Gujarat High Court Strikes Down Income Addition Over Faceless Assessment Lapses – A Big Win for Taxpayers
In a major victory for taxpayers across India, the Gujarat High Court recently ruled in favor of the assessee in the case of Saurabh Rohitbhai Modi (HUF) vs. National Faceless Assessment Centre (NFAC). The judgment underscores a crucial principle: procedural fairness is as important as the final tax decision itself.
The Court held that if the Income Tax Department fails to issue a show cause notice or draft assessment order under the Faceless Assessment Scheme, the final addition made to the taxpayer’s income is legally unsustainable.
Understanding the Case: What Was It All About?
Let’s break it down step by step for clarity.
● Who Was Involved?
- Petitioner: Saurabh Rohitbhai Modi, representing a **Hindu Undivided Family (HUF)*.
- Respondent: National Faceless Assessment Centre (NFAC) under the Income Tax Department.
● The Backstory
The Income Tax Return (ITR) of the petitioner was initially processed under Section 143(1) — this is a routine, computerized scrutiny done without any human interaction, often completed quickly.
But then, the tax authorities reopened the case using Section 147, which deals with reassessment — essentially, they believed some income had escaped from the earlier scrutiny.
A notice under Section 148 was issued on March 31, 2021, based on data gathered from a search and seizure operation on a different group (K-Star group, Surat) back in 2016. The authorities believed that the petitioner had underreported income from two land sale transactions.
The Crux: What Went Wrong in the Assessment?
During the reassessment:
- The tax officer alleged that the land sale values were understated, and hence, Section 50C was invoked. This section allows the tax department to adopt the higher “stamp duty value” of a property as the sale value for tax purposes.
- Based on this, the department calculated that income to the tune of over ₹3.43 crore had been “escaped” or hidden.
So far, so good — but here’s the catch.
Despite all this, the NFAC finalized the assessment without issuing the required show cause notice or draft assessment order to the taxpayer. That’s where they violated the rules laid out under Section 144B of the Income Tax Act, which governs the Faceless Assessment Scheme.
What is Section 144B and the Faceless Assessment Scheme?
Introduced to reduce corruption and increase transparency, the Faceless Assessment Scheme is one of the biggest reforms in India’s income tax administration.
Under Section 144B, the process must include:
- Issuing a show cause notice if any adverse action is to be taken.
- Giving the taxpayer a chance to respond to the draft assessment order.
- Allowing an automated system to review everything before finalizing the assessment.
Skipping any of these steps violates natural justice — that is, everyone has the right to be heard before a decision is made against them.
Gujarat High Court’s Verdict: Procedure Cannot Be Bypassed
The Gujarat High Court had no hesitation in declaring that the Income Tax Department’s action was illegal.
Here’s what the Court highlighted:
- No Show Cause Notice = No Fair Hearing: The petitioner was not told about the proposed income addition, which is a serious procedural lapse.
- Mandatory Procedures Ignored: Section 144B procedures are not optional. They are binding.
- Assessment Declared Invalid: Since the required steps weren’t followed, the final order could not stand in the eyes of law.
The final assessment, which added ₹2.65 crore to the taxpayer’s income, was quashed.
What This Means for Taxpayers
This decision has far-reaching implications for everyone — whether you are a salaried individual, a small business owner, or running a family trust or HUF.
1. Faceless Doesn’t Mean Voiceless
The faceless scheme is supposed to remove personal bias, but that doesn’t mean the department can skip informing you before making major additions to your income.
2. You Must Be Given a Chance to Respond
Even if your case is being assessed remotely, the law requires the tax department to send you a show cause notice before finalizing the assessment.
3. Violations of Process = Grounds to Challenge
If your assessment was completed without following these steps, you have strong legal grounds to challenge it — and potentially get it dismissed altogether, like in this case.
Expert Take: A Welcome Move for Justice
According to tax experts, this ruling reinforces a long-standing principle of Indian law — “audi alteram partem”, which means “listen to the other side.”
The faceless assessment system may be modern and AI-driven, but it must not compromise on basic legal rights.
In fact, many believe this case will act as a guiding precedent for future tax disputes, especially when procedural fairness is in question.
Conclusion: Procedure Is Power — Use It Well
The Gujarat High Court’s decision in Saurabh Rohitbhai Modi HUF vs. NFAC is a landmark moment in India’s evolving tax system. It reminds both taxpayers and the authorities that rules and procedures are not mere formalities — they are essential safeguards.
For taxpayers, the message is loud and clear: know your rights, watch for notices, and don’t hesitate to seek legal remedy if you feel the process hasn’t been followed.
And for the Income Tax Department, this is a call to ensure that technology doesn’t override the human element of justice.
