Whether Issuance of notice u/s section 263 after new Faceless Assessment Scheme justified?

With the evolution of tax laws, the balance between old and new statutes is crucial. Section 263 of the Income Tax Act, aimed at revising orders prejudicial to revenue, often intersects with contemporary reforms like the Faceless Assessment Scheme. This article scrutinizes the justification behind issuing notices under Section 263 post the implementation of the Faceless Assessment Scheme.

The Laws governing the taxation should be watchful of the need of harmony between the old and newly introduced laws. But with the passage of time, with the introduction of new laws and Schemes on the statutes the old laws and rules become redundant and become more of a hindrance than a remedy for both the department and the taxpayer.

A similar mismatch between the intention of the lawmaker has been noticed under Section 263 (Revision of orders prejudicial to revenue) of the Income Tax Act which was introduced since the inception of the Income Tax Act 1961 the relevant extracts of which is reproduced as below: –

Revision of orders prejudicial to revenue.

263. (1) The 99[Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer 1[or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the Assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, 2[including,—

(i) An order enhancing or modifying the Assessment or cancelling the Assessment and directing a fresh Assessment; or

(ii) An order modifying the order under section 92CA; or

(iii) An order cancelling the order under section 92CA and directing a fresh order under the said section].

Explanation 1. —For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, —

(a) An order passed on or before or after the 1st day of June, 1988 by the Assessing Officer 1[or the Transfer Pricing Officer, as the case may be,] shall include—

(i) An order of Assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

(ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer 3[or the Transfer Pricing Officer, as the case may be,] conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General or Principal Commissioner or Commissioner authorised by the Board in this behalf under section 120;

3[(iii) an order under section 92CA by the Transfer Pricing Officer;]

Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer 3[or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,—

(a) The order is passed without making inquiries or verification which should have been made;

(b) The order is passed allowing any relief without inquiring into the claim;

(c) The order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or

(d) The order has not been passed in accordance with any decision which is prejudicial to the Assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the Assessee or any other person.

Reading of the above section and especially explanation 2(a) clearly reveals that any order passed by the Assessing Officer without making proper inquires or verifications which should have been made in the opinion of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, would be deemed to be an order prejudicial to the interest of the revenue.

Therefore, any order which the Assessing Officer passes can be reviewed by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner (in short commissioner) for determining whether the order passed is prejudicial to the interest of the revenue.

If it becomes prejudicial to the interest of the revenue Commissioner after giving an opportunity of being heard to the Assessee passes an order u/s 263 determining it to be prejudicial and revision of the order passed by the A.O.

The possible reasons for an Assessment leading to be prejudicial by the A.O. can be the following: –

1. Bonafede Lapse on part of Assessing Officer

2. Connivance of Assessee and A.O.

Keeping in view the above lapses and to eradicate such lapses from the tax system itself, Faceless Assessment Scheme was introduced by the lawmaker on 1^st April, 2021.

The extract of the Faceless Assessment Scheme is as follows:

Faceless Assessment Scheme has brought about a sea of change and a paradigm shift in the functioning of the Assessment function in the Income-tax Department. The Scheme relies on the use of technology like machine learning and artificial intelligence and applies risk management system for arriving at the conclusions in the Assessment order. The Assessee as well as the Assessing officers have been made opaque to each other with enhanced transparency and professionalism in the functioning of the Department. The Taxpayers’ Charter defines the commitment of the tax authorities and also specifies certain expectations from the taxpayers. The Charter now has a legal basis which was earlier only administrative in nature. The taxpayer is expected to be conversant with the rules of procedure, update the mode of communication viz. emails, mobile numbers and also regularly visit the e-filing portal for responding to communications received from the Department so as to obviate the consequences of default in non-compliance to the statutory notices issued. The Assessment orders are expected to be in accordance with law after considering the facts of the case and applying law in force and will not only reduce litigation because of application of minds at several stages but with the use of information technology, will also result in qualitatively improved orders which are likely to stand the test of appeals. The cost of compliance to the taxpayer as well as the cost of tax collection is likely to be reduced and with the utilisation of information available and information being prefilled in the return of the Assessee while filing the return, the tax base would increase and there would be better compliance in the days to come. The Scheme develops on the learnings of the pilot Scheme carried out last year in selected metros. The Scheme has been made operational by posting of officers in various units.

The main features of the introduction of the Faceless Assessment Scheme were: –

• No Human Interface
• Expeditious Disposal of Cases
• Ease of Compliance for Taxpayers
• Transparency and Efficiency
• Functional Specialisation

How Faceless Assessment overcomes its predecessor’s shortcomings:

This new Faceless Assessment Scheme overcame the shortcomings of the earlier Assessment procedure by:

1. Since, under the faceless Assessment scheme the Assessing officer and the Assessee are never able to establish contact other than through official channels, the possibility of an informal relationship (connivance) is impossible.

2. Also, since under the Faceless Assessment Scheme rather than Assessment being done by the Assessing Officer only it is a Team based Assessment. Thus, the chances of Bonafide lapse reaches close to null. Since, the Assessment and the information is passed and reviewed by panels of teams, it becomes very partial to review it solely on the basis of it having being passed without proper inquires and verifications.

Thus, the Faceless Assessment Scheme provides a harmonious remedy for the above limitations of the old Assessment Procedure.

From the above it becomes clear that the Faceless Assessment Scheme was framed with the objective of avoiding all kind of defects in earlier Assessment procedure which could be prejudicial to the interest of the revenue.

Thus, it can be safely concluded that there is no justification of the continuance of explanation 2 clause a of Section 263 on the Statute, determining an order passed by A.O. under the Faceless Assessment Scheme to be prejudicial just on the basis that no additional enquiry was made.

When a team of officers conclude a Faceless Assessment then to doubt their capability of not raising any particular inquiry is bad in law. Revenue should trust their own officers and particularly an Assessment framed by a group of people.

It is to be appreciated that there is no limit of finding fault in any Assessment even if carried out by a group of people, to raise additional inquires, because every set of people have different level of intellect. Revenue should train their teams for a quality Assessment instead of taking up the matter u/s 263 explanation 2 clause a.

Our view is also supported by the view of Jaipur ITAT in the case of Sourabh Sharma Vs PCIT (ITAT Jaipur) in which:

The case stemmed from the PCIT’s dissatisfaction with the AO’s handling of sales promotion expenses claimed by the Assessee, Sourabh Sharma. Despite the AO raising nine specific questions regarding these expenses and ultimately allowing them based on the Assessee’s responses, the PCIT issued notices under the assumption of inadequate inquiry. However, the ITAT Jaipur highlighted a critical aspect of the ‘faceless Assessment’ process, emphasizing the collaborative effort involving multiple units under the Income Tax Department. This process ensures a thorough review and consideration of the cases, negating the notion of inadequate inquiry by a single officer.

Conclusion:

Every rule and law exist and is made for the betterment of the society as a whole however, if any rule and law results in hardship to common taxpayer then a revision or retraction of the rule and law becomes a necessity.

The powers vested through clause (a) of explanation 2 of the section 263 are too far from being necessary and should be revised in order to bring a reconciliation between the intention of revenue and the Law, since after the introduction of Faceless Assessment Scheme the power vested are not justified.

All Assessees who are affected by clause (a) explanation 2 of section 263 cases may take a cue from above while approaching ITAT for quashing of the 263 proceedings.

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