Faceless Assessments And Appeals Under The Income-Tax Law: Two Steps Forward And One Step Back

Advocate Aditya Ajgaonkar has described the Faceless Assessment Scheme & the Faceless Appeal Scheme as a big tax reform and game-changer because they seek to streamline, and bring greater transparency and accountability into, the tax administration. He has, however, cautioned that the non-grant of a personal hearing via video conference as a default choice vested in the assessee may be a violation of the principles of natural justice and may put the schemes into jeopardy. He has given convincing reasons for his views

The Delhi High Court in the case of Lakshya Budhiraja v. UOI & Anr. W.P.(C) 8044/2020has issued notice on 16th October 2020, on the grounds of the Petitioner that the mechanism where the approval of the Chief Commissioner or the Director General of Income-tax is required for video conference facility is discriminatory in nature as it gives them the discretion to deny the same and that no person should be judged without a fair hearing in which each party is given an opportunity to respond to the evidence against them.

In this backdrop, it may be desirable to not only look at the Faceless Appeal Scheme but also the Faceless Assessment Scheme and to analyse why the constitutional validity of certain aspects of both the schemes are suspect and how the schemes represent two steps forward but one step back in the sphere of tax administration reform.

The Faceless Assessment Scheme and the Faceless Appeal Scheme (faceless scheme) are arguably the biggest tax reforms that has been witnessed by the Income-tax Act, 1961, in recent times. There is absolutely no doubt that the concept behind the schemes is a game changer and brings with it a promise to streamline and bring greater transparency and accountability into the tax administration. It is ironic that this transparency has been brought out by seeking to prop up an opaque wall between the taxpayer and the officer in charge of assessment. The civil society has for a long time asked for provisions to be introduced in the act that would place accountability upon the tax administration. The faceless schemes purports to be a step in that direction, but in practice, runs the danger of falling short.

Originally envisaged as the E-Assessment Scheme, 2019, the Faceless Assessment Scheme has been introduced into the statute books through the introduction of Section 143(3A) and (3B) into the Income-tax Act, 1961. This sub-section provides for “eliminating the interface between the assessing officer and the assessee to the extent feasible”, “optimising the utilisation of resources to economies of scale and functional specialisation” and “introducing team based assessment with dynamic jurisdiction”, all in the name of imparting “greater efficiency, transparency and accountability”. A natural added bonus, which is the possible sub text to the terms ‘accountability and transparency’ is that this process shall aid in greatly reducing the possibility of accusations of corruption in the tax department by Assesses. The process of assessment is routed through the National e-assessment centre, is fairly elaborate (some would say convoluted), where simplistically speaking, it shall allocate cases selected for  faceless assessment under the scheme to regional e-assessment centres through an automated allocation system. The assessment proceedings thereafter proceed through all communication, predominantly via written electronic exchanges, routed through the National e-assessment centre. There is also provision for a personal hearing through video conferencing according to the procedure laid down by scheme. However, the personal hearing through video conference is not a matter of right and seems to be an exception rather than the norm.

The scheme seems to ‘prima facie’ give rise to Constitutional problems by the very nature of the traditional role of the assessing officer in the tax administration. It is well established that the assessing officer is a quasi judicial authority, fulfilling a judicial function while making an assessment. The courts have time and again stressed on the principles of natural justice being followed during assessment and that no interference is to be made any superior authority in the assessment. Herein rise the first probable stumbling blocks in the new scheme that would be a matter of Constitutional challenge before the Courts.

The personal hearing through video conference is not granted to assessee as a matter of right. The officer making the assessment does not have the power to grant such a hearing. Approval has to be obtained from the Chief Commissioner or Director-General of Income-tax in charge of the regional e-assessment centre. The rejection of such approval shall undoubtedly qualify for a constitutional challenge as a violation of the principles of natural justice that are intrinsic to judicial proceedings, even if carried on by a quasi-judicial authority. Also,the Notification seems to state that such request for video conference hearing may not be available to the Assessee at every point of time, or when the draft assessment order is being finalised, but as per para (B)(2) only where  a modification is proposed in the draft assessment order, and an opportunity is provided to the assessee by serving a notice calling upon him to show cause as to why the assessment should not be completed as per the such draft assessment order.

The procedure of Assessment seems to suggest that the Nation e-assessment Centre may finalise the Draft Assessment Order if it does not propose any modification or assign any review. It is therefore possible that the scheme can be interpreted in a way that does not make any provision of an Assessee to have a video conference with the assessing officer in order to clarify any questions that the officer may have. Needless to say, as the assessing officer cannot request for the same either, this has the potential to cause a serious miscarriage of justice and leads to a serious violation of the principle ‘Audi Alteram Partem’. Anyone who has taken part in Assessment Proceedings can amply attest to the fact that a lot of queries of the assessing officer are often resolved during oral arguments. The lack of being able to constructively  engage with the assessing officer may find justice delivery in the form of assessment of tax liability severely hamstrung. The Supreme Court in the case of Rajesh Kumar v. DCIT [2006] 287 ITR 91 (SC) has re-iterated based on Section 136 of the Income-tax Act, 1961, that proceedings before Income-tax Authorities are judicial proceedings. The restriction on the right to be heard therefore is a serious violation of the fundamentals rights of the Assessee and is prima-facie unconstitutional.

In fact, the very un-availability of personal hearing via video conference as a default choice vested in the assessee may also be considered a violation of the principles of natural justice. The assessee is the person upon which the tax liability shall be imposed. Even though the assessee always has the option to appeal the assessment order, the stay on the demand raised by the department always comes with the precondition of a percentage deposit. Not allowing a personal hearing through video-conference may cause substantial prejudice to the assessee. The assessment, though technical, is not a formula that is to be applied without due application of mind or exercise of discretion. If the scheme is to be successful, the option of a video conference with the assessing officer preparing the assessment order, should be a default choice. The very fact that the permission of a higher authority shall have to be taken by the assessee in order to best present his case before the authority and adjudicate in upon his case is an interference in the due process and against the principles of natural justice.

The new scheme provides that after considering the material before him, the officer making the assessment shall pass a “draft assessment order” which shall then be sent to the National reassessment centre. Upon the receipt of such order, the National e-assessment centre shall either finalise the draft assessment order, propose a modification of the said order by providing the assessee an opportunity to be heard or assign the draft assessment order to a review a unit in any of the regional assessment centres through an automated allocation system. This process is a direct encroachment upon the autonomy of the officer making the assessment while discharging his judicial functions. An appeal lies from his order before appellate authority. A revision application also lies before the Commissioner of Income Tax in case the assessment order is prejudicial to the interest of the revenue(Section 263 of the Income-tax Act, 1961). The Supreme Court in UOI v Greenworld Corporation [2009] 314 ITR 81 (SC) held that the order of an assessing officer should not be interfered with only because another view is possible.

The order passed by the officer making the assessment is subject to review by either the National e-assessment authority or a review board to which the matter is allocated by the said authority. Such interference into the application of the judicial mind by an assessing officer is to be deprecated. Also, the multiple reviews of the orders passed by the officer making assessment is not be required as Section 263 of the Income-tax Act, 1961, already grants supervisory jurisdiction upon the Commissioner of Income-tax. If the assessee has any quarrel with the assessment order passed by the assessing officer, the option of filing an appeal is always available. Similarly, Section 263 gives the Department and opportunity to revise an order of assessment if it is found to be erroneous and prejudicial to the interest of the revenue. The review of the order of the Assessing officer, in its draft stages is a clear interference in his adjudicatory function and may not stand up to a constitutional challenge.

The Faceless Appeal Scheme, 2020, that has been brought out by the insertion of (6B) and (6C) into Section 250 of the Income-tax Act, 1961, that deals with the procedure in appeal. The said scheme also seeks, in a manner similar to what the Faceless Assessment Scheme does to the assessing Officer, to erode the judicial discretion of the Commissioner of Income-tax (Appeals), who undoubtedly is discharging a judicial function in the adjudication of appeals and must therefore by above fear or favour. However, the introduction of a review unit in the process of adjudication of the Commissioner Income-tax (Appeals) is a major usurpation of his judicial independence. The question of whether this new procedure shall stand the scrutiny of constitutionality remains to be seen. It however, does not seem to have been challenged in the Delhi High Court in Lakshya Budhiraja. What is however challenged, is the fact that the opportunity to be heard through teleconference is sought to be provided as a matter of privilege after approval from the Chief Commissioner or the Deputy Director and not as a matter of right, as it should have been in a matter that has vast implications on the privacy rights as well as the economic and mental wellbeing of an Appellant. It is however, still a better opportunity than what the Assessee gets during the Assessment stage as in Appeal, there seems to be no restrictions on when an Appellant can seek approval for a personal hearing through the video conferencing facility. Needless to say, if the approval required for personal hearing in the Appellate stage is struck down by the Hon’ble Delhi High Court, then the same should also apply to the approval required for personal hearing at the Assessment stage. It is my humble opinion that this aspect should be brought to the notice of the Court in order to prevent multiplicity of proceedings.

Though recent events have shown that the administration has sought to be more friendly towards taxpayers, certain actions of the department have shown otherwise. The Income-tax department, though a party in adversarial proceedings, has a responsibility to ensure that it looks after the interests of not only the government coffers but also that of the taxpayers. There have been various initiatives of the department that have reflected the same and have synchronised with the vision of the current administration to streamline tax reforms and make the tax administration more accountable, transparent and most importantly, taxpayer friendly. A recent example of how a perception of bias, however misplaced, may creep into the minds of the taxpayer is reflected by the contents of the central action plan for the financial year 2018-19 that sought to incentivise ‘quality’ orders passed by the Commissioner of Income-tax in their capacity as the first appellate authority. Quality orders were defined as those orders that either enhanced assessment, strengthen the orders of the assessing officer or levy penalty under Section 271(1)(c). The Bombay High Court had quashed this offending part of the central action plan in order to preserve the independence of the Commissioner of Income Tax (appeals) in Chamber of Tax Consultants v. CBDT [2019] 416 ITR 21 (Bom). If quality of orders is to be gauged by how pro-department the order is, then the new processes as laid down by the faceless schemes have the potential to be less taxpayer friendly than the current process.

The fact that the assessing officer is an agent of the Income-tax department is something that must factor centrally in any reform process. An often used phrase would come to mind at this juncture “Ceaser’s wife must be above suspicion”. It would be quite as sorry state of affairs if the new policy manages to eradicate the visage of individual bias by promoting the accountability of assessing officers while letting a strong feeling of institutional bias to creep in. The independence of the officer making the assessment and the appellate authority adjudication the appeal must be maintained and the accountability of their orders must rest on their shoulders alone. Team based assessments, as desirable as they may sound in certain aspects, are one steps forward and two steps back in as far as the accountability in the tax administration is concerned.

It is often said that judicial authority must be exercised without fear or favour. If the goal of the administration is to make proceedings tax-payer friendly, let assessments have the exalted status of Ceaser’s wife.

The Author is an Advocate practicing in the field of commercial laws including taxation in Delhi & Mumbai. Views expressed are personal.