Faceless Assessment Scheme Mired In Litigation
Two constitutional challenges, thousands of writ petitions and angry high courts - one year of faceless assessments.
Two constitutional challenges, thousands of writ petitions and angry high courts. The tax department’s Faceless Assessment Scheme has been mired in litigation in the first year of its implementation.
Introduced in August last year, the scheme promised transparency and efficiency in tax assessments. It takes away the element of interaction between an assessing officer and taxpayer, presumably to weed out any corruption. Cases are allocated on a random basis irrespective of territorial jurisdiction.
Very briefly, the cases are assigned to tax officers by the national and regional e-assessment centers. And that kicks off a multi-level assessment process. The assessment unit is tasked with seeking information from the taxpayer selected for assessment; the verification unit then checks it against the taxpayer’s books of accounts and earlier records; the technical unit provides assistance on legal and accounting matters and finally, the review unit looks at the draft assessment order before it is issued to the taxpayer.
The court challenges broadly fall under two buckets:
Lapses in the process laid down for faceless assessments.
Constitutional challenge to the faceless assessment scheme and appeal process.
It’s Raining Relief Writs
The income tax law lays down a series of steps that have to be followed during the faceless assessment process. A draft order of the assessment unit goes to the National Faceless Assessment Centre, which can do one of three things-
Finalise the assessment if no variation prejudicial to the interest of taxpayer is proposed, or,
Provide an opportunity to the taxpayer to explain if variation is proposed in the tax returns
Assign the draft assessment order to a review unit.
Taxpayers have approached high courts for relief - claiming procedural lapses and violation of principles of natural justice. And they seem to be winning.
For instance, the Delhi High Court set aside the income tax demand order against International Management and Smart Vishwas Society since no draft assessment order or a show cause notice was issued by the revenue department. The Calcutta High Court set aside the assessment order against Lexmark International (India) Pvt. as it was passed before the Dispute Resolution Panel could pass directions on taxpayers’ objections. In Neeraja Rateria’s case, the Calcutta High Court found gross violation of principle of natural justice since the password for personal hearing via video conferencing wasn't shared.
Mantra Industries Ltd., too, got relief from the Bombay High Court just few weeks ago after it complained that its request for an adjournment was not considered, request for personal hearing wasn't granted and the reply, objection filed in response to the show cause notice was not considered.
Setting aside the order against Mantra Industries, the high court even issued a warning to the revenue department.
“….circulate this order right from the Revenue Secretary to everybody in the Finance Ministry, that if such orders are continued to be passed, this Court will be constrained to impose substantial costs on the concerned Assessing Officer to be recovered from his/her salary and also direct the department to place such judicial orders in the career records of such Assessing Officer.” - Bombay High Court
When it was first announced, tax industry associations had pointed out that a big deficiency in the faceless assessment scheme is principles of natural justice, Mukesh Butani, founding partner at BMR Legal, told BloombergQuint. Now the courts are saying the same thing, he said.
The opportunity of being heard isn't built into the scheme. You can’t claim it as a matter of right but only when there’s a variation in the assessment income. That too, it needs the approval of Chief Commissioner/Director-General in charge of the regional e-assessment centre.Mukesh Butani, Founding Partner, BMR Legal
Legislative amendments are needed to make the opportunity of being heard as a fundamental rule of law. That's the only way you can remedy the situation that you have, Butani added.
The Constitutional Challenge
Two such petitions are live—one before Madras High Court and another before the Bombay High Court.
The petition before the Madras High Court has asserted that the faceless assessment scheme is unconstitutional, contrary to the provisions of the Income Tax Act, violates settled principles of natural justice and administrative law.
It points out-
Section 144B says assessment has to be completed by the NFAC basis the Risk Management Strategy specified by the CBDT. This strategy has not been made public. An assessment based on an opaque strategy not available in the public domain violates Article 13 of the Constitution which requires laws to be consistent/not in derogation of fundamental rights.
The framing of such strategy provides a wide ambit to directly interfere in the quasi-judicial process of making an assessment. The parameters of such strategy must be specified in the primary legislation for completion of assessment by authority of law.Petition before Madras High Court
Allocation of cases to the assessment unit, reference to review unit for further investigation without any guidelines is wholly arbitrary. Authorities vested with vague and undefined powers can impair rights of citizens. Provisions have been declared void by the Supreme Court on grounds of being vague.
The scheme gives the NFAC two alternatives for making assessment orders. Provide the taxpayer with an opportunity in case any variation prejudicial to its interest is proposed. Or assign the draft assessment order to a review unit. This is a violation of Article 14 as it seeks to arbitrarily discriminate between similarly placed taxpayers.
An unreasonable classification is being created without an intelligible differentia between the assessees. If procedure laid down in sub clause (b) is adopted, then the assessment will be concluded by one assessing officer. If sub clause (b) is adopted, then the assessment will be concluded by three different assessing officers….Petition before Madras High Court
Allocation of cases without defining territorial jurisdiction is arbitrary. In its absence, the assessment unit will not follow judicial discipline and will ignore precedents binding in the jurisdiction of the taxpayer.
NFAC lacks complete accountability and results in cryptic orders without application of mind.
Before the Bombay High Court, the Chamber of Tax Consultants have challenged the Faceless Appeal Scheme. The opportunity for a personal hearing is not given at the first appellate stage. The first time the taxpayer will be heard in person is at the ITAT stage. Complete debarment of physical hearing is absurd and arbitrary, the Chamber has argued.
The high court can give relief in two forms, Butani pointed out. If the court comes to conclusion that the manner in which jurisdiction was exercised, suffered from deficiencies, it can quash the order. It will say that this assessment is not valid. It means that the entire objective with which the faceless assessment scheme was launched is defeated in those cases.
The second kind of relief that the high court can give is to issue directions. That the assessment needs to be done again after giving the taxpayer an opportunity of being heard.
The high courts will not interpret the law just because the law has been written in the manner in which it has been written by which only the tax department can exercise the right to give an opportunity. It will interpret the law keeping in mind the provisions for natural justice and the other form of reliefs that it can give as a civil court.”Mukesh Butani, Founding Partner, BMR Legal
It may hold lack of personal hearing as unconstitutional but it’s unlikely that the high court will say this part of the scheme or that part is bad in law etc. since that’s a matter of policy, Butani said.
Watch the full interview with Butani here: