Personal Hearing Mandatory Under S.144B IT Act If AO Proposes Adverse Order, Even Without Assessee's Specific 'Request': Court - 2024-04-26

Court Quashes Ex Parte Tax Assessment, Rules Personal Hearing Mandatory Under S.144B If Adverse Order Proposed

NEW DELHI: In a significant ruling clarifying the procedural requirements under the faceless assessment regime, a High Court has set aside an ex parte income tax assessment order, holding that providing an opportunity for personal hearing is mandatory under Section 144B of the Income Tax Act, 1961, if the Assessing Officer (AO) intends to pass an order adverse to the assessee, even if the assessee has not specifically requested such a hearing. The Court emphasized that principles of natural justice cannot be bypassed merely based on a restrictive interpretation of the word "request" in the statute.

Case Background

The petitioner challenged an ex parte assessment order dated March 23, 2024, passed under Section 143(3) read with Section 144B of the Income Tax Act for the Assessment Year 2022-23. The primary grievance was the denial of a reasonable opportunity of hearing. A show-cause notice proposing variations was issued on March 11, 2024, fixing the hearing for March 15, 2024. An adjournment was sought on March 16, 2024, and the AO fixed the next date for March 17, 2024, which was a Sunday. Subsequently, the ex parte assessment order was passed on March 23, 2024.

Arguments Presented

The petitioner, represented by Sri. Shubham Agarwal , argued that the extremely short notice period and the scheduling of a hearing on a Sunday effectively denied any real opportunity to be heard, violating principles of natural justice.

The revenue, represented by Sri. Manu Ghildyal , countered that the petitioner had participated earlier but became non-cooperative towards the end of the proceedings. They also raised the objection of an available statutory alternative remedy of appeal, urging the court not to entertain the writ petition.

Court's Interpretation of Section 144B and Natural Justice

The Court meticulously examined Section 144B(6)(vii) and (viii) of the Act, which deal with the show-cause notice and the provision for personal hearing upon "request".

The Court rejected the revenue's narrow interpretation that a personal hearing is only necessary if specifically requested in writing by the assessee. It reasoned:

"Reading of the two provisions does not suggest that grant of opportunity of personal hearing is optional at the discretion of the Assessing Officer... providing for opportunity of personal hearing appears to be the Rule and its waiver an exception to be exercised by the assessee."

The bench highlighted the inherent complexities in assessment proceedings involving disputed facts and law, stating:

"Assessment proceedings by very nature, often involve disputed question of facts and law. By merely submitting written explanations, facts and law may not become clear, on their own... oral hearing remains an important and near about mandatory requirement to be fulfilled to ensure both, the requirement to pass a just and proper judicial or quasi judicial order and also to preserve the faith in the adjudicatory authorities."

The Court interpreted the term "request" under Section 144B(6)(vii) and (viii) contextually:

"...the word 'request'... only imply, where an assessee may furnish his written reply to the show-cause notice but not opt to avail opportunity of personal hearing, it may not be mandatory for the Assessing Officer to grant such opportunity... If however, on reading the explanation furnished, the Assessing Officer maintains his tentative opinion to pass the assessment order as proposed, that may be adverse to the assessee, he would necessarily fix a date for personal hearing..."

Furthermore, the Court noted the amendment to Section 251 of the Act, which removed the first appellate authority's power to "set aside" and remit defective orders. Allowing AOs to routinely deny personal hearings would force appellate authorities to function as primary assessing bodies, undermining the Act's scheme and depriving assessees of a crucial tier of adjudication.

Violation of Natural Justice and Bypassing Alternative Remedy

Finding the facts of the case "glaring", the Court noted the extremely short notice, the scheduling of a hearing on a Sunday, and the lack of any valid explanation for this course of action. It concluded that there was a complete violation of the rules of natural justice.

"Seen in that light, the facts of the present case are glaring... Therefore, it was obligatory without fail for the Assessing Officer to have fixed another date before he may have proceeded to pass the final order... where rules of natural justice have been completely violated, we may never allow such an order to stand."

Given this fundamental flaw, the Court decided to bypass the alternative remedy of appeal.

Final Decision and Directions

The Court allowed the petition and set aside the ex parte assessment order dated March 23, 2024.

It directed that: 1. The quashed order be treated as the final show-cause notice. 2. The petitioner must submit its reply by May 4, 2024. 3. If the AO accepts the explanation entirely, a consequential order can be passed without a further hearing (as none was requested). 4. If the AO proposes to reject the explanation, a personal hearing must be fixed with at least 15 days' prior notice. 5. The petitioner undertook to appear for the hearing if scheduled. 6. The assessment should then be completed in accordance with the law.

This judgment underscores the judiciary's commitment to upholding natural justice principles, even within the framework of faceless assessments, ensuring that assessees receive a fair hearing before adverse orders are passed.