2025 (7) TMI 827 - HC - Income Tax

Validity of order passed u/s 147 r/w Section 144B - shorter time granted to file records - NFAC instructed the petitioner to upload certain evidences granting him barely four days which is considered by the petitioner to be insufficient for compliance - violation of principle of natural justice HELD THAT - Section 144B(6)(xi) of the I.T. Act empowers the Principal Chief Commissioner or the Principal Director General as the case may be in-charge of the National Faceless Assessment Centre to lay down the standards procedures and processes for effective functioning of the National Faceless Assessment Centre and the units set up in an automated and mechanised environment with prior approval of the Board. The Standard Operating Procedure under the Faceless Assessment provisions of Section 144B of the I.T. Act issued by the Government of India Ministry of Finance Central Board of Direct Taxes National Faceless Assessment Centre on 03.08.2022 clearly lays down that in order to afford natural justice and reasonable opportunity to the assessee seven days time from the issue of show cause have been stipulated. Having glanced at show cause notice issued u/s 144(3) it is apparent that the same was issued on 22.02.2025 with stipulation for submission of reply by 26.02.2025. Therefore the time so specified by the Faceless Assessment Unit is not in consonance with the Standard Operative Procedure. Therefore this Court is of the view that there has been flagrant violation of the principles of natural justice. Thus as inadequate time was granted to the petitioner to furnish voluminous documents. Therefore this Court is inclined to set aside the Assessment Order passed u/s 147 read with Section 144B - Assessee appeal allowed.

Summary

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

1. Whether the issuance of the show cause notice under Section 144(3) of the Income Tax Act, 1961, with a response time of four days, complies with the principles of natural justice and the Standard Operating Procedure (SOP) prescribed for faceless assessments under Section 144B of the Income Tax Act.

2. Whether the time granted for uploading voluminous documents and evidences on the faceless assessment portal was sufficient and reasonable, given the technological constraints such as limited space and scanning time.

3. Whether the assessment order passed under Section 147 read with Section 144B of the Income Tax Act, 1961, without affording adequate opportunity to the petitioner to present its case, is liable to be set aside.

4. The extent of the powers of the National Faceless Assessment Centre under Section 144B(6)(xi) of the Income Tax Act to prescribe procedures and timelines, and whether such procedures must conform to the principles of natural justice.

Issue-wise Detailed Analysis

Issue 1: Compliance with Principles of Natural Justice and SOP Timelines

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act empowers the Assessing Officer to reassess income where income has escaped assessment. Section 144B introduces faceless assessment procedures and empowers the National Faceless Assessment Centre to prescribe standards, procedures, and processes under Section 144B(6)(xi). The SOP dated 03.08.2022 prescribes a response time of seven days from the issuance of the show cause notice, with a possible curtailment only in exceptional circumstances such as limitation dates for completing assessment.

Judicial precedents cited include Basudeo Tiwary v. Sido Kanhu University and Nagarjuna Construction Co. Ltd. v. Government of Andhra Pradesh, which emphasize that violation of natural justice leads to arbitrariness and courts presume a duty to observe natural justice whenever rights are affected by statutory decisions.

Court's Interpretation and Reasoning: The Court observed that the show cause notice was issued on 22.02.2025 with a due date for submission of reply fixed on 26.02.2025, providing only four days instead of the prescribed seven days under the SOP. The Court held that this is a flagrant violation of the SOP and the principles of natural justice, which require reasonable opportunity to be given to the assessee.

Application of Law to Facts: The Court found the faceless assessment unit's action of granting only four days without adequate justification inconsistent with the SOP and natural justice. The Court noted that the SOP allows curtailment of the response time only in view of limitation dates, which was not demonstrated here.

Treatment of Competing Arguments: The Revenue contended that the petitioner had sufficient time to upload the documents and that the order passed was appropriate. The Court rejected this, emphasizing the mandatory nature of the SOP timelines and the need to afford reasonable opportunity.

Conclusion: The Court concluded that the issuance of the show cause notice with only four days' time was contrary to the SOP and principles of natural justice, rendering the assessment order liable to be set aside.

Issue 2: Adequacy of Time and Facility for Uploading Documents

Relevant Legal Framework: The faceless assessment procedure requires submission of evidences electronically. The SOP recognizes the need to provide reasonable opportunity and adequate time to the assessee to comply.

Key Evidence and Findings: The petitioner submitted that voluminous records had to be scanned and uploaded, which was time-consuming due to limited space on the portal. The four-day period was insufficient for compliance.

Court's Reasoning: The Court accepted the petitioner's submission that the limited time and space constraints hindered proper compliance. This was relevant to the principle of natural justice, which demands a fair opportunity to present one's case.

Application of Law to Facts: Given the technological constraints and volume of documents, the Court found the time granted insufficient and unreasonable.

Treatment of Competing Arguments: The Revenue argued that the petitioner could have uploaded documents within the stipulated time. The Court found this argument unpersuasive in light of the petitioner's uncontested difficulties.

Conclusion: The Court held that the inadequate time and limited facility for uploading documents violated the principle of reasonable opportunity.

Issue 3: Validity of the Assessment Order Passed Under Section 147 read with Section 144B

Relevant Legal Framework: Section 147 authorizes reassessment where income has escaped assessment. Section 144B introduces faceless assessment procedures, requiring adherence to prescribed standards and natural justice.

Court's Interpretation and Reasoning: The Court noted that the assessment order was passed without affording adequate opportunity to the petitioner to submit necessary documents, in violation of the SOP and natural justice.

Application of Law to Facts: Since the petitioner was not given reasonable opportunity to comply, the assessment order was rendered arbitrary and unsustainable.

Conclusion: The Court set aside the assessment order dated 08.03.2025 and remitted the matter for fresh adjudication with directions to afford reasonable opportunity.

Issue 4: Powers of the National Faceless Assessment Centre and Requirement to Observe Natural Justice

Relevant Legal Framework: Section 144B(6)(xi) empowers the Principal Chief Commissioner or Principal Director General in charge of the National Faceless Assessment Centre to lay down standards and procedures for its functioning, subject to Board approval.

Court's Interpretation and Reasoning: The Court observed that while the Centre has powers to prescribe procedures, these must comply with the overarching principles of natural justice. The SOP itself reflects an intention to ensure reasonable opportunity.

Application of Law to Facts: The Court found that deviation from the SOP without valid justification amounted to violation of natural justice.

Conclusion: The Court emphasized that the procedures prescribed under Section 144B must be consistent with natural justice and cannot be arbitrarily curtailed.

Significant Holdings

"It is apparent that the time so specified by the Faceless Assessment Unit is not in consonance with the Standard Operative Procedure. Therefore, this Court is of the view that there has been flagrant violation of the principles of natural justice."

"Violation of natural justice leads to arbitrariness and when right is affected by decision taken by statutory powers, the Court may presume existence of a duty to observe the rules of natural justice."

"Inadequate time was granted to the petitioner to furnish voluminous documents. Therefore, this Court is inclined to set aside the Assessment Order dated 08.03.2025 passed under Section 147 read with Section 144B of the Income Tax Act and remit the matter to the opposite party no. 4-The Assessment Unit, Income Tax Department, The National Faceless Assessment Centre for fresh adjudication."

Core principles established include the mandatory adherence to the SOP timelines issued under Section 144B of the Income Tax Act, the necessity of affording reasonable opportunity consistent with natural justice in faceless assessments, and the invalidity of assessment orders passed in breach of these principles.

Final determinations are that the assessment order framed under Section 147 read with Section 144B is set aside due to violation of natural justice arising from insufficient time granted for compliance, and the matter is remitted for fresh adjudication with directions to afford reasonable opportunity to the petitioner.