• Sahil Sharma, BMR Legal

Faceless Assessment Scheme – Mired in Litigation



Introduction


The faceless assessment scheme (“scheme”) is arguably one of the biggest income tax reforms of the last decade. It signals a metamorphosis in the Indian income tax administration, a measure unprecedented in any other country. The Government has taken the culminating giant leap forward by doing away with physical income tax assessments and making the entire process digital and faceless. It seems but natural for the faceless assessment scheme to encounter challenges and hurdles. However, a spate of recent High Court interventions on grounds of violation of principles of natural justice and questions around the constitutional validity of the faceless scheme have necessitated an examination of the scheme as well as the way forward.


Background


The last decade witnessed the Government undertaking measured steps towards digitisation of income tax assessments. The use of technology-enabled assessments began in April 2017, with the introduction of an e-proceeding portal. In the Union Budget of 2018, the then Finance Minister proposed the introduction of a scheme of e-assessment which was introduced by the Central Board of Direct Taxes (CBDT) on 12th September 2019.[1] The given scheme was a part of the transparent taxation initiative of the Government. Subsequently, on 13th August 2020, the CBDT[2] introduced a faceless assessment scheme in line of making assessments “faceless, seamless and painless”.[3] On 29th September 2020, the faceless assessment scheme was codified in the Income- tax Act (the “Act”),[4] and was made applicable from 1st April 2021 onwards.


Overview of the Structural Framework

The scheme formulates an ecosystem marked by no human interface, dynamic jurisdiction, team-based audit mechanism and a specialization in functions. The hierarchal structure has the National Faceless Assessment Centre (NFAC) at the apex (overseas all communications with the taxpayers), followed by the Regional Faceless Assessment Centre (RFAC), responsible for undertaking the income tax assessments. Under RFAC, various units have been setup with functional specializations. These are known as Assessment Units (AU), Verification Units (VU), Review Units (RU) and Technical Units (TU) (collectively referred to as “units”) that work in close coordination with each other in order to perform a team-based audit. The cases are randomly allocated to the RFAC and at no given point is the taxpayer privy to the identity of the tax officer undertaking the assessment.


Underlying objectives of the scheme

Through its unique tax design, the scheme seeks to achieve the following, inter alia:

  1. Repose the faith of taxpayers in the Income-tax Department through the elimination of human interface, and reduce any instances of taxpayer harassment;

  2. Minimize discretion in the administrative processes and reduce ambiguity through specialized functional roles of respective units under the RFAC;

  3. Improve the tax administration system through technology driven processes;

  4. Integrate the elements of ‘efficiency, transparency and accountability’ in the tax governance system.

  5. Reduce tax litigation at various levels by focusing on high standards for qualitative assessments.

  6. Despite the noble intentions of the scheme, it has been mired in litigation on account of certain lacunae in so far as the denial of a personal hearing is concerned. This has been discussed in detail below.


Whether the scheme violates the principles of natural justice?

Principles of natural justice, concept of common law, serve as a safeguard to check the arbitrary exercise of State power against its citizens. They are incorporated under Article 14 of the Constitution of India and implied in Article 21. The doctrine of audi alteram partem is one such principle of natural justice, which refers to the right to a fair hearing.


Principles of natural justice are not defined under the Act. However, it is understood that every judicial, quasi-judicial and administrative agency must follow them. There are a plethora of rulings where it has been held that the principles of natural justice cannot be overlooked while discharging any judicial/administrative function. The Hon’ble Supreme Court in Manohar s/o Manikrao Anchule vs State of Maharashtra & Ors[5] held that an adjudicatory process must be in consonance with the doctrine of audi alteram partem. Similarly, the Apex Court in the case of P.N. Eswara Iyer vs. Registrar[6]emphasized on the significance of an oral hearing, and observed that audi alteram partem, being a basic value of our judicial system, is deeply embedded in the constitutional order. Further, not only judicial orders, but administrative orders also require an appropriate hearing as was clarified by the Supreme Court in the case of S.L. Kapoor vs. Jagmohan & Ors.[7]


Under the scheme, the grant of a personal hearing vests with the discretion of the Chief Commissioner or the Director General.[8] A bare reading of the provision implies that a personal hearing is an exception and not the general rule, and shall be granted only on meeting certain conditions. Interestingly, no such conditions have been notified as yet, raising concerns in the minds of the taxpayers on whether the assessment scheme can be viewed as “fair and just”.


A conspicuous absence of a mandatory provision for a personal hearing has resulted in the entire faceless scheme being challenged as unconstitutional before the High Courts at Delhi and Bombay[9]. It has been argued by the taxpayers that the scheme violates the principles of natural justice, resulting in a denial of fundamental rights under Article 14 and 21. These matters are presently sub-judice with the fate of the scheme is hanging in the balance.


Interestingly, in a recent decision of the Delhi High Court,[10] the scheme was examined in detail, and it held that the use of the word “may” for grant of personal hearing does not absolve the Revenue from its obligation to consider the request made for grant of a personal hearing. The High Court, while setting aside the impugned assessment order, observed that despite the power to frame standards, procedures, and processes for circumstances under which request for personal hearing can be approved, no action has been taken by the CBDT. A similar position has been taken other matters where the writ jurisdiction of the High Courts[11] has been invoked to contest validity of assessment orders in the absence of a personal hearing.



The way forward.


The recent influx of court interventions is testament to an obvious pitfall in the scheme as it stands today, which warrants a serious reconsideration. The right to a fair hearing is an inherent right which cannot be whittled away under the rationale of efficiency and expediency in the disposal of income tax cases. It undermines the purported objective of “fair and transparent taxation”.


Taxpayer rights have assumed greater significance since the introduction of the Taxpayers’ Charter 2020, which aims at achieving greater mutual trust and cooperation between the taxpayer and tax administration. The Charter, inter alia, recognizes rights such as the right to a fair and just system, the right to fair and reasonable treatment, the right to be treated as honest, and the right to representation. These rights are based on the underlying principles of fairness and equity[12] and a denial of a personal hearing may go contrary to what has been contemplated under the Charter.


Nevertheless, the present controversy can be put to rest by the CBDT through an appropriate amendment to the scheme. A personal hearing should be allowed if requested for by the Taxpayer, this will serve both the taxpayers and the tax administration in good stead as well as help achieve the overall objective of the scheme. Needless to say, such an amendment will also help curb any protracted litigation on account of a large volume of affected taxpayers.

Bibliography

[1] Notification No. 61/2019 (F No. 370149/154/2019-TPL] dated 12 September 2019 5 Notification No. 62/2019 (F No. 370149/154/2019-TPL)] dated 12 September 2019 [2]Notification No.60/2020, 13th August,2020. Available at: https://www.incometaxindia.gov.in/communications/notification/notification_60_2020.pdf Notification No. 61/2020 (F No. 370149/154/2019-TPL)], 13th August 2020 Available at: https://www.incometaxindia.gov.in/communications/notification/notification_61_2020.pdf [3]Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 https://www.incometaxindia.gov.in/Pages/default.aspx [4] https://egazette.nic.in/WriteReadData/2020/222110.pdf [5]Manohar s/o Manikrao Anchule vs State of Maharashtra & Another (2012) 13 Supreme Court Cases 14 [6] P.N. Eswara Iyer vs. Registrar, SC, (1980) SCR (2) 889 [7] S.L. Kapoor vs. Jagmohan & Ors[7]. 1981 AIR 136 [8] Section 144B(7)(vii) of the Income Tax Act, 1961 [9] Lakshaya Budhiraja v Union of India & Anr W.P.(C).8044/2020; Chamber of Tax Consultants vs CBDT & Another W.P.(L) 16066/2021 [10] Sanjay Aggarwal v. National Faceless Assessment Centre, Delhi (W.P.(C) 5741/2021) [11] DJ Surfactants v. National E-Assessment Centre in [2021] 127 taxmann.com 370, Parag Kishorchandra Shah v. National Faceless Assessment Centre in W.P. (C) No. 11052 of 2021, Suresh Kumar Lakhotia v. National e-Assessment Centre in W.P. (C) No. 10639 of 2021,.Raja Builders v. National Faceless Assessment Centre in [2021] 127 taxmann.com 339, Lemon Tree Hotels Ltd. v. National Faceless Assessment Centre in Delhi W.P.(C) 5427/2021.. [12] Taxpayer Rights, Deciphering the Indian Charter, edited by Mukesh Butani and Kinshuk Jha.

Cite this Article - Sahil Sharma, Faceless Assessment Scheme – Mired in Litigation (Tax Terminal Blog, 24 September 2021 ) < https://www.taxterminal.in/post/faceless-assessment-scheme-mired-in-litigation >


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