Faceless Assessment Scheme: Madras High Court notice to Centre in challenge to Section 144B of Income Tax Act

The Madras High Court on Wednesday issued notice in a petition challenging the Constitutional validity of the Faceless Assessment Scheme introduced in 2020 by insertion of Section 144B to the Income Tax Act (M/S.Navitas LLP v Union of India and ors)..A Bench comprising Chief Justice Sanjib Banerjee and Justice PD Audikesavalu also directed that a copy of the petition be sent to the Attorney General's office before adjourning the matter by a fortnight. .The petition has been filed by a limited liability partnership, focusing on Section 144B of the Income Tax Act of 1961, which was inserted by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.The Faceless Assessment Scheme was transformed into a statuary scheme with the insertion of Section 144B, which provides a detailed and cumbersome procedure for completing the assessment, the petitioner said.The petition further stated that the scheme is arbitrary and opaque, contrary to provisions of Income Tax Act, contrary to the principles of administrative law and natural justice and in violation of Articles 14, 19 (1)(g), 21, 265 of the Constitution of India..The petitioner claimed that it has suffered a wholly arbitrary assessment order which was bereft of reasons and showed non-application of mind after being subjected to the Faceless Assessment Scheme. ."The entire assessment procedure under the “Faceless Assessment Scheme” is opaque, arbitrary and suffers from judicial infirmities … and has led to a wholly unawarranted demand in the case of the petitioner," the petition stated. .Following the submissions made for the petitioner by Advocate Sandeep Bagmar on Wednesday, the Court also restrained the Income Tax Department from recovering the demand made in excess of ₹49 crores on the petitioner until the next hearing. .On the returnable date, the Court will consider if the stay on recovery should continue, or whether the stay should continue conditionally or unconditionally..On the Faceless Assessment Procedure.With the introduction of the Faceless Assessment Scheme, a jurisdictional assessing officer will no longer be involved in the completion of an assessment. Instead, the entire assessment will be under the control of the “National Faceless Assessment Centre”, whose constitution has not been defined under the Income Tax Act, the petitioner submitted.The assessment will be conducted by the “assessment unit”, allocated by the National Centre based on an automated allocation system. No guidelines on the role and constitution of the assessment is provided in Section 144b (3) (iii) read with 144B (4), the petitioner submitted.The assessment unit is to prepare a draft assessment order and forward a copy to the National Faceless Assessment Centre. The National Faceless Assessment Centre may then decide on one of the following courses of action, based on a "Risk Management System":(i) Finalise the assessment;(ii) Provide an opportunity to the assessee in case there are variations in the draft assessment order which are prejudicial to the interests of the assessee by serving a notice calling to show cause as to why the proposed variation in the draft assessment order should not be made;(iii) Assign the draft assessment order to a review unit in the “Regional Faceless Assessment Centre” through an automated allocation system for conducting review of the draft assessment order;The petitioner's grievance was that the adoption of such different measures for assessing the same classes of assessees is improper and without any guidelines on the parameters for differential treatment. This, in turn, falls foul of the right to equality under Article 14, the petitioner contended. .Highlights of the petitioner's contentions.1. Faceless Assessment Scheme violates Articles 14, 19, 21 and 265 of the Constitution.The procedure adopted (out of the courses available to the National Faceless Assessment Centre) is not informed to the assessee. The scheme is opaque and without any disclosure as to whether each of the procedures provided for, have been followed. The "Risk Management Strategy" followed by the National Faceless Assessment Centre has not been made public and the same is not law under the Constitution of India. The completion of an assessment based on an opaque strategy not available in the public domain does not stand the test of law. It is arbitrary ad liable to be quashed Assessment by way of an assessment unit without defining territorial jurisdiction is arbitrary, the petitioner contended. It is elaborated in the petition that the assessment, under the new scheme, can be done by any assessment unit located in a any of the “Regional Faceless Assessment Centres.” This could also be outside the territorial jurisdiction where the assessee resides or runs its business. Without guidelines, the assessment unit will not follow judicial discipline and will ignore judicial decisions which are binding in the territorial jurisdiction of the assessee; The assessment concluded by the National Faceless Assessment Centre lacks complete accountability and results in passing of cryptic orders without any application of mind; Under Article 265 of the Constitution, no tax shall be levied or collected except by authority of law. Section 144B suffers from serious illegalities and Constitutional infirmities. Therefore, any tax collected under the scheme set out under Section 144B is in violation of Article 265; The Faceless Assessment Scheme violates right to privacy. The principal Commissioner is provided unfettered powers under Section 144B(7)(xii) to (i) access, verify, authenticate information and responses of the assessee, including documents given during assessment proceedings, (ii) and when it comes to receipt, storage, and retrieval of information or documents in a centralised manner. In the absence of data Ppotection law or guidelines, there remains a threat to the privacy of the assessee i.e. to the information, documents and evidence that he submits to the National Faceless Assessment Centre..2. Faceless Assessment Scheme is against Income Tax Act.The "National Faceless Assessment Centre" is not an Income Tax authority as per Section 116 of the Income Tax Act. Section 144B is contrary to Sections 120 and 124 of the Act. Section 120 defines the jurisdiction of income tax authorities. No provision is there under Section 144B on how jurisdiction of the income tax authority is defined or their scope. Rather, the assessment is assigned to the Regional Faceless Assessment Centre through an automated allocation system which is contrary to Sections 120 and 124 of the Income Tax Act. Section 144B suffers from excessive delegation..3. Faceless Assessment Scheme violates natural justice principles.The Regional Faceless Assessment Centre has the discretion to provide the assessee with a personal hearing or to deny the same under Section 144B (7)(viii) read with 144B (7)(xii)(h). The request for personal hearing comes only in certain circumstances which are to be prescribed under Section 144b(7)(xii)(h). However, no circumstances have been framed yet. The grant of opportunity of hearing being contingent upon the disruption of the Chief Commissioner of the Director General in charge of the Regional Faceless Assessment Centre is arbitrary. There is, therefore, a gross violation of natural justice principles. There can be no discretion in the grant of personal hearing when an assessment is made which is prejudicial to the interest of the assessee. The rule of audi alteram partem is completely violated under Section 144B. There is no guidance as to whether the assessment is to be made by passing a speaking order by duly recording reasons. In the case of the petitioner, the assessment order is a non-speaking order, bereft of reasons and is arbitrary. It is unclear whether the assessing officer who examines the records, issues the draft assessment order and hears the case will be the same assessing officer who will consider and pass the final assessment order. There is no opportunity of being heard provided to the assessee before the technical unit, the review unit and the verification unit. The entire procedure or enquiry or investigation or review will be conducted unilaterally and without provision any opportunity of hearing before these units. Time limits for providing replies, furnishing documents, evidence etc. may vary as per the discretion of the National Faceless Assessment Centre. This also affects the principle of natural justice..4. Faceless Assessment Scheme violates Administrative Law principles.It is not known whether the assessment unit acts independently or whether it is acting at the behest of the National Faceless Assessment Centre. It is a cardinal rule of administrative law that the senior authority cannot give instructions or dictate to an adjudicatory body as to how it should exercise its adjudicatory functions. The assessment process is now controlled by the National Faceless Assessment Centre and the role of the assessment unit may remain a mere formality. The scheme of Section 144B is contrary to the settled administrative law principle that the government or higher authority cannot control quasi judicial functions..The matter is listed next on November 11. .[Read Order]