Mandatory Show-Cause Notice Requirement: When an Income Tax Assessment Is Quashed for Not Issuing It
In a significant decision by the Income Tax Appellate Tribunal (ITAT), an income tax assessment order was quashed because the Assessing Officer (AO) failed to issue a mandatory show-cause notice before making adverse additions. This case highlights a fundamental procedural requirement in Indian taxation and underscores how failure to follow statutory and administrative instructions can invalidate a completed assessment. Below is a detailed and SEO-friendly article in four structured paragraphs covering facts, tribunal observations, applicable law, and the tribunal’s conclusion — explained in clear language for both tax professionals and laypersons.
Facts and Issue of the Case
The case in question, ITO vs. Shubhankar Estates Pvt. Ltd. before the ITAT Bangalore Bench, stemmed from an assessment for the Assessment Year 2016–17 in which additions were made to the assessee’s income under Section 68 of the Income-tax Act, 1961 (ITA). The assessee had filed its return of income, which was selected for scrutiny under the Centralized Computerized Scrutiny Selection (CASS) system. During the scrutiny proceedings, the AO proposed to disallow certain credits/incomes on suspicion that they represented unexplained cash credits. Consequently, without issuing a formal show-cause notice or providing the taxpayer an opportunity to explain why such additions should not be made, the AO finalized the assessment and made substantial additions to the taxpayer’s income.
The principal issue before the tribunal was whether the assessment order could stand when no mandatory show-cause notice was issued prior to making adverse additions. As per the facts available in the published order details, the assessee contended that the AO’s failure to issue the notice violated both procedural requirements and principles of natural justice, leading to an invalid order. The Appeal was filed by the revenue against the order of the Commissioner of Income Tax (Appeals)/NFAC (National Faceless Appeal Centre) which had already quashed the assessment on this ground. The revenue did not contest the absence of the show-cause notice but focused its arguments on merits of additions, effectively conceding the foundational procedural issue.
Observation by the Tribunal
The tribunal closely examined the procedural conduct of the assessment process and made critical observations on the role of show-cause notices in tax proceedings. In its detailed order, the ITAT observed that Central Board of Direct Taxes (CBDT) Instruction No. 20/2015 expressly mandates that where an AO proposes to make additions or disallowances in the assessment, a proper show-cause notice explaining the reasons and evidence for such proposed additions must be issued, and the assessee must be given an opportunity to respond before finalising the assessment. This instruction reflects the broader administrative and legal principle that taxpayers must be afforded a fair opportunity of being heard — a core element of natural justice.
The tribunal also noted that in the present case, there was no proof on record that such a notice was issued prior to passing the adverse assessment order. Even though the AO had undertaken other inquiries like issuing summons under Section 131 of the Act or commissioning investigations, these did not substitute the statutorily or administratively required show-cause notice. According to the tribunal, mere existence of enquiries or summons cannot be deemed fulfillment of the show-cause requirement, particularly when the draft or proposed additions were not formally communicated as grounds for objection and response. This lack of formal communication meant that the taxpayer could not meaningfully respond to the potential additions, violating the statutory imperative of a fair hearing.
Law Applicable
The legal framework underscoring this case involves both statutory provisions of the Income-tax Act, 1961 and administrative instructions issued by the CBDT, which function as binding guidelines for tax officials. The Act itself contains detailed provisions governing assessment procedures, notices, and hearings. While Sections like 143(2) mandate the issuance of notices for scrutiny assessments, it is the CBDT Instruction No. 20/2015 that specifically prescribes that where proposed additions or disallowances are considered, an appropriate show-cause notice must be issued indicating reasons and evidence supporting the proposed additions or disallowances. This instruction borrows from the overarching legal principle of ‘Audi Alteram Partem’ — the requirement to hear the other side — rooted in Article 14 and Article 21 of the Constitution of India.
Judicial precedents, including those cited implicitly in administrative analyses, firmly establish that procedural compliance is essential for the validity of tax proceedings. Courts have held in several judgments that failure to grant a reasonable and meaningful opportunity to be heard, or to issue a proper show-cause notice as mandated, vitiates the entire assessment or penalty proceedings. Several High Court decisions have reinforced that show-cause notices are more than mere formalities, and without them, adverse orders like assessments, penalties, or demand notices often get quashed.
In addition to statutory and CBDT instruction requirements, principles of natural justice have become part of judicial scrutiny in tax litigation. When an assessing authority proceeds without affording taxpayer rights to respond to proposed adverse actions, courts and tribunals have shown a tendency to nullify such orders, holding that the absence of fair hearing undermines justice and legality.
Conclusion by the Tribunal
After considering the submissions of both sides and examining the procedural history of the case, the ITAT concluded that the assessment order was liable to be quashed because it was passed in breach of the CBDT Instruction requiring issuance of a prior show-cause notice. The tribunal reiterated that such instructions, though administrative in nature, are binding on the Revenue and form part of the procedural law governing assessments. Since the revenue had not challenged this specific finding by the CIT(A)/NFAC, the ITAT held that the appeal by the department was infructuous and academic on this ground alone. Consequently, the tribunal affirmed the CIT(A)’s order quashing the assessment and dismissed the revenue’s appeal.
This case thus illustrates a crucial compliance checkpoint for tax officials — the issuance of mandatory show-cause notices — and reaffirms that procedural lapses in income tax assessments can be fatal to the validity of the proceedings. For taxpayers and practitioners alike, it accentuates the need to ensure that all procedural and legal safeguards are respected before adverse tax consequences are finalized.
