2022 (10) TMI 422 - HC - Income Tax

Validity of Faceless assessments framed u/s 144B - As argued final orders of assessment in terms of Section 144B have been passed without being preceded by a show cause notice (SCN)/draft order of assessment (DOA) - HELD THAT - Requirement of SCN/DAO is mandatory and cannot be sidestepped by the respondents. The Supreme Court in the case of Hotel Blue Moon 2010 (2) TMI 1 - SUPREME COURT was concerned with non-issue of a notice under Section 143(2) within the period prescribed. The High Court had held that failure to issue a notice u/s 143(2) was only a procedural irregularity and one that could be dispensed with. In the case of faceless assessments as well the procedure for scrutiny commences with the issuance of a statutory notice in terms of Section 143(2). The notices to be issued thereafter are part of the procedure for faceless assessments and cannot be equated to a notice under Section 143(2) of the Act. Reliance upon Section 144C is also of no assistance to the petitioners as Section 144C provides for a separate and distinct scheme of assessment and the issuance of a DAO is part of that scheme. Though failure to issue the notices as provided in Section 144B would certainly vitiate the proceedings as being in violation of the principles of natural justice it is an infirmity that may be cured by permitting such SCN/DAO to be issued now. The impugned assessments are set aside and liberty granted to the respondents to complete the assessments de novo in accordance with law. We find overwhelming support from the following cases wherein the failure to issue a SCN/DAO has been construed as a procedural irregularity. The impugned orders of assessment are set aside and respondents granted liberty to issue SCN/DAO within a period of four (4) weeks from date of receipt of copy of this order.

Summary

Issues Involved:
1. Non-issuance of Show Cause Notice (SCN)/Draft Assessment Order (DAO) under Section 144B.
2. Violation of principles of natural justice.
3. Availability of alternate remedies.
4. Compliance with the Faceless Assessment Scheme.

Issue-wise Detailed Analysis:

1. Non-issuance of Show Cause Notice (SCN)/Draft Assessment Order (DAO) under Section 144B:

The primary issue in this batch of writ petitions is the non-issuance of SCN/DAO before passing the final assessment orders under Section 144B of the Income Tax Act, 1961. The petitioners argued that the omission of SCN/DAO vitiates the assessment procedure. In most cases, the respondents admitted that no SCN/DAO was issued. The Court emphasized that the requirement of SCN/DAO is mandatory and cannot be sidestepped. The relevant clauses in Section 144B mandate the issuance of a draft order proposing variations to the return of income, which must be served upon the assessee for response before finalizing the assessment.

2. Violation of principles of natural justice:

The petitioners contended that the non-issuance of SCN/DAO and the lack of personal hearings violated the principles of natural justice. The Court noted that the Faceless Assessment Scheme aims to eliminate the interface between the Assessing Officer and the assessee, but it does not dispense with the need for procedural fairness. The Court held that the failure to issue SCN/DAO and the lack of effective opportunity to respond and be heard constituted a violation of natural justice.

3. Availability of alternate remedies:

The respondents argued that the petitioners should be relegated to alternate remedies, such as filing appeals against the assessment orders. However, the Court rejected this contention, stating that the procedural violations in the assessment process could not be cured by relegating the petitioners to alternate remedies. The Court emphasized that the non-issuance of SCN/DAO is a fundamental procedural irregularity that vitiates the assessment orders.

4. Compliance with the Faceless Assessment Scheme:

The Court examined the compliance with the Faceless Assessment Scheme, which requires the issuance of SCN/DAO before finalizing the assessments. The Court referred to various judgments, including ACIT v. Hotel Blue Moon, Sapthagiri Finance & Investments v. ITO, and CIT v. Alstom T & D India Ltd., which held that the absence of statutory notices invalidates the assessments. The Court concluded that the failure to issue SCN/DAO in the present cases is a procedural irregularity that vitiates the assessment orders.

Conclusion:

The Court set aside the impugned assessment orders, except for the order in W.P.No.14373 of 2021, which was dealt with separately. The respondents were granted liberty to issue SCN/DAO within four weeks from the date of receipt of the order. The petitioners were to be heard, and new assessment orders were to be passed de novo. The entire exercise was to be completed within sixteen weeks from the date of receipt of the order. The writ petitions were allowed, and the connected miscellaneous petitions were closed with no order as to costs.