MARGITA INFRA Versus NATIONAL E-ASSESSMENT- CENTRE DELHI

“IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

R/SPECIAL CIVIL APPLICATION NO. 15756 of 2021”

Date: 09/01/2023

CORAM: HONOURABLE MS. JUSTICE SONIA GOKANI and

HONOURABLE MR. JUSTICE SANDEEP N. BHATT

Author: Hetu, a student at Graphic Era Hill University, Dehradun

Facts of the case

 The taxpayer submitted their income tax return for the 2018-19 assessment year. The tax authorities issued a notice suggesting they would disregard the recorded accounts and approximate the net profit instead. Despite several requests by the taxpayer for a video conference hearing, these were denied. The assessment was finalized by rejecting the accounts and increasing the declared income significantly, resulting in a fifty-fold 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 144B: 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. The petitioner undergoes periodic tax assessments 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 was also received from the respondent under section 142. 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 was such request denied, but the respondent proceeded to complete the assessment by disregarding the petitioner’s accounts and increasing the proposed income by fifty times as stated in the show cause notice, which warrants consideration.

2. Affidavit-in-reply is filed by the respondent, denying each and every allegation 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 the assessment scheme under Section 144B of the Act, which operates without direct interaction with taxpayers

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 is efficacious remedy available and instead of approaching this Court the petitioner should be relegated to the same.

6. One of the grounds for challenging the assessment order is that it deviates from the provisions of the Income Tax Act, as the additions made exceed the scope and issues outlined in the show cause notice, resulting in the assessed income being 50 times higher than originally proposed. 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, assessment 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. The petitioner will have the opportunity to raise all legal arguments available in the new proceedings.

While making the order reference made to case i.e., Gandhi Realty (India) (P.) Ltd. v. Asstt. /Jt./Dy. /Asstt. CIT/ITO .

Considering that the provision itself allows the assessee the right to request a hearing, and being denied repeatedly when requested is certainly the cause 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 will be heard from the point where it was previously halted. The next date of hearing be given by the respondent through the email 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

The tax department conducted a faceless assessment for the assessee, wherein it disregarded the assessee’s financial records and made substantial additions to the income proposed in the show cause notice. These additions resulted in the assessed income being fifty times higher than originally proposed. Throughout the assessment procedure, the assessee repeatedly requested a virtual hearing via video conferencing, but the department denied these requests without considering the reasons provided by the assessee. The court found that this repeated denial of the assessee’s requests for a virtual hearing violated the principles of natural justice.

The court highlighted that Section 144B of the Income-tax Act explicitly allows the assessee to request a hearing during the assessment process. By consistently refusing this right, the assessment order was deemed invalid due to the breach of natural justice principles. Furthermore, the assessment order was considered to be inconsistent with the provisions of the Income-tax Act because the additions to the income exceeded the scope and issues outlined in the show cause notice. Faceless assessment scheme, which was followed by the department under Section 144B, is designed to ensure efficiency and transparency in the assessment process. In this case, the denial of the assessee’s right to request a virtual hearing via video conferencing undermined the intended purpose of the scheme. Consequently, the court decided to invalidate and cancel both the assessment order and the demand notice issued under Section 144.

Department was granted permission to issue the fresh show cause notice, and during the new proceeding assessee was allowed to raise all relevant contentions. The decision of Court aimed to rectify the procedural flaws in the initial assessment and provide the assessee with an opportunity for fair and just proceedings as per the provisions of the Income-tax Act and principles of natural justice

Conclusion

This case highlights the importance of procedural fairness and principles of natural justice in the context of faceless assessments under India’s E-Assessment Schemes which is designed to streamline the assessment process, but there have been instances where these principles are overlooked, leading to violation of principle of natural justice, resulting in legal challenges therefore court underscored the importance of adhering to principles of natural justice, providing taxpayers with a fair opportunity to respond, and ensuring that the faceless assessment process operates effectively without glitches or mismanagement in order to ensure that the rights of taxpayers must be protected. If these principles are breached, courts may intervene and set aside the assessment order.

FAQ

Based on the detailed case analysis provided, here are some FAQs that could be prepared:

1. What does “faceless assessment” mean under the Income-tax Act?

Faceless assessment is a process where tax evaluations are conducted electronically without direct interaction between the taxpayer and the assessing officer, aimed at enhancing efficiency and transparency.

2. What were the primary concerns in the Margita Infra case?

The case raised issues such as significant alterations in the final assessment order without notifying the taxpayer, failure to allow the taxpayer to respond to new information, and non-compliance with Section 144B of the Income-tax Act.

3. Why did the court invalidate the assessment order and demand           notice in this case?

The court nullified the assessment order and demand notice because the taxpayer’s repeated requests for a virtual hearing were denied, breaching principles of natural justice. Furthermore, the additional income assessments exceeded the boundaries defined in the show cause notice.

4. What is the significance of Section 144B of the Income-tax Act in the Margita Infra case?

Section 144B outlines procedural guidelines for faceless assessments, including the taxpayer’s entitlement to request a hearing. Its breach in this case contributed to the court’s decision to invalidate the assessment order.

5. What implications does the Margita Infra case have for faceless assessment systems?

The case underscores the importance of adhering to procedural fairness and natural justice principles in faceless assessments. It highlights that denial of a taxpayer’s right to a virtual hearing and exceeding the issues outlined in assessments can lead to legal challenges and annulment of assessment orders.

6. How does the Margita Infra case underscore the role of natural justice in tax assessments?

The case emphasizes that tax assessments must uphold principles of natural justice, ensuring taxpayers have a fair opportunity to respond to proposed assessments and any adverse findings.