ITAT Delhi Quashes Faceless Assessment for Jurisdictional Error Under Section 144B

In a landmark ruling, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has set aside an assessment order passed under the faceless assessment scheme, citing a jurisdictional error due to non-compliance with mandatory provisions under Section 144B of the Income Tax Act, 1961. This ruling reaffirms the significance of due process, especially in an era where technology is increasingly being used to handle tax assessments.

The decision was delivered in the case of M/s U.S. Enterprises vs National Faceless Assessment Centre (NFAC), Delhi, relating to the Assessment Year 2018–19.

Background of the Case

M/s U.S. Enterprises, the appellant in the case, was subjected to a faceless assessment under the new scheme implemented through Section 144B. The faceless scheme, introduced to bring transparency, accountability, and efficiency into tax administration, eliminates the interface between the Assessing Officer and the taxpayer by conducting assessments digitally.

However, the appellant challenged the assessment order on the grounds that it was passed in violation of the procedure mandated under Section 144B, thereby rendering it invalid in law. Specifically, the assessee alleged that:

• A draft assessment order was never served,
• No show cause notice was issued as required,
• And no opportunity for personal hearing, even via video conferencing, was granted.

The assessee contended that these procedural lapses not only violated the statutory framework but also the principles of natural justice, which are the cornerstone of any fair legal or administrative process.

Understanding Section 144B: The Backbone of Faceless Assessments

Section 144B lays down the standard operating procedure for assessments conducted under the faceless assessment regime. The process is structured to ensure transparency and includes the following key steps:

1. Issuance of a Show Cause Notice (SCN) to the assessee.
2. Provision for the assessee to file a response to the SCN.
3. Issuance of a Draft Assessment Order (DAO) by the assessment unit.
4. Opportunity for the assessee to accept or object to the draft order.
5. Option to request a personal hearing (typically through video conferencing).
6. Final assessment order to be passed only after considering the assessee’s response.

Each of these steps is essential to ensure that the assessee is fully aware of the issues being raised and is provided a fair opportunity to present their case. Non-adherence to this structured mechanism vitiates the assessment process.

Key Observations of the ITAT

The ITAT Delhi Bench, after hearing both sides, made several crucial observations:

• The Tribunal held that failure to serve the draft assessment order before passing the final order constituted a jurisdictional defect, not just a procedural lapse.
• The Bench emphasized that the issuance of a show cause notice and allowing a response is not a formality, but a mandatory legal requirement to uphold the taxpayer’s rights.
• The Tribunal rejected the Revenue’s contention that the assessment order could stand simply because digital notices or system-generated communications were sent.
• It noted that there must be clear evidence that the statutory procedure laid down in Section 144B was followed in both letter and spirit.

As a result, the ITAT ruled that the assessment order was passed in gross violation of the mandated procedure, thereby rendering it null and void ab initio.

Tribunal’s Verdict

The ITAT allowed the appeal filed by M/s U.S. Enterprises and quashed the impugned assessment order. The ruling states:

“The assessment order is liable to be set aside as the Revenue has failed to adhere to the procedure prescribed under Section 144B. The denial of opportunity to the assessee to respond to the draft order and to request a personal hearing amounts to a jurisdictional error.”

Wider Implications of the Ruling

This decision has broader implications for how assessments are conducted under the faceless regime. While the faceless assessment system was introduced to reduce corruption, streamline processes, and enhance accountability, this case underscores the importance of procedural safeguards.

Key takeaways include:

• Technology cannot override due process. Even in a faceless system, natural justice and the right to be heard are sacrosanct.
• Tax authorities must strictly follow procedural mandates when issuing orders.
• Jurisdictional errors are fatal to assessment orders and cannot be cured retroactively.
• The ruling sets a precedent that other taxpayers may invoke where similar lapses have occurred.

Conclusion

The ITAT Delhi’s judgment is a critical reminder that the rule of law must be upheld in all processes—digital or otherwise. Faceless assessments, while innovative and efficient, must not come at the cost of fairness, transparency, or statutory compliance.

As faceless assessment becomes the norm, taxpayers and professionals must stay vigilant and ensure that authorities are adhering to the prescribed protocols. This case reaffirms that any deviation from mandatory procedures—especially those affecting the rights of the assessee—can render an assessment order legally untenable.