IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

R/SPECIAL CIVIL APPLICATION NO. 15756 of 2021

MARGITA INFRA

Versus

NATIONAL E-ASSESSMENT- CENTRE DELHI

Facts of the case

The assessee filed his return of income for the assessment year 2018-19. The department issued a show cause notice, proposing to reject the books of account and estimate the net profit. The assessee requested multiple times for a personal hearing through video conferencing, but his request was not granted. The department completed the assessment by rejecting the books of account and making additions to the income proposed in the show cause notice, resulting in a 50 times higher assessment.

Issues that were involved in this case

1. There were Significant Changes Without Notice: The final assessment order contained significant changes compared to the draft assessment order, indicating that additional inquiries or assessments were made without informing the petitioner.

2. There was Failure to Provide an Opportunity to Respond: The petitioner was not given an opportunity to respond to the new information or material before the final assessment order was issued.

3. Non-Compliance with Section 144B1: The NFAC did not adhere to the procedures outlined in Section 144B of the Income Tax Act, which require providing the petitioner with an opportunity to respond and to know the basis for any assessment changes.

Arguments on behalf of petitioner

Key arguments made by the petitioner:

1. Violation of Section 144B of the Income Tax Act: The petitioner argued that the assessment order was passed without following the procedure outlined in Section 144B. The section mandates that if the revised draft assessment order contains variations that could be prejudicial to the taxpayer, the taxpayer must be given an opportunity to respond. In this case, the petitioner claimed they were not given this opportunity.

2. Lack of Communication and Material Disclosure: The petitioner contended that the NFAC made additional inquiries after issuing the draft assessment order without notifying the petitioner. The information and material used to arrive at the final assessment order were never disclosed, denying the petitioner a chance to respond.

3. Discrepancies Between Draft and Final Orders: The petitioner pointed out that the draft assessment order and the final assessment order differed significantly. This change suggested that additional information was used, but the petitioner was not informed about it, violating the principles of natural justice.

4. Prior Precedents on Natural Justice: The petitioner referred to court rulings that highlighted the need to follow due process and maintain the principles of natural justice during assessments. They cited cases that support the argument that when these principles are violated, the assessment order is rendered invalid.

Arguments on behalf of respondent

Key arguments from the respondent’s side:

1. Legitimacy of Assessment Order: The respondent argued that the assessment order issued by the NFAC was legitimate and based on information indicating discrepancies in the petitioner’s financial records. The NFAC’s contention was that the order was grounded in evidence and complied with the legal framework for income tax assessments.

2. Basis for Additions to Income: The respondent highlighted discrepancies between the audit report and the balance sheet, specifically concerning unsecured loans. These inconsistencies formed the basis for the addition to the petitioner’s declared income, suggesting that the additional assessment was justified due to unexplained financial transactions.

3. Response to Show-Cause Notice: The respondent argued that the petitioner had ample opportunity to respond to the show-cause notice and that their failure to provide a satisfactory explanation led to the final assessment order. This could have been presented as justification for the actions taken by the NFAC.

4. Faceless Assessment Process: The respondent defended the faceless assessment process, emphasizing its compliance with the applicable rules and procedures. They have asserted that the process was designed to ensure transparency and objectivity, with the final assessment based on the available evidence.

Decision by the court

The present petition is preferred under Article 226 and 227 of the Constitution of India where at the time of issuance of notice, this Court passed the following order:

1. Petitioner is regularly assessed to tax by the respondent. For the Assessment Year 2018- 19, income tax was filed on 26.08.2018. On 23.04.2021, he received a show cause notice as to why the assessment be not completed as per the draft assessment order. He filed the reply for the same & the petitioner received interim letter from the respondent for compliance. A reply to which had been filed on 02.07.2021 in relation to the scrutiny assessment. The respondent proposed to reject the books of accounts and estimated net profit of the total turnover. Further reply also had been filed to the said show cause notice. The notice under section 1424 also was received from the respondent. It is the grievance on the part of the petitioner that from the time the show cause notice along with the draft assessment order was received, which permitted the petitioner to meet the requisition for personal hearing through the video conferencing, he made not less than four times such requests. Not only such request has not been granted, but also the subsequent action on the part of the respondent was of completing the assessment on rejecting his books of accounts and making the addition 50 times more to the income proposed to be assessment under the show cause notice, which deserves indulgence.

2. Affidavit-in-reply is filed by the respondent, denying each and every allegations made and contentions raised in the memo of the petition.

3. According to the respondent, additions have been made as per the provisions of Sections 145(3), 68, 69A and 36(1) (iii) of the I.T Act and following the procedure of faceless assessment scheme under Section 144B of the Act.

4. It is further contended that reply forwarded by the Assessing Officer against the objections raised by the assessee during the course of the assessment proceedings are self-explanatory. The objections were duly considered by the Assessing Officer of the ReFAC vide letter including the rejections of the VC request, whereby it was communicated that there is no legal aspect to be heard and thus request for the video conference is rejected. It is reiterated that in the faceless assessment, without proper and complete details the case could not be discussed with the assessee through video conference.

5. According to the respondent, the assessment order is passed as per the provisions of the I.T Act and guidelines issued by the CBDT from time to time. There are efficacious remedy available and instead of approaching this Court the petitioner should be relegated to the same.

6. One of the grounds of challenge is that assessment order is also contrary to the scheme of I.T Act because the additions are made beyond the scope and issues in the show cause notice resulting in actual income assessed at 50 times then proposed to be assessed in the show cause notice. Thus, on both the counts non-grant of virtual hearing, though asked for repeatedly by the petitioner, and because the additions are made beyond the scope and issue of the show cause notice, the final assessment order passed deserves to be interfered with.

7. As a result assesment order and the demand notice issued under Section 144 of the self same date are hereby quashed and set aside giving the permission to the respondent to issue a fresh show cause notice. All contentions available under the law would be open for the petitioner to be raised in the fresh proceedings.

While making the order reference made to case i.e., Gandhi Realty (India) (P.) Ltd. v. Asstt./Jt./Dy./Asstt. CIT/ITO 5, Noticing the fact that the provision itself permits the assessee to have right to seek the audience and once denied when repeatedly asked for is surely is the reason for this Court to hold that the order which has been passed is in breach of principles of natural justice, therefore, deserves to be quashed. The matter shall be heard from the stage at which it was left. The next date of hearing be given by the respondent through the e-mail to the petitioner which shall without seeking any further adjournment. The petitioner shall proceed with the hearing and following the prescribed procedure the respondent shall decide.

Comprehensive Analysis of the case

Department has conducted faceless assessment for the assessee, during which it rejected the assessee’s books of account and made significant additions to income proposed in the show cause notice. Additions has resulted in actual income being assessed at 50 times more than the proposed income. Throughout the assessment process, Assessee repeatedly requested a personal hearing through video conferencing, However, Department denied the request without considering the reasons provided by assessee. Denial of the assessee’s repeated requests for virtual hearing was found to be in breach of principles of natural justice by the court.

Court pointed out that the provisions of Section 144B of the Income-tax Act itself permit the assessee to seek audience during the assessment process. By repeatedly denying the right, the assessment order was rendered invalid due to the violation of principles of natural justice. Additionally, the assessment order was deemed to be contrary to the scheme of the Income-tax Act because additions made to the income were beyond the scope and issues mentioned in the show cause notice. Faceless assessment scheme, which was followed by the department under Section 144B6, is designed to ensure efficiency and transparency in the assessment process. However, present case, denial of the assessee’s right to seek audience through video conferencing undermined intended purpose of the scheme.

As a result, the court concluded that the assessment order and the demand notice issued under Section 1447 were to be quashed and set aside. Department was granted permission to issue the fresh show cause notice, and during the new  proceedings assessee was allowed to raise all relevant contentions. Court’s decision aimed to rectify the procedural flaws in the initial assessment and provide the assessee with an opportunity for fair and just proceedings in line with the principles of natural justice and the scheme of the Income-tax Act.

Contributed By: Hetu (Intern)