with the procedure laid down under this section;
(iii) a notice shall be served on the assessee, through the National Faceless Assessment Centre, under sub-section (2) of section 143 or under sub-section (1) of section 142 and the assessee may file his response to such notice within the date specified therein, to the National Faceless Assessment Centre which shall forward the same to the assessment unit;
(iv) where a case is assigned to the assessment unit, under clause (i), it may make a request through the National Faceless Assessment Centre for—
(a) obtaining such further information, documents or evidence from the assessee or any other person, as it may specify;
(b) conducting of enquiry or verification by verification unit;
(c) seeking technical assistance in respect of determination of arm’s length price, valuation of property, withdrawal of registration, approval, exemption or any other technical matter by referring to the technical unit;
(v) where a request under sub-clause (a) of clause (iv) has been initiated by the assessment unit, the National Faceless Assessment Centre shall serve appropriate notice or requisition on the assessee or any other person for obtaining the information, documents or evidence requisitioned by the assessment unit and the assessee or any other person, as the case may be, shall file his response to such notice within the time specified therein or such time as may be extended on the basis of an application in this regard, to the National Faceless Assessment Centre which shall forward the reply to the assessment unit;
(vi) where a request,—
(a) for conducting of enquiry or verification by the verification unit has been made by the assessment unit under sub-clause (b) of clause (iv), the request shall be assigned by the National Faceless Assessment Centre to a verification unit through an automated allocation system; or
(b) for reference to the technical unit has been made by the assessment unit under sub-clause (c) of clause (iv), the request shall be assigned by the National Faceless Assessment Centre to a technical unit through an automated allocation system;
(vii) the National Faceless Assessment Centre shall send the report received from the verification unit or the technical unit, as the case may be, based on the request referred to in clause (vi) to the concerned assessment unit;
(viii) where the assessee fails to comply with the notice served under clause (v) or notice issued under sub-section (1) of section 142 or the terms of notice issued under sub-section (2) of section 143, the National Faceless Assessment Centre shall intimate such failure to the assessment unit;
(ix) the assessment unit shall serve upon such assessee, as referred to in clause (viii), a notice, through the National Faceless Assessment Centre, under section 144, giving him an opportunity to show-cause on a date and time as specified in such notice as to why the assessment in his case should not be completed to the best of its judgment;
(x) the assessee shall, within the time specified in the notice referred to in clause (ix) or such time as may be extended on the basis of an application in this regard, file his response to the National Faceless Assessment Centre which shall forward the same to the assessment unit;
(xi) where the assessee fails to file response to the notice served under clause (ix) within the time specified therein or within the extended time, if any, the National Faceless Assessment Centre shall intimate such failure to the assessment unit;
(xii) the assessment unit shall, after taking into account all the relevant material available on the record, prepare, in writing,—
(a) an income or loss determination proposal, where no variation prejudicial to assessee is proposed and send a copy of such income or loss determination proposal to the National Faceless Assessment Centre; or
(b) in any other case, a show cause notice stating the variations prejudicial to the interest of assessee proposed to be made to the income of the assessee and calling upon him to submit as to why the proposed variation should not be made and serve such show cause notice, on the assessee, through the National Faceless Assessment Centre;”
Therefore, in the aforesaid provision, it is mandatory that show cause notice has to be issued to the assessee stating variations prejudicial to the interest of the assessee proposed to be made to the income of the assessee.
In this regard, the Ld. Counsel further demonstrates that in the assessment order, the additions had been made as follows:
| Sr. No. | Description | Amount (in INR) |
|---|---|---|
| 1 | Income as per Return of income filed | 37,56,750/- |
| 2. | Income as computed u/s. 143(1)(a) | – |
| 3. | Variation in respect of disallowance of cost of Acquisition/construction | 52,96,834/- |
| 4. | Total Income determined | 90,53,584/- |
The Ld. Counsel further contended that regarding disallowance cost of acquisition/construction of Rs.52,96,834/-, no show cause notice has been issued to the assessee.
5. The Ld. Sr. DR could not refute these facts on record and nor could submit any evidence to suggest that any show cause notice has been issued to the assessee regarding proposed variations made in the case of the assessee. Rather, he conceded that as per record, no show cause notice had been issued to the assessee before making addition regarding cost of acquisition/construction as emanated in the assessment order.
6. Further, it is clear from reading of Section 144B of the Act that the assessee is required to be given an opportunity in case of variation as proposed in the draft assessment order upon its examination by the NFAC and whenever, such variation proposed is prejudicial to the interest of the assessee, the obligation is on the A.O to serve show cause notice calling upon him to show cause as to why proposed variation should not be made, failing which, would make assessment non-est as per law.
7. We find that the Hon’ble High Court of Gujarat in the case of Dhvanil Hamendra Reshamwala Vs. ITO (2024) 8 NYPCTR 16 on this issue has held and observed as follows:
“6. …………………. that the final assessment order under Section 147 read with Section 144B of the Act, has been passed without providing a copy of draft assessment order as required under Section 144B(xxi)……”
**** **** **** **** ****
9…………….. The final assessment order is not made in accordance with the procedure envisaged under section 144 (xvi) (b) of the act as in spite of the variation being prejudicial to the assessee, no opportunity has been given to the assessee by serving show cause notice along with draft assessment order calling upon him to show cause as to why the proposed variation should not be made. Thus, we have no doubt in holding that the impugned order of assessment dated 07.04.2021 is invalid and non-est, passed in gross violation of principles of natural justice as well as mandatory provision in the form of section 144B of the act. In such circumstances referred to above, we are left with no other option but to quash the assessment order and remit the matter to the Assessing Officer.”
10. In light of the aforesaid settled legal position and in the facts and circumstances of the case, the impugned final assessment order dated 30.03.2022 issued by the respondent authorities is hereby declared as non-est and is quashed and set aside……..”
8. Further, the Hon’ble High Court of Bombay in the case of Vivek Jaisingh Asher Vs. Income Tax Officer, 162 taxmann.com 127 (Bom.) while observing that the very show cause notice for proposed additions was defective so to the fact that the assessee would be totally unaware of the grounds which prompted the A.O to arrive at prima facie conclusion and issue show cause notice, in such scenario, impugned assessment order was quashed/cancelled/set-aside. Relevant paras are extracted as follows:
“9. The courts have time and again held that issuance of show cause notice is not an empty formality. Its purpose is to give reasonable opportunity to the affected persons to effectively deal with the allegations in the show cause notice. In our view, even the show cause notice dated 23 rd August 2022 is defective in as much as even though it had reference to Section 56(2)(x) of the Act, it did not mention whether the Assessing Officer proposed to treat the stamp duty value as deemed income of assessee under clause (a) or clause (b) of Section 56(2)(x) of the Act. This is because both are separate provisions and under either of these two clauses the stamp duty value could be treated as deemed income. By not specifying whether Section 56(2)(x)(a) or Section 56(2)(x)(b) of the Act was applicable, the A.O. first of all has not given reasonable opportunity of showing cause to the assessee. Assessee would be totally unaware of the grounds which had prompted the A.O. to arrive at a prima facie conclusion and issue show cause notice. The power that the A.O. had was required to be executed properly. Moreover in the assessment order dated 29th September 2022 that is impugned in the petition, the A.O. has chosen to give Section 56(2)(x), a go by and treat the stamp duty value of the flat at Rs.11,68,99,000/- as from unexplained source under Section 69 of the Act. There is no reference to Section 56(2)(x) of the Act in the operative part of the order dated 29th September 2022.
10. In the circumstances, the impugned order dated 29th September 2022 cannot be sustained. The allegations in the affidavit in reply that assessee has claimed tenancy rights as colourable device in order to get an exemption under the provisions of the Act and evade the tax liability also cannot be accepted because if the A.O. had evidence to that effect the same should have been stated in the show cause notice dated 23rd August 2022.
11. In the circumstances, Rule made absolute in terms of prayer clause – (a) which reads as under:
(a) that this Hon’ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the case leading to the passing of the assessment order u/s. 143(3) read with Section 144B of the Act dated 29th September, 2022 (Ex. ‘N’) and after going through the same and examining the question of legality thereof to quash, cancel and set aside the impugned assessment order passed u/s. 143(3) read with Section 144B of the Act dated 29th September, 2022 (Ex. ‘N’).”
9. Further, the Hon’ble High Court of Bombay in the case of Piramal Enterprises Ltd. Vs. Addl/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, (2021) 129 taxmann.com 18 (Bom.) on this issue has held and observed as follows:
“65. Sub-section (9) of section 144B declares that assessment made under section 143(3) or under section 144(4) referable to sub-section (2) other than sub-section (8) on or after 1st day of April, 2021 shall be non-est if such assessment is not made in accordance with the procedure laid down under section 144B. There is a telling/pronounced rigour, to follow the procedure under section 144B, lest the assessment would be non-est.
66. Going by the provisions under section 144B, when hearing has been envisioned and incorporated, it is imperative to observe principles of natural justice as stipulated.
67. In the present matter, it is not disputed that show-cause notice had been issued to the petitioner on 25/03/2021 to which the petitioner has responded to from time to time vide letters dated 26th March, 2021, 28th March, 2021 requesting for personal hearing and by sending responses dated 7th and 8th April, 2021. There is nothing to reflect upon that after receipt of response to show-cause-notice dated 26th March, 2021, 28th March, 2021, 7th and 8th April, 2021, prescribed procedure has been followed. The petitioner appears to be losing out on an opportunity as would be available to it under clause (xxiii)(b) read with sub section (7) sub-clause (vii).
68. In the circumstances, when an assessee approaches with response to show cause notice, the request made by an assessee, as referred to in clause (vii) of sub section 7 of section 144B, would have to be taken into account and it would not be proper, looking at the prescribed procedure with strong undercurrent to have hearing on a request after notice, to say that petitioner would have opportunity pursuant to section 144C in the present matter, would intercept operation of the scheme contained under section 144B.
69. Foregoing discussion leads to that impugned draft assessment order dated 22.04.2021 is unsustainable. The petition is allowed in terms of prayer clause (a) leaving it open to the authorities to carry forward the process in accordance with section 144B of the Income Tax Act, 1961 by giving opportunity of hearing to the petitioner.
In favour of assessee.”
10. That upon examination of the documents on record and as per the bindings dictate of the judicial pronouncements afore-stated, admittedly no show cause notice had been issued by the A.O to the assessee before making addition as per assessment order in the case of the assessee. Therefore, assessment made is not in accordance with the mandatory procedure laid down u/s.144B of the Act. The A.O had not followed principles of natural justice and the binding dictate of the said provisions. The A.O, therefore, ceases to possess any valid inherent jurisdiction to pass assessment order and such assessment order is declared as non-est as per law.
11. That once assessment order itself is non-est as per law, therefore, question of any subsequent proceedings does not arise at all. Rest other grounds stand academic only.
12. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 6th October, 2026.
