In a recent order in DJ Surfactants v. National E-Assessment Center, Income Tax Department, New Delhi and Others (Written Petition No. 4814/2021) (Order), the Hon’ble Delhi High Court (High Court) ruled layover granted in the assessment order issued in the faceless assessment procedure. The High Court found that DJ Surfactants (taxpayers) found in the faceless assessment an apparent violation of “principles of natural justice” by the National E-Assessment Center (tax department).
With the intention of eliminating the human interface between taxpayers and tax officials and creating more transparency in tax administration, the government introduced the Faceless Assessment Scheme 2019 (Faceless Assessments) in September 2019. See our ERGO of September 26, 2019. One of the outstanding features of Faceless Assessments was that a personal hearing (via video conferencing) would only take place if the taxpayer’s application for a personal hearing is approved by the prescribed authority. Therefore, all income tax assessments (with certain exceptions) are currently carried out facelessly. To conduct faceless assessments, the government had set up various units (i.e., National Faceless Assessment Center, Regional Faceless Assessment Centers, Assessment Units, Verification Units, Engineering Units, and Review Units).
Section 68 of the Income Tax Act 1961 (IT Act) provides for the taxation of amounts (that is, in the form of share capital, unsecured loans, etc.) deposited on a taxpayer’s ledger if that taxpayer is unable to provide a satisfactory explanation on type and source (section 68, addendum). In view of the judgments in this regard, the legal situation is justified that an addition according to § 68 cannot be made if the taxpayer has fulfilled his prima facie evidence to provide information on the “identity” of the payer / applicant, the applicant, “creditworthiness” of the payer / Share applicant and “authenticity of the transaction” (ICG test) to the tax department.
The present case of the taxpayer concerned the assessment year 2018-19 (relevant to the fiscal year (FY) 2017-18) in which the question in question was asked in relation to Section 68 Unsecured Loans. In the course of the assessment procedure, the tax department of the taxpayer issued a notification of the reason for issuance dated March 1, 2021 (SCN) together with a draft assessment decision with an even date. The taxpayer had to submit his answer to the SCN by March 8, 2021 and explain why the aforementioned addition according to § 68 should not be made.
In response to the SCN, on March 8, 2021, the taxpayer requested an adjournment for a week so that they could submit the response. In the absence of a response from the tax authority to the adjournment request, the taxpayer submitted his response on March 12, 2021 and demonstrated the merits of his case by attempting to establish / meet the ICG test on unsecured loans. The taxpayer also requested a personal hearing to further clarify his case.
Despite the request for a personal hearing and submission of an answer on the main issue, the tax authority passed the assessment ordinance on March 13, 2021, without taking into account the answer submitted by the taxpayer. The taxpayer affected by the taxation ordinance filed a written application with the High Court requesting that the taxation ordinance be repealed for violating the “principles of natural justice”.
The High Court ruled that the taxpayer found an apparent violation of “the principles of natural justice” by finding:
The assessment notice was passed without taking into account the response submitted by the taxpayer on March 12, 2021. and
The application for a personal hearing was not granted by the tax authorities.
The High Court also granted a provisional postponement of the assessment order pending further orders. The matter was now brought up for a hearing on June 2, 2021.
Since the introduction of Faceless Assessments, cases have recently been identified where taxpayer filing has not been primarily considered and in some cases the request for a face-to-face interview has also not been approved. Interestingly, other high courts have issued orders similar to the following:
The Supreme Court of Hon’ble Telangana at Axis Windparks (Anantapur) Private Limited v Union of India and Others (Written Petition No. 11812 of 2021) has granted a temporary stay on an examination order issued under the faceless assessment regime with similar facts.
The Hon’ble Madras Supreme Court in Magick Wood Exports Private Limited v Delhi National E-Assessment Center (Written Petition No. 10693 of 2021) also overturned a faceless scoring review order without the motion Postponement to be considered filed by the taxpayer. In this case, the Hon’ble Madras High Court ordered the Tax Department to review the taxpayer’s submission and complete the assessment process in accordance with the law.
The Hon’ble Bombay High Court for Shelf Drilling Offshore Services (India) Private Limited against the Deputy Commissioner for Income Tax, Mumbai and Others (Written Petition No. 10949 of 2021) granted a temporary stay on a faceless tax assessment order the determination that the statements of the taxpayer about the new additions in the assessment order were not heard at all. The Hon’ble Bombay High Court further noted that “there are many glitches in implementing a faceless grading scheme”.
This order, and the aforementioned orders of the Hon’ble Telangana High Court, Hon’ble Madras High Court and Hon’ble Bombay High Court, are important orders like the taxpayers, in whose case appraisal decisions have been made on similar grounds among the Faceless The Appraisal Regime can assess the merits / facts of their cases and assess how to proceed. These orders by the High Courts are evidence of an important principle that a taxpayer must be given the full opportunity to present and justify his case and that his statements / arguments must be duly taken into account by the tax authorities when issuing a corresponding assessment decision the law.
It is also worth mentioning here that the first appointment before the commissioner (appointment) is faceless. Therefore, similar problems / challenges may arise in such appeals and one may knock on the door of the courts again.
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