2021 (6) TMI 823 - HC - Income Tax

Validity of assessment - whether a show cause notice has to be issued prior to finalisation of assessments under the Act? - Petitioner had relied upon an Instruction issued by the Central Board of Direct Taxes (CBDT) bearing No.20 of 2015 dated 29.12.2015 dealing with the subjects Scrutiny assessments some important issues and scope of scrutiny in cases selected though Computer Aided Scrutiny Selection (CASS) - HELD THAT - In this case admittedly two pre-assessment notices have been issued leading to some exchange of communications inter se the parties. However no show cause notice crystallizing the issues dealt with in the assessment orders have been crystallised as such and put to the petitioner for rebuttal prior to completion of proceedings. CBDT has fairly concluded that principles of natural justice which are enshrined in the procedure for assessment mandate the issuance of a show cause notice prior to finalisation of an order of assessment. The Board refers to Instruction No.3 of 2018 dated 20.08.2018 specifically para 6(vi) thereof relating to AY 2016-17 and the E-proceeding facility available during 2018-19 specifically para (iv)d thereof as well as Circular Number 27 of 2019 dated 26.09.2019 that also reiterate the importance of adherence to the principles of natural justice in the finalisation of proceedings. In view of the confirmation by the CBDT an important issue stands settled. Though the Income Tax Act does not anywhere contemplate issuance of a show cause notice prior to finalisation of scrutiny assessments as a matter of procedure and good office the Assessing Authority is expected to crystalise the issues arising from the return of income filed by an assessee the questionnaires issued under Section 142(1) and notices under Section 143(2) and responses thereto issue a show cause notice setting out the issues solicit the response of the assessee and pass orders only thereafter after hearing the assessee concerned. Writ Petitions are allowed. The orders of assessment in this case shall be treated as show cause notices and the petitioner shall file replies to the same within a period of six (6) weeks from today.

Summary

Issues:
Challenge to assessment orders for AY 2016-17 and 2017-18, requirement of show cause notice prior to finalization of assessments under the Income Tax Act, 1961.

Analysis:
The petitioner, a company, contested two assessment orders dated 26.12.2019 for AY 2016-17 and 2017-18 by the Assistant Commissioner of Income Tax. The primary legal issue was whether a show cause notice must precede the finalization of assessments under the Act. While pre-assessment notices were exchanged, a formal show cause notice specifying the issues for rebuttal was not provided to the petitioner before the completion of proceedings.

The petitioner relied on Instruction No.20 of 2015 issued by the Central Board of Direct Taxes (CBDT), emphasizing the need for a fair opportunity for the assessee to explain their position during scrutiny assessments. The instruction mandated the issuance of a show cause notice detailing proposed additions/disallowances and soliciting the assessee's response before finalizing the assessment.

The CBDT clarified that the mentioned instruction applied only to AY 2014-15 and did not explicitly impact assessments for other years. However, the CBDT acknowledged the importance of principles of natural justice in the assessment process, requiring the issuance of a show cause notice before finalizing an assessment order. Various CBDT instructions and circulars highlighted the significance of adhering to natural justice principles in assessment proceedings.

The High Court concluded that while the Income Tax Act does not expressly mandate a show cause notice before finalizing scrutiny assessments, it is expected as a procedural requirement for the Assessing Authority to crystallize issues, issue a show cause notice, solicit the assessee's response, and then pass orders after hearing the concerned party. Consequently, the court allowed the Writ Petitions, treating the assessment orders as show cause notices and directing the petitioner to respond within six weeks. The court further mandated the passing of assessment orders within sixteen weeks after hearing the petitioner.

In summary, the judgment clarified the procedural requirement of issuing a show cause notice before finalizing assessment orders under the Income Tax Act, emphasizing the principles of natural justice and fair opportunity for the assessee to present their case.