Quashing of Assessment Order: A Case of Natural Justice

Introduction

The assessment of income tax in India has undergone a transformative shift with the introduction of the faceless assessment regime under Section 144B of the Income Tax Act, 1961. While this digital framework aims to enhance transparency and eliminate human bias, it has raised critical questions about adherence to natural justice principles. The power of High Courts to quash assessment orders violating these principles is derived from Article 226 of the Constitution, which empowers High Courts to issue writs for enforcement of fundamental and legal rights. This article examines the legal framework governing quashing of assessment orders, statutory provisions regulating faceless assessments, and judicial precedents shaping this area of tax law.

Understanding the Principles of Natural Justice

The principles of natural justice constitute the bedrock of procedural fairness in administrative and quasi-judicial proceedings. These principles have evolved through judicial interpretation and are fundamental to ensuring justice. The two primary pillars are nemo judex in causa sua (no one should be a judge in their own cause) and audi alteram partem (hear the other side). The latter principle mandates that no person should be condemned unheard and every party must be afforded reasonable opportunity to present their case before any adverse decision [1]. The principle encompasses several essential components: adequate notice must be provided informing the assessee of proposed action and grounds; the assessee must be granted reasonable opportunity to be heard through written submissions or personal hearings; and the authority must consider submissions in good faith and provide reasoned decisions.

The Supreme Court of India has consistently held that the principles of natural justice are applicable to income tax proceedings. In the landmark judgment of Dhakeshwari Cotton Mills Ltd. v. CIT [2], the apex court emphasized that assessment proceedings before the Income Tax Officer are judicial proceedings, and all incidents of such judicial proceedings must be observed before any conclusion is arrived at. The court held that the assessee has a right to inspect the record and all relevant documents before being called upon to lead evidence in rebuttal. This fundamental right cannot be taken away by any express provision of the Income Tax Act unless the statute explicitly excludes the application of natural justice principles.

The audi alteram partem principle encompasses several essential components. First, adequate notice must be provided to the assessee, informing them of the proposed action and the grounds upon which such action is contemplated. The notice must be clear, unambiguous, and contain sufficient particulars to enable the assessee to prepare an effective response. Second, the assessee must be granted a reasonable opportunity to be heard, which may take the form of written submissions or personal hearings, depending on the circumstances of the case. Third, the authority must consider the submissions made by the assessee in good faith and provide reasoned decisions explaining why certain contentions were accepted or rejected.

Constitutional Framework: Article 226 and Writ Jurisdiction

Article 226 of the Constitution empowers every High Court to issue directions, orders, or writs including habeas corpus, mandamus, prohibition, quo warranto, and certiorari for enforcement of fundamental rights under Part III and for any other purpose [3]. Article 226’s scope is broader than Article 32 as it protects not only fundamental rights but also legal rights. This expansive jurisdiction has made High Courts the primary forum for challenging administrative actions including income tax assessment orders.

High Courts’ territorial jurisdiction extends throughout their territories. Clause (2) of Article 226, introduced through the Fifteenth Amendment in 1963, allows High Courts to issue writs to any government, authority, or person outside territorial limits if cause of action arises within their jurisdiction. This amendment was necessitated by practical difficulties faced by litigants approaching distant High Courts when challenging Central Government actions. When challenging assessment orders under Article 226, petitioners typically seek certiorari to quash orders suffering from jurisdictional error, natural justice violation, or illegality. High Courts do not function as appellate authorities but examine whether orders are vitiated by illegality going to the root of the matter. If natural justice violations or mandatory procedural non-compliance is found, courts have power to quash orders and remit matters to assessing authorities for fresh consideration in accordance with law and principles of fairness.

The Faceless Assessment Regime under Section 144B

Section 144B introduced by Finance Act 2020 establishes the framework for conducting assessments electronically through the National Faceless Assessment Centre (NaFAC) without direct interface between assessing officers and assessees [4]. The scheme aims to minimize human discretion, eliminate corruption, and ensure uniformity through technology and automated case allocation to assessment, verification, technical, and review units. All communications are conducted electronically through designated portals. Assessment units may issue notices under Sections 142(1) or 143(2) seeking information, and assessees must respond within specified timelines, typically 7-15 days. When proposing additions to returned income, assessment units must issue show cause notice-cum-draft assessment order setting out proposed variations and providing opportunity to respond before finalization.

A critical safeguard in Section 144B is the requirement that draft assessment orders be reviewed by a review unit before finalization. The review unit examines whether the draft complies with law and natural justice principles. Despite these safeguards, challenges have emerged regarding adequacy of response time and specificity of show cause notices. Courts have emphasized that Section 144B procedures are mandatory, not directory. Non-compliance with procedural requirements, such as failure to issue show cause notice-cum-draft assessment order, renders the assessment order legally invalid. The Delhi High Court affirmed that violation of mandatory Section 144B procedures coupled with breach of natural justice warrants quashing of assessment orders [5].

Judicial Precedents on Quashing of Assessment Orders

Indian courts have developed robust jurisprudence on circumstances under which assessment orders may be quashed for violating natural justice. The Kerala High Court recently quashed an assessment order under the Income Tax Act on grounds of clear natural justice violation [6]. The court noted the assessee had not been provided adequate opportunity to respond to allegations, and the assessment order was passed in undue haste without proper consideration of submissions. The principle established is that hasty assessment without adequate hearing constitutes a fatal flaw rendering the entire proceeding voidable.

Similarly, the Bombay High Court held that non-compliance with mandatory Section 144B provisions, particularly failure to issue show cause notice-cum-draft assessment order, constitutes breach of statutory natural justice principles that cannot be rectified through appellate remedies [7]. The court emphasized that when a statute prescribes specific procedure for assessment, that procedure must be followed strictly, and any deviation vitiates the assessment order. This principle recognizes that procedural requirements are not mere technicalities but essential safeguards protecting taxpayers’ rights and ensuring fairness in tax administration. The court further observed that the mandatory nature of these procedures stems from their fundamental purpose of preventing arbitrary administrative action and ensuring transparency in decision-making processes.

The Punjab and Haryana High Court, in the case of Arihant Roller Flour Mills v. National Faceless Assessment Centre, quashed an assessment order where the hearing scheduled through video conferencing was rescheduled by the assessee due to unavailability, but the request was not acknowledged by the assessing authority, and the order was passed ex parte [8]. The court held that such conduct was violative of clauses (vii) and (viii) of sub-section (6) of Section 144B, which mandate that adequate opportunity must be provided to the assessee to present their case. The matter was remitted back to the assessing officer with directions to provide the assessee a fresh opportunity to be heard.

The Supreme Court has consistently held that when an order is passed in violation of natural justice principles, it is void and not merely voidable. In Ponkunnam Traders v. Additional Income Tax Officer [9], the court observed that failure to conform to the principles of natural justice would make a judicial or quasi-judicial order void, and such an order cannot be validated by appellate or revisional orders. This principle has significant implications for assessment proceedings, as it means that an assessee is not required to exhaust alternative remedies such as filing an appeal before the Commissioner (Appeals) if the assessment order itself is fundamentally flawed due to violation of natural justice.

The Critical Role of Show Cause Notices

A proper show cause notice is a fundamental safeguard in assessment proceedings. It must contain specific Income Tax Act provisions, facts forming the basis of proposed order, penalties envisaged, and the assessee’s explicit right to respond. Recent decisions establish that orders without proper show cause notices are invalid. However, concerns exist regarding quality and specificity of notices under faceless assessment. Many notices are standardized, vague, and lack substantive explanation or supporting evidence, undermining taxpayers’ ability to respond effectively. The short response time of 24-48 hours exacerbates these issues in complex cases.

In Punjab National Bank v. All India Bank Employees Federation, the Supreme Court held that a notice not containing charges against which penalty was imposed was defective, and quashed the penalty. The court observed that if essential particulars required to enable a person to meet charges are not furnished in the notice, it would be inadequate and any order pursuant to such notice would be liable to be set aside.

Balancing Efficiency and Fairness: The Way Forward

The faceless assessment regime represents significant progress in modernizing tax administration and reducing corruption. However, implementation must not compromise fundamental procedural rights. Courts recognize that digitization should not curtail constitutional rights under Articles 14 and 21 guaranteeing equality and right to life and liberty. To restore trust and fairness, reforms are necessary: show cause notices must be precise with supporting evidence; adequate response time should be provided based on case complexity; assessment orders must explicitly address submissions made by assessees; and training programs should ensure officers understand natural justice principles and conduct fair assessments.

Conclusion

High Courts’ power to quash assessment orders violating natural justice principles serves as a crucial check on arbitrary exercise of power by tax authorities. The faceless assessment regime must be implemented respecting fundamental procedural rights. Natural justice principles represent the essence of fair adjudication in a democracy governed by rule of law. As the Supreme Court observed in Maneka Gandhi v. Union of India, procedural fairness is integral to Article 21 rights, and any procedure failing reasonableness and fairness tests would be constitutionally impermissible.

Judicial precedents demonstrate courts’ vigilance in protecting taxpayers’ rights and readiness to quash orders violating natural justice or statutory procedures. Courts recognize that not every procedural irregularity warrants interference; the test is whether the irregularity caused prejudice to the assessee or denied fair opportunity to present their case. Going forward, tax authorities must balance efficiency and fairness, ensuring faceless assessment objectives are achieved without compromising fundamental principles forming the foundation of administrative law in India.

References

[1] Audi Alteram Partem – Wikipedia. Available at: https://en.wikipedia.org/wiki/Audi_alteram_partem

[2] Dhakeshwari Cotton Mills Ltd. v. CIT, [1954] 26 ITR 775 (SC). Available at: https://indiankanoon.org/doc/1712542/

[3] Article 226 in Constitution of India. Available at: https://indiankanoon.org/doc/1712542/

[4] Section 144B of Income Tax Act: Faceless Assessment. Available at: https://cleartax.in/s/e-assessment-scheme-2019

[5] Delhi High Court – I-T Faceless Assessment: Violation of principles of natural justice. Available at: https://legiteye.com/i-t-faceless-assessment-violation-of-principles-of-natural-justice-mandatory-procedure-merits-quashing-of-assessment-says-delhi-hc/

[6] Kerala High Court quashes Assessment Order for Violation of Natural Justice. Available at: https://www.taxscan.in/violation-of-natural-justice-principles-kerala-hc-quashes-assessment-order-passed-under-income-tax-act/368056/

[7] Bombay High Court – Teerth Developers and Teerth Realties JV (AOP). Available at: https://www.lawtext.in/judgement.php?bid=1224

[8] Arihant Roller Flour Mills v. National Faceless Assessment Centre, Punjab High Court. Available at: https://primelegal.in/2023/05/11/order-quashed-on-grounds-of-violation-of-principles-of-natural-justice-punjab-high-court/

[9] Ponkunnam Traders v. Additional Income Tax Officer, [1972] 83 ITR 508 (Ker.). Available at: https://taxguru.in/income-tax/latest-cases-principles-natural-justice-faceless-assessment.html

 

Published and Authorized by Dhrutika Barad