Section 144B in the Income Tax Act,1961 has been introduced in the Income-tax act by National e-Assessment Scheme. The ambitious scheme launched in August 2020 seeks to bring the much-needed reform revolution to the income tax procedure that encumbered tax filing for the common man, fostered corruption, and aided tax evasion.
Before the scheme, after an income taxpayer has filed the return of income, it was examined by the income tax department, when an Assessment officer red-flagged a return, it was considered “file under scrutiny”, as the process is referred to by income tax practitioners, subsequently, the assessee was intimated about the fallacy and the same was remedied.
The new scheme introduced under the aegis of “Transparent Taxation- honoring the honest platform” has the noble objective to introduce the ‘faceless system’, a modern system to digitize the process of ‘scrutinizing’ a file, wherein no person would be subject to visits arbitrarily demanded by officers of the IT department[1] or ‘under the table’ dealings. Additionally, the scheme is considered a relief since it saved taxpayers time, money, effort and awarded the convenience of e-filling of audit reports, representations, etc.
A careful perusal of Section 144B of the Income Tax Act,1961, lays the procedure for assessment of a return of income as follows- when an assessee hasn’t furnished his return of income u/s 139 (return of income) or in response to a notice u/s 142(1) (inquiry) or u/s 148 (assessment notice). Then, the case is assigned to an assessment unit, hereinafter referred to as AU, and if any document related to the case is required, the AU requests National Faceless Assessment Centre, hereinafter referred to as NFAC, which further issues a relevant notice to the assessee u/s 144B(1)(vi). Additionally, the AU has the technical and verification team at its disposal for their respective purposes. When an assessee fails to comply with a notice u/s 144B(1)(vi) or 142(1) or 144 or to a direction u/s 142(2), the NFAC serves a show-cause notice u/s 144B(1)(xi). Still, if no response is received, the AU under subclause (xiv) prepares a draft assessment order and sends it to NFAC, who can then accept, change, or sent it for review to a review unit. Finally, a copy of the finalized assessment order along with a demand notice is served to the assessee for initiating penalty proceedings, if applicable.
However, the scheme draws scrutiny, recently, in light of decrees from the hon’ble courts that have passed orders in favor of aggrieved taxpayers.
In re Show Cause Notice
The Hon’ble Delhi High Court, in Rani Promoter Pvt. Ltd. vs. Additional Commissioner of Income Tax[2] & Toplight Corporate Management (P.) Ltd. vs. National Faceless Assessment Centre Delhi[3], held that issuance of Show Cause Notice, mentioning the procedure under Section 144B(1)(xvi), is a mandatory requirement and any assessment order passed without the issuance of such Show Cause Notice is bad in law. Concluding that such conduct of Assessment officers (AOs) was violative of the principles of natural justice, the hon’ble court, thus, stayed the proceedings and directed the authority to restart the proceedings.
Other provisions of section 144B, provide that an assessee may request a personal hearing under subclause 7(vii) and sub-clause 7(viii) & (x) mandate such personal hearing to be held by way of a video conference.
CBDT vide Circular F.No.Pr.CCIT/NeAC/SOP/2020-21 dated 23rd November 2020 laid down the SOP for personal hearing, it is reproduced hereinbelow:-
“Where any modification is proposed in the draft assessment order (DAO) issued by any AU and the Assessee or the authorized representative in his/her written response disputes the facts underlying the proposed modification and makes a request for a personal hearing, the CCIT ReAC may allow personal hearing through Video Conference, after considering the facts & circumstances of the case, as below:-
1. The Assessee has submitted written submission in response to the DAO.
2. The Video Conference will ordinarily be of 30 minutes duration. It may be extended on the request of the Assessee or authorised representative.
3. The Assessee may furnish documents/evidence, to substantiate points raised in the Video Conference during the session or within a reasonable time allowed by the AU, after considering the facts and circumstances of the case.”
The circular makes it unequivocally clear that the AO’s power to grant a personal hearing is recognized by both statute[4] and delegated legislation.
In re Personal Hearing
The Delhi HC in Sanjay Aggarwal vs. National Faceless Assessment Centre[5] & Umkal Healthcare (P.) Ltd. vs. NFAC[6] held that it was incumbent upon the Department to accord a personal hearing to the assessee where such a request was made under Section 144B (7) and failure to do so would amount to a violation of principles of natural justice as well as the mandatory procedure prescribed in the Faceless Assessment Scheme under Section 144B of the Act.
The Bombay High court in Piramal Enterprises Limited vs. Additional/Joint/Deputy Assistant Commissioner of Income-tax/Income-tax Officer & Ors.[7], held:
“65. Principles of natural justice firmly run through fabric of section 144B (1) of the Income Tax Act, 1961. Whenever DAO, FDAO is prejudicial to the interest of assessee or RDAO is prejudicial to the interest of assessee in comparison to DAO or FDAO, upon a response to show-cause notice, personal hearing for oral submissions or to present its case before income tax authority is strongly entwined in the provisions on a request from an assessee unless it is absurd, strategized and/or intended to protract assessment etc. It would also emerge from various decisions, referred to above, ordinarily, such a request would not be declined.
68. 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.” [8]
Recently the Hon’ble Delhi High court in Bharat Aluminium Company Ltd. v. Union of India & Ors[9], the divisional bench held that “the right to personal hearing cannot depend upon the facts of each case”. Thus, even the opportunity to be heard in a personal hearing was held to be reasonable and protected by the principles of natural justice, which were violated by the AOs when such a hearing wasn’t granted.
Such procedural violations by the AOs hold no reasonable ground, as submissions of counsel on behalf of the income tax department show and are reinforced by inferences of Hon’ble High courts. One can only speculate the reasons for such dereliction of duty, perhaps it is unawareness about the seemingly new scheme among the departmental officers or perhaps an overburdened department or sheer laxity.
One aggrieved taxpayer owing to a similar procedurally flawed assessment order has challenged the constitutionality of Section 144B challenged before the Hon’ble Kerala High court in writ petition titled Mohamed Babu Paramboor v/s Union of India[10] on the grounds of arbitrariness under article 14 of the Constitution.
Nevertheless, the National E-Assessment Scheme is a revolutionary scheme that seeks to bring reform to the Income Tax assessment procedure, by digitizing it and reducing the opportunity for ‘mismanagement of resources’ aka corruption. The scheme also envisions the realistic Indian problem of unawareness/illiteracy and thus provides for a personal hearing to an assessee to ensure transparency, effective communication and equal opportunity. Debarring the procedural hiccups, the scheme is exhaustive in setting up a framework, inclusive of principles of natural justice, and supportive to both the public and the Income Tax Department, who are given the explicit power to summon support from varied units.
[1] Section 144B(7)(vi)
[2] [2021 (7) TMI 919-Delhi High Court]
[3] [(2021) 128 taxmann.com 221 (Delhi)]
[4] As under section 144B(7)(vii), Income Tax Act ,1961
[5] [2021 (6) TMI 336 – Delhi High Court]
[6] [(2021) 131 taxmann.com 325 (Delhi)]
[7] 2021 SCC OnLine Bom 1534
[8] 2021 SCC OnLine Bom 1534
[9] W.P.(C) 14528/2021 & CM APPL. 45702/2021
[10] WP(C) 27163/2021
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