Natural Justice Violation in Draft Assessment: Kerala HC Sets Aside Order

Jesna Steefan Vs Additional/Joint/Deputy/ACIT/ITO (Kerala High Court)

Introduction: In a recent judgment, the Kerala High Court addressed the critical issue of natural justice principles in tax assessments. The case of Jesna Steefan vs. Additional/Joint/Deputy/ACIT/ITO involves the petitioner challenging Exhibits P-2, P-4, P-5 to P-10, with Exhibit P-7 being the assessment order passed under Section 147 read with Section 144B of the Income Tax Act for the assessment year 2017-18.

Detailed Analysis: The petitioner, an assessee, had not filed a return of income for the said assessment year. The assessing authority initiated proceedings based on information suggesting a significant financial transaction during the financial year 2016-17. After issuing notices and granting opportunities, the assessing authority made additions to the total assessable income, leading to tax demands and penalty proceedings.

The crucial aspect of the case revolves around the final opportunity granted on March 30, 2022, through a show cause notice along with a draft assessment order. The petitioner was given only one day to respond to this notice. The Kerala High Court, considering the brief time granted, concluded that virtually no opportunity was provided to the petitioner against the draft assessment order. This, according to the court, constituted a violation of the principles of natural justice.

The court, in its judgment, permitted the petitioner to file a reply to the show cause notice within seven days, starting from the date the link is provided for uploading the reply. The final assessment order was directed to be passed after providing an opportunity of hearing to the petitioner.

The judgment also emphasized that the petitioner should not raise objections regarding the time-barred assessment, as the matter had been remanded back by the court under Article 226 of the Constitution of India.

Conclusion: The Kerala High Court’s decision underscores the significance of adhering to natural justice principles in assessment proceedings. Granting reasonable time and a fair opportunity to the assessee to respond to draft assessment orders ensures a just and transparent tax assessment process. This case serves as a reminder to tax authorities to uphold procedural fairness, ultimately contributing to the integrity of the tax administration system.

FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT

1. The present writ petition has been filed by the petitioner who is an assessee under the provisions of the Income Tax Act, 1961 impugning Exhibits P-2, P-4, P-5 to P-10. Exhibit P-7 is the assessment order passed under Section 147 read with Section 144B of the Income Tax Act dated 31.03.2022 in respect of the assessment year 2017-18.

2. The petitioner did not file return of income for the assessment year 2017-18. As per the information received through Multiyear NMS cases in AIMS module of ITBA, the petitioner had carried out financial transaction of huge amount during the financial year 2016­17. On analysis of the said information, it was concluded that the income of the petitioner has escaped income within the meaning of Section 147 of Income Tax Act and, therefore, the assessing authority concluded that there was reason to believe that the income chargeable to tax are escaped assessment in the case of the petitioner/assessee for the assessment year 2017-18. Accordingly, after approval of the competent authority, notice under Section 148 of the Income Tax Act was issued to the petitioner/assessee on 29.03.2021. despite service of the said notice, the petitioner did not file return of his income in response to the said notice and thereafter, a notice under Section 142 (1) of the Income Tax Act was issued on 19.07.2021 and 16.03.2022 for compliance with. But the petitioner/assessee did not file any reply in response to the said notice. As the petitioner was not coming forth despite having been given two opportunities for uploading the documents and replies to the Show Cause Notices, the assessing authority was left with no other alternative but, to make addition on the basis of the information available to the department and accordingly the total assessable income was found to be 4,00,98,170/- on which tax was demanded and penalty proceedings under Section 270A, 271B, 272A(1)(d) and 271F were ordered to be initiated.

3. The assessment order notes that the final opportunity was given to the assessee on 30.03.2022 by issuing a show cause notice along with draft assessment order for compliance. Only one day time was granted to the petitioner to file reply to the Show Cause Notice and draft assessment order.

4. Considering the fact that only one day time was granted to the petitioner in the notice dated 30.03.2022, I am of the considered view that virtually no opportunity was granted to the petitioner against the draft assessment order and there has been violation of the principles of natural justice from the stage of issuing the Show Cause Notice dated 30.03.2022 whereby the draft assessment order was communicated to the petitioner.

5. In the above circumstances, the petitioner is permitted to file reply to the Show Cause Notice dated 30.03.2022 within seven days from today. The petitioner shall be granted seven days time form the date the link is provided to the petitioner to for uploading the reply to the Show Cause Notice dated 30.03.2022 and thereafter the final assessment order shall be passed after giving an opportunity of hearing to the petitioner. The link for uploading the reply should be intimated on the registered E-mail id of the petitioner as mentioned in Exhibit P-1. If the petitioner does not avail the opportunity of filing the reply to the Show Cause Notice dated 30.03.2022 as directed above, no further opportunity shall be granted to the petitioner and it would be presume that the petitioner has nothing to say in response to the Show Cause Notice dated 30.03.2022 and the impugned order and subsequent notices shall be held to be valid and the authority would be free to proceed to realise the tax and penalty amount from the petitioner.

6. The petitioner shall not raise the objection regarding the time barred assessment as the matter has been remanded back by this Court in exercise of its jurisdiction under Article 226 of the Constitution of India.

With the aforesaid directions, this writ petition is allowed to the extent of setting aside the assessment order in Exhibit P-7 and subsequent notices thereafter.