2025 (6) TMI 985 - HC - Income Tax

Validity of reassessment proceedings - show cause notices granted just one days time to the Petitioner to furnish its response - HELD THAT - It is apparent that the Respondents have acted in violation of the principles of natural justice by granting insufficient time of just 1 day to the Petitioner to respond to the show cause notice proposing variations. Thus we deem it appropriate to set aside the assessment order. We accordingly hereby set aside the assessment order dated 30th September 2021 and remand the matter back to Respondent No. 1 to pass a fresh de novo order after providing an opportunity of hearing to the Petitioner. Such exercise shall be completed within 12 weeks from the date of uploading of this order.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

• Whether the final assessment order passed under section 147 read with section 144B of the Act is valid in the absence of issuance of a draft assessment order as mandated under section 144B(1)(xvi) of the Act;
• Whether the principles of natural justice were violated by granting the Petitioner only one day's time to respond to the show cause notice proposing variations;
• Whether the assessing officer was justified in not considering the Petitioner's reply to the show cause notice before passing the final assessment order;
• Whether the impugned assessment order suffers from jurisdictional defects and is liable to be set aside on procedural grounds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the final assessment order in the absence of issuance of draft assessment order under section 144B(1)(xvi) of the Act

The legal framework governing this issue is section 144B of the Income Tax Act, which incorporates the Faceless Assessment Scheme. Specifically, section 144B(1)(xvi) mandates issuance of a draft assessment order to the assessee before passing the final assessment order. The purpose of this provision is to ensure transparency and provide the assessee an opportunity to object to the proposed findings.

The Petitioner contended that the final assessment order dated 30th September 2021 was passed without issuance of any draft assessment order, rendering the order without jurisdiction and violative of the statutory scheme. Reliance was placed on the precedent of this Court in Rinku R. Rai v. ITO, which emphasized the mandatory nature of issuing a draft order under the Faceless Assessment Scheme and held non-compliance as a jurisdictional defect.

The Respondents did not dispute the absence of a draft order but argued implicitly that the final order was valid. The Court, however, noted that the non-issuance of the draft order is a clear violation of the statutory mandate and constitutes a jurisdictional defect. The Court underscored that compliance with procedural safeguards under section 144B is essential for the validity of the assessment order.

Applying the law to the facts, the Court concluded that the impugned order suffered from a fundamental procedural irregularity by bypassing the issuance of the draft order, thereby vitiating the assessment process.

Issue 2: Violation of principles of natural justice by granting only one day to respond to the show cause notice

The principles of natural justice require that an assessee be given a reasonable opportunity to present its case before an adverse order is passed. The Petitioner submitted that it was granted only one day (till 23:59 hours of 29th September 2021) to respond to the show cause notice dated 28th September 2021, which was insufficient and unfair.

The Respondents conceded that only one day was given but did not justify the brevity of the time period. The Court observed that such a truncated time frame does not meet the standards of fairness and natural justice. The Court emphasized that adequate time is necessary to enable the assessee to prepare and submit a meaningful response to the proposed variations.

Further, the Petitioner did file a reply within the stipulated time, but the assessing officer proceeded to pass the final assessment order without considering the same. This omission compounded the violation of natural justice.

The Court held that granting only one day to respond was arbitrary and amounted to denial of a fair hearing. This procedural lapse warranted setting aside the assessment order.

Issue 3: Non-consideration of the Petitioner's reply to the show cause notice

The Petitioner's reply to the show cause notice was filed on 29th September 2021. Despite this, the final assessment order dated 30th September 2021 stated that the Petitioner had not responded to the show cause notice. The Petitioner contended that this was a manifest error and that its submissions were not considered by the assessing officer.

The Court found that the assessing officer's failure to consider the Petitioner's reply before passing the final order was a breach of the procedural requirements and principles of natural justice. The Court relied on the judgement of the Gujarat High Court in Chatursinh Javanji Chavda v. ACIT, which held that non-consideration of the assessee's reply to a show cause notice is impermissible.

Applying the law to the facts, the Court concluded that the impugned order was passed without due consideration of the Petitioner's submissions, thereby rendering the order unsustainable.

Issue 4: Jurisdictional defect and the remedy

Given the violations of the statutory scheme under section 144B and principles of natural justice, the Court found the final assessment order to be without jurisdiction. The Court declined to examine the merits of the additions made under section 69B of the Act, stating that the procedural infirmities warranted setting aside the order.

The Court directed that the matter be remanded to the assessing officer for a fresh de novo assessment. The assessing officer was instructed to provide the Petitioner with a proper opportunity of hearing, including issuance of a draft assessment order and reasonable time for response. The fresh assessment was to be completed within 12 weeks from the date of uploading the order.

The Court also directed the Petitioner to communicate the order to the jurisdictional assessing officer within seven days.

3. SIGNIFICANT HOLDINGS

The Court held:

"The issuance of a draft assessment order is mandatory in terms of the Faceless Assessment Scheme as incorporated in section 144B of the Act and the non-issuance of the draft assessment order is a jurisdictional defect."

"It is apparent that the Respondents have acted in violation of the principles of natural justice by granting insufficient time of just 1 day to the Petitioner to respond to the show cause notice proposing variations."

"The assessing officer's failure to consider the Petitioner's reply to the show cause notice before passing the final order is a breach of procedural requirements and principles of natural justice."

Core principles established include the mandatory nature of procedural safeguards under the Faceless Assessment Scheme, the requirement of reasonable opportunity to respond to show cause notices, and the necessity for the assessing officer to consider the assessee's submissions before passing the final order.

Final determinations on each issue are:

• The impugned final assessment order is invalid for non-compliance with section 144B(1)(xvi) regarding issuance of a draft order;
• The grant of only one day to respond to the show cause notice violates natural justice;
• The assessing officer's non-consideration of the Petitioner's reply renders the order unsustainable;
• The assessment order is set aside and the matter remanded for fresh assessment in compliance with statutory and procedural safeguards.