Kiran Raj

The Division Bench of the Bombay High Court comprising Justice G. S. Kulkarni and Justice Advait M. Sethna has quashed an income tax assessment order along with associated demand and penalty notices, citing a fundamental breach of the principles of natural justice. The court held that the assessing officer failed to provide the petitioner an opportunity for a personal hearing despite a statutory mandate under Section 144B of the Income Tax Act, thereby rendering the assessment order void.

The petitioner in this case is a partnership firm engaged in trading and investment activities in the capital market. For the assessment year 2020-21, the petitioner filed a NIL return of income. However, the income tax authorities selected the return for scrutiny under Section 143(2) of the Income Tax Act, 1961.

The Income Tax Department, through the National Faceless Assessment Centre (NFAC), issued multiple notices under Section 142(1) seeking various details, including documentation concerning unsecured loans and verification of certain transactions. The petitioner duly responded to these notices, providing the requisite details and supporting documents.

On August 18, 2022, a show cause notice-cum-draft assessment order was issued by the NFAC, directing the petitioner to submit objections to the proposed assessment or to request a personal hearing through video conferencing by August 26, 2022. The petitioner submitted objections on time and, on August 27, 2022, requested a personal hearing. However, the NFAC did not consider this request and proceeded to finalize the assessment on September 9, 2022.

In the final assessment order, the department made an addition of Rs. 4,58,74,139 to the petitioner’s total income. Based on this assessment, a demand notice under Section 156 was issued, directing the petitioner to pay Rs. 2,21,98,176. Additionally, penalty proceedings under Sections 270A and 271AA(1) were initiated for alleged underreporting and misreporting of income.

Aggrieved by this, the petitioner approached the Bombay High Court, contending that the final assessment order was passed in violation of the principles of natural justice, as the assessing officer had not granted the requested personal hearing despite the mandate under Section 144B.

The court carefully examined the relevant provisions of the Income Tax Act, particularly Section 144B, which governs faceless assessment. The court noted that this provision was introduced to bring transparency and fairness to the assessment process while ensuring that the rights of the assessee are protected. Section 144B(6)(viii) specifically provides that an assessee has the right to seek a personal hearing through video conferencing, which the assessing officer must grant before passing the final assessment order.

The court recorded that "the mandatory procedure provided for therein had to be followed by the respondents not only during assessment proceedings but also whilst issuing the final assessment order." The court further found that the petitioner’s request for a hearing was ignored, despite being submitted before the issuance of the final assessment order. This, in the court’s view, amounted to a violation of the statutory mandate and rendered the assessment order legally untenable.

The judgment referenced the decision in Teerth Builders and Realties JV v. Additional/Joint/Deputy/Assistant Commissioner of Income Tax, wherein the court had observed that "any non-adherence to the mandatory requirement of the statutory provisions and such principles as recognized by it, would render the assessment order patently illegal." Applying the same principle, the court held that an order passed without following the mandated procedure is a nullity.

The court also dismissed the department’s argument that the petitioner’s request for a hearing was belated. The bench observed that the request was made within a reasonable period and that a mere delay of one day beyond the compliance deadline did not justify denying the right to a personal hearing. The court held that statutory rights cannot be negated on hyper-technical grounds.

Additionally, the court examined the additions made to the petitioner’s income and found that the assessment order was passed without properly considering the submissions and supporting evidence provided by the petitioner. The court noted that fundamental errors in the assessment process had led to wrongful additions, further strengthening the case for setting aside the assessment order.

Based on the findings, the Bombay High Court set aside:

1. The final assessment order dated September 9, 2022

2. The corresponding demand notice issued under Section 156.

3. The penalty initiation notices under Sections 270A and 271AA(1).

The respondents were directed to reassess the matter afresh, ensuring that all statutory requirements, including the grant of a personal hearing if requested, are met.

Case Title: Vimal Trading v. National Faceless Assessment Centre & Ors.

Case Number: Writ Petition No. 12317 of 2022

Bench: Justice G. S. Kulkarni and Justice Advait M. Sethna

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