Income Tax Assessment – It is faceless but not voiceless !

Author – Gopal Mundhra, Partner, Economic Laws Practice

The scheme of scrutiny assessment under Income Tax witnessed a paradigm shift with the introduction of faceless assessment. The underlying intention behind this transition was to eliminate exceptionable activities by avoiding high level of personal interaction between taxpayers and the tax officials. Though the underlying intent of the faceless assessment scheme, is no doubt in the right direction, taxpayers have been facing multiple issues. One of them is that assessment orders are being passed without following due process prescribed under Section 144B of the Income Tax Act, 1961 (‘IT Act’).

This has led to a whole new series of litigation where almost every other assessment order is being challenged before jurisdictional High Courts on the grounds of violation of principles of natural justice. During the course of these hearings, the Revenue more or less conceded defeat where the Assessment Orders under challenge were passed without issuance of show cause notice or draft assessment order or any other procedural infirmities. However, on the issue of granting  a personal hearing to the assessee, the Revenue was of the view, that under the scheme of faceless assessment,  a grant of a personal hearing is not mandatory in every case.

As per Section 144B(7) of the IT Act, the assessee may request for a personal hearing where a variation is proposed in the draft assessment order and the assessee is issued a show cause notice. Further, the Chief Commissioner or the Director General, in charge of the Regional Faceless Assessment Centre, ‘may’ approve the request for personal hearing if he is of the opinion that the request is covered by the circumstances as laid down by the Principal Chief Commissioner with approval of CBDT. In this regard, the CBDT vide Circular dated 23.11.2020 (as made applicable to Faceless Assessment Scheme under Section 144B by Circular dated 31.03.2021), states that personal hearing would be granted by the Department to assessee where:

  • The assessee has submitted written submission in response to the Draft Assessment Order; and
  • The assessee in his/her written response disputes the facts underlying the proposed modification and makes a request for personal hearing.

In light of the word ‘may’ used in Section 144B(7)(viii) and the SOP laid down in CBDT Circular dated 23.11.2020, the Revenue took the position that the personal hearing is discretionary and could be granted only where any dispute on fact is involved.

The issue was initially addressed by the Hon’ble Delhi High Court in Sanjay Aggarwal vs. NFAC [ ] and by the Hon’ble Bombay High Court in Piramal Enterprises Ltd. vs. ACIT [WP(L) No. 11040 of 2021]  wherein it was held that it was incumbent upon the Department to accord a personal hearing to the assessee where such a request was made.  Failureailure to do so would amount to violation of principles of natural justice as well as mandatory procedure prescribed in the Faceless Assessment Scheme under Section 144B of the Act. However, these decisions did not delve into the impact of the word ‘may’ in Section 144B and the SOP laid down in Circular dated 23.11.2020. Further, another question which remained unanswered was whether grant of personal hearing frustrates the concept and purpose of faceless assessment as the underlying objective is to eliminate any personal interaction between taxpayers and the Departmen.

The controversy has now been put to rest by the Delhi High Court in is recent landmark ruling in the case of Bharat Aluminium Company Ltd. vs. Union of India & Ors. [WP(C) 14528/2021] wherein it is held that even under the faceless assessment scheme, the assessee would have a vested right to personal hearing and the same has to be given by the Department if an assessee asks for it, irrespective of the facts of each case. The key findings of the decision have been summarized below:

  • Faceless assessment does not mean no personal hearing. Grant of personal hearing would neither frustrate the concept nor defeat the purpose of faceless assessment. Reference was placed on the decision of Bombay High Court in Piramal Enterprises (supra).
  • Where an action entails civil consequences, observance of natural justice would be warranted and unless the law specifically excludes the application of natural justice, it should be taken as implanted into the scheme. Reference was placed on decision of Supreme Court in Raghunath Thakur vs. State of Bihar [(1989) 1 SCC 229] and Sahara India (Firm) v. CIT [[[2008] 169 Taxman 328 (SC)].
  • As per the settled legal position inter alia laid down in State (Delhi Admn.) vs. I.K. Nangia & Anr. [(1980) 1 SCC 258], where a discretion is conferred upon a quasi judicial authority whose decision has civil consequences, the word ‘may’ which denotes discretion should be construed to mean a command. Therefore, the word “may” in Section 144B(viii) should be read as “must” or “shall” and requirement of giving an assessee a reasonable opportunity of personal hearing is mandatory.
  • The identity of the assessing officer can be hidden/protected while granting personal hearing by either creating a blank screen or by decreasing the pixel/density/resolution.
  • The distinction made under Circular dated 23.11.2020 with respect to question of facts and question of law is untenable and not founded on intelligible differentia. The right to personal hearing cannot depend on facts of each case and would be universally available where the assessee asks for it.

In view of the above decision of Delhi High Court, the Department would be mandatorily required to grant personal hearing to the assessee under faceless assessment wherever the assessee asks for it and irrespective whether the assessee disputes any question of fact or question of law. This ruling not only upholds the settled legal position on principles of natural justice but also discards the myth that the scheme of faceless assessment would be frustrated with grant of personal hearing. It must be appreciated that if the ultimate objective of faceless assessment is to prevent malpractices occurring due to human interactions behind closed doors, this objective would be met if personal hearing is granted by way of virtual means with the identity of the Assessing Officer being hidden. Therefore, there is no plausible logic to take away the right of personal hearing from the assessees in the garb of faceless assessment. It would also reduce unnecessary litigation arising out of incorrect understanding of legal implications on facts in hand by the Assessing Officers, which one may be aware, is rampant. This judgement has come as a breather for industry – one can now be reassured that income tax assessment can be faceless but certainly not voiceless!