Case Law Details
Nainraj Enterprises Pvt. Ltd. Vs DCIT (Bombay High Court)
The Bombay High Court recently delivered a significant judgment in the case of Nainraj Enterprises Pvt. Ltd. vs. DCIT, addressing the validity of reassessment notices issued under the Income Tax Act. The court ruled in favor of Nainraj Enterprises, setting aside the notices issued by the DCIT, which were found to be in violation of the procedural requirements established by law.
Background
Nainraj Enterprises Pvt. Ltd. filed a petition under Article 226 of the Indian Constitution, challenging the notice issued on April 10, 2024, by the DCIT under Section 148 of the Income Tax Act. The petitioner contended that the notice and the preceding order under Section 148A(d) were issued without proper jurisdiction, violating the provisions of Section 151A of the Income Tax Act which mandates a faceless assessment process.
Legal Provisions Involved
- Section 148 of the Income Tax Act: Pertains to the issuance of notice for reassessment of income.
- Section 148A(d): Requires the Assessing Officer to provide an opportunity to the assessee to explain why the notice should not be issued.
- Section 151A: Introduces the faceless assessment scheme, aimed at eliminating the interface between taxpayers and the tax authorities, thereby ensuring transparency and efficiency.
Petitioner’s Argument
The petitioner argued that the notice issued by the Jurisdictional Assessing Officer (JAO) was invalid as it contravened the faceless assessment scheme under Section 151A. The petitioner’s counsel cited the precedent set by the Division Bench of the Bombay High Court in Hexaware Technology Ltd. vs. ACIT, where a similar notice was invalidated due to non-compliance with Section 151A.
Court’s Observations
The court noted the following key points:
1. Non-Compliance with Section 151A: The JAO issued the notice despite the mandatory requirement of automated, faceless allocation of cases, as stipulated by the Central Board of Direct Taxes (CBDT) notification dated March 29, 2022.
2. Precedent from Hexaware Technologies Ltd. Case: The court reiterated the importance of adhering to the faceless assessment scheme, underscoring that any deviation from this process renders the notice invalid.
3. Absence of Concurrent Jurisdiction: The court rejected the argument of concurrent jurisdiction between the JAO and the Faceless Assessing Officer (FAO), emphasizing that the faceless scheme must be exclusively followed.
Judgment
The Bombay High Court concluded that the notice issued under Section 148 by the JAO was invalid due to non-compliance with Section 151A’s faceless assessment mandate. Consequently, the court quashed the order dated April 10, 2024, under Section 148A(d) and the subsequent notice under Section 148.
Implications
This judgment reinforces the legal requirement for tax authorities to strictly follow the faceless assessment procedure. It serves as a critical reminder for both tax authorities and taxpayers about the significance of procedural compliance in tax assessments.
Conclusion
The Bombay High Court’s ruling in Nainraj Enterprises Pvt. Ltd. vs. DCIT is a landmark decision that underscores the importance of procedural adherence in the issuance of reassessment notices. By invalidating the notice due to non-compliance with the faceless assessment scheme, the court has set a precedent that enhances transparency and accountability in tax administration.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Rule, rule made returnable forthwith. Respondents waives service. By consent of the parties, heard finally.
2. This petition under Article 226 of the Constitution of India essentially prays for quashing and setting aside an order dated 10 April 2024 passed by respondent No.1 under Section 148A(d) of the Income Tax Act (for short “the IT Act”) and the consequent notice dated 10 April 2024 issued by respondent No.1 under Section 148 of the IT Act, re-opening the petitioner’s assessment. The substantive prayers as made in the petition are required to be noted which reads thus:
“(a) this Hon’ble Court be pleased to issue a Writ of Certiorari or a writ in the nature of Certiorari or any other writ, order or direction under Article 226 of the Constitution of India calling for the records pertaining to the Petitioner’s case and after going into the validity and legality thereof be pleased to quash and set aside (i) the impugned notice dated 10.04.2024 issued by the Respondent No.1(Exhibit “A”) and (ii) the impugned order dated 10.04.2024 passed by the Respondent No.1.(Exhibit “B”);
(b) this Hon’ble Court be pleased to issue a Writ of Mandamus or a writ in the nature of Mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India ordering and directing the Respondent to forthwith refrain from taking any steps or proceedings pursuant to and in furtherance of or in implementation of (i) the impugned notice dated 10.04.2024 issued by the Respondent No.1 (Exhibit “A”) and (ii) the impugned order dated 10.04.2024 passed by the Respondent No.1.(Exhibit “B”);
(c) this Hon’ble Court be pleased to issue a Writ of Prohibition or a writ in the nature of Prohibition or any other appropriate writ, order or direction under Article 226 of the Constitution of India prohibiting the Respondent No.1 from taking any further steps or proceedings pursuant to or in furtherance of or in implementation of the impugned notice dated 10.04.2024 (Exhibit “A”);
(d) The pending the hearing and final disposal of the above Petition, this Hon’ble Court be pleased to restrain the Respondent by themselves, their successors in office, subordinates, servants and agents by an interim order and injunction of this Hon’ble Court from taking any further steps or proceedings pursuant to or in furtherance of or in implementation of the impugned notice dated 10.04.2024 issued under Section 148 of the Act (Exhibit “A”);
3. It is the petitioner’s case that the petitioner filed its return of income for the Assessment Year 2017-18 on 6 November 2017 inter alia declaring a total income of Rs.8,36,740/-, indicating a net loss of Rs.11,31,588/- under the head “Profit and Gains from Business and Profession”. It is also contended that on 17 August 2018, the petitioner was issued a notice under Section 143(2) of the IT Act, intimating the petitioner that his return of income was selected for scrutiny assessment. Thereafter, a notice dated 30 September 2019 was issued to the petitioner under Section 142(1) of the IT Act, whereby the petitioner was called upon to provide the relevant documents and explanation including the details of sales, purchases, bank statements, stock registers, loans / advances, details of investments etc., along with ledgers, bills, challans. On 10 October 2019 and 18 December 2019, the petitioner furnished the relevant documents providing the required information, as per the said notice.
4. It is the case of the petitioner that respondent No.1 issued a show cause notice dated 22 December 2019 to the petitioner proposing to reject the books of accounts for the financial year 2016-17 and proposing to estimate gross profit specially in respect of the transaction undertaken by the petitioner with M/s. Choksi Navnitlal. The petitioner thereafter filed a detailed reply dated 24 December 2019 inter alia denying the allegations of abnormal fluctuations. On 30 December 2019, an Assessment Order was passed by Respondent No.1 rejecting the books of accounts of the petitioner and estimating net profit at Rs.1,96,64,955/-, against which the petitioner filed an appeal before the Commissioner of Income Tax (Appeals) which is still pending.
5. It is the petitioner’s contention that the Assessing Officer, on a purported information that an amount of Rs.10,02,24,000/- was received by the petitioner from M/s. Choksi Navnitlal and that it was a Suspicious Transaction, a notice dated 23 March 2024 under Section 148A(b) of the Act, was issued to the petitioner, calling upon the petitioner to show cause as to why a notice under Section 148 of the Act should not be issued. On 4 April 2024 the petitioner filed a detailed response to such notice. It is the case of the petitioner that without considering the contentions as raised by the petitioner, Respondent No.1 has passed the impugned order dated 10 April 2024, proposing to reassess the income of the petitioner.
6. It is on the above backdrop, we have heard learned counsel for the parties and with their assistance perused the record.
7. At the outset, learned counsel for the petitioner would submit that the impugned notice being issued by the Jurisdictional Assessing Officer (JAO) would be invalid and illegal being in the teeth of the provisions of Section 151A of the Income Tax Act, 1961. This in as much as in pursuance of such provision, a scheme for faceless assessment is made applicable which by notification dated 22 March 2022 has not been followed in the present case. It is submitted that the Jurisdictional Assessing Officer had no authority to issue such notice in view of the Faceless Assessment being already implemented by the Government of India.
8. In supporting such contention, learned counsel for the petitioner would submit that such issue would stand covered by the decision of the Division Bench of this Court in Hexaware Technology Ltd. Vs. Assistant Commissioner of Income Tax, Circle 15(1)(2), Mumbai & Ors1. He has drawn our attention to issue no.4 as framed by the Court which reads thus:
“Whether the impugned notice dated 27 August 2022 is invalid and bad in law being issued by the JAO as the same was not in accordance with Section 151A of the Act?”
In answering such issue, the Court has held that the provisions of Section 151A of the IT Act had clearly brought a regime of faceless assessment. The Court held that it was not permissible for the Jurisdictional Assessing Officer to issue a notice under Section 148, as the same would amount to breach of the provisions of section 151A of the IT Act.
9. The relevant observations of the court reads thus:
32. As regards issue no.4, Section 151A reads as under:
Faceless assessment of income escaping assessment.
“Section 151A of the Act gives the power to the Central Board of Direct Taxes (“CBDT”) to notify the Scheme for :
(i) the purpose of assessment, reassessment or recomputation under Section 147; or
(ii) issuance of notice under Section 148; or
(iii) conducting of inquiry or issuance of show cause notice or passing of order under Section 148A; or
(iv) sanction for issuance of notice under Section 151;
so as to impart greater efficiency, transparency and accountability by inter alia eliminating the interface between the Income Tax Authorities and assessee. Sub-section 3 of Section 151A of the Act also provides that every notification issued under sub-section (1) and (2) of Section 151A of the Act shall be laid before each House of Parliament.
In exercise of the powers conferred by sub-sections (1) and (2) of Section 151A of the Act, CBDT issued a notification dated 29th March, 2022 [Notification No.18/2022/F. No.370142/16/2022-TPL and formulated a Scheme. The Scheme provides that –
(a) the assessment, reassessment or recomputation under Section 147 of the Act,
(b) and the issuance of notice under Section 148 of the Act, shall be through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in Section 148 of the Act for issuance of notice and in a faceless manner, to the extent provided in Section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee. The impugned notice dated 27th August, 2022 has been issued by respondent no.1 (JAO) and not by the NFAC, which is not in accordance with the aforesaid Scheme.
Section 151A of the Act gives the power to the Central Board of Direct Taxes (“CBDT”) to notify the Scheme for :
(i) the purpose of assessment, reassessment or recomputation under Section 147; or
(ii) issuance of notice under Section 148; or
(iii) conducting of inquiry or issuance of show cause notice or passing of order under Section 148A; or
(iv) sanction for issuance of notice under Section 151;
so as to impart greater efficiency, transparency and accountability by inter alia eliminating the interface between the Income Tax Authorities and assessee. Sub-section 3 of Section 151A of the Act also provides that every notification issued under sub-section (1) and (2) of Section 151A of the Act shall be laid before each House of Parliament.
In exercise of the powers conferred by sub-sections (1) and (2) of Section 151A of the Act, CBDT issued a notification dated 29th March, 2022 [Notification No.18/2022/F. No.370142/16/2022-TPL and formulated a Scheme. The Scheme provides that –
(a) the assessment, reassessment or recomputation under Section 147 of the Act,
(b) and the issuance of notice under Section 148 of the Act, shall be through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in Section 148 of the Act for issuance of notice and in a faceless manner, to the extent provided in Section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee. The impugned notice dated27th August, 2022 has been issued by respondent no.1 (JAO) and not by the NFAC, which is not in accordance with the aforesaid Scheme.
35 Further, in our view, there is no question of concurrent jurisdiction of the JAO and the FAO for issuance of notice under Section 148 of the Act or even for passing assessment or reassessment order. When specific jurisdiction has been assigned to either the JAO or the FAO in the Scheme dated 29th March, 2022, then it is to the exclusion of the other. To take any other view in the matter, would not only result in chaos but also render the whole faceless proceedings redundant. If the argument of Revenue is to be accepted, then even when notices are issued by the FAO, it would be open to an assessee to make submission before the JAO and vice versa, which is clearly not contemplated in the Act. Therefore, there is no question of concurrent jurisdiction of both FAO or the JAO with respect to the issuance of notice under Section 148 of the Act. The Scheme dated 29th March 2022 in paragraph 3 clearly provides that the issuance of notice “shall be through automated allocation” which means that the same is mandatory and is required to be followed by the Department and does not give any discretion to the Department to choose whether to follow it or not. That automated allocation is defined in paragraph 2(b) of the Scheme to mean an algorithm for randomised allocation of cases by using suitable technological tools including artificial intelligence and machine learning with a view to optimise the use of resources. Therefore, it means that the case can be allocated randomly to any officer who would then have jurisdiction to issue the notice under Section 148 of the Act. It is not the case of respondent no.1 that respondent no.1 was the random officer who had been allocated jurisdiction.
37 When an authority acts contrary to law, the said act of the Authority is required to be quashed and set aside as invalid and bad in law and the person seeking to quash such an action is not required to establish prejudice from the said Act. An act which is done by an authority contrary to the provisions of the statue, itself causes prejudice to assessee. All assessees are entitled to be assessed as per law and by following the procedure prescribed by law. Therefore, when the Income Tax Authority proposes to take action against an assessee without following the due process of law, the said action itself results in a prejudice to assessee. Therefore, there is no question of petitioner having to prove further prejudice before arguing the invalidity of the notice.”
10. Learned counsel for the revenue would also not dispute the aforesaid position and to what has been held by the Division Bench in Hexaware Technologies Limited (supra) would cover the issue on the impugned notice being issued without jurisdiction.
11. In the light of the above discussion, the impugned order passed under Section 148A(d) as also the consequential notice under Section 148 as impugned, would be required to be quashed and set aside.
12. The petition is accordingly allowed in terms of prayer clause (a).
13. Rule is made absolute in the above terms. No order as to costs.
Note:-
1 Writ Petition No.1778 of 2023 decided on 3 May 2024
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