In Writ Petition No. 25903 of 2022 -TEL HC- Income tax department must use faceless assessment system for re-assessment: Telangana High Court
Justice P. Sam Koshy & Justice Laxmi Narayana Alishetty [14-09-2023]

Read Order: Kankanala Ravindra Reddy v. The Income Tax Officer and others

Chahat Varma

New Delhi, September 19, 2023: In a significant ruling, the Telangana High Court has held that the Income Tax Department cannot initiate reassessment proceedings against a taxpayer using the local jurisdictional officer. Instead, the Department must use the faceless assessment system, as mandated by the law.

In the case at hand, a batch of writ petitions was filed, challenging the order issued by the Income Tax Officer for the assessment year 2016-17, pursuant to Section 148-A(d) of the Income Tax Act, 1961. The specific objection raised was that once the Income Tax Officer had decided to initiate re-assessment and had issued a notice under Section 148A of the Act, it was mandatory for them to follow the amended provisions of the Act.

According to the counsel representing the petitioner, the re-assessment should have been conducted in a faceless manner as per the scheme established by the Central Government under Section 151A of the Act. This implied that the petitioner believed that the assessment should not have been carried out by the jurisdictional officer but rather in accordance with the government's scheme, which promoted a more decentralized and automated approach to tax assessment, removing the influence of the local tax officer.

The division bench of Justice P. Sam Koshy and Justice Laxmi Narayana Alishetty referred to the judgment rendered in Union of India & Ors v. Ashish Agarwal [LQ/SC/2022/586] and observed that the Supreme Court, in order to strike a balance between the rights of the revenue and the respective assessee’s, ordered that the notices that were issued under Section 148 of the un-amended Act should be deemed to have been issued under Section 148A of the Income Tax Act as substituted by the Finance Act, 2021. Additionally, the Supreme Court had ordered that these notices should be construed or treated as show cause notices in terms of Section 148A (b) while disposing of the batch matters.

The bench further referred to two notifications issued by the Central Board of Direct Taxes dated 28.03.2022 and 29.03.2022 and observed that they clearly indicated that the Central Board of Direct Taxes had a clear intent when it formulated the two schemes - the Faceless Jurisdiction of Income Tax Authorities Scheme, 2022, and the e-assessment of Income Escaping Assessment Scheme 2022. These schemes were designed to be conducted in a faceless manner. The Department was required to adhere to two mandatory conditions. First, the allocation of cases had to be made through an automated allocation system following the risk management strategy formulated by the Board under Section 148 of the Act. Second, the re-assessment had to be carried out in a faceless manner to the extent provided under Section 144B of the Act.

Thus, the bench expressed its opinion that following the introduction of the two mentioned schemes, it became mandatory for the revenue to conduct or initiate proceedings related to reassessment under Section 147, 148, and 148A of the Act in a faceless manner.

The bench highlighted that the Parliament, through the Finance Act 2021, had introduced amendments to the provisions of the Income Tax Act, especially concerning the procedures for reassessment conducted by the Income Tax Department. These amendments aimed to enhance transparency and effectiveness in the application of tax law. Additionally, the Supreme Court, in the case of Ashish Agarwal, had explicitly directed the Union of India to proceed in accordance with the substituted provisions introduced by the Finance Act 2021.

Based on the aforementioned reasons, the bench concluded that the notices challenged by the petitioner and the proceedings initiated by the Department were not valid or sustainable. The notices issued and the procedures followed were per se illegal and, as a result, deserved to be quashed.