Rarely do adverse court rulings lead to the government gracefully accepting defeat. Even rarer is policy correction in response. So, when that happens, it deserves due credit. After multiple high courts ruled in favour of taxpayers and pulled up the tax department for ignoring principles of natural justice, the Finance Bill, 2022 has proposed several changes to the faceless assessment framework.
The most important being mandating the right to personal hearing. Now, if a variation is proposed to the assessment income and the taxpayer asks for a personal hearing, the revenue department will have to grant one. So far, it was only available at the discretion of the Chief Commissioner or the Director General in charge of the regional e-assessment centre.
The denial of personal hearing led to thousands of writ petitions before high courts who all upheld the taxpayers’ view.
Mandating personal hearing will take care of 50% of the litigation on faceless assessments, Sanjay Sanghvi, partner at Khaitan & Co., told BloombergQuint. That said, other elements of fairness in the assessment process can’t really be mandated under the law - if those continue to get ignored, taxpayers will be forced to approach courts.
Thus, it is crucial that in doing faceless assessments, a) proper hearing is afforded to the taxpayer; (b) ‘written submissions’ filed are duly taken into account before passing the assessment order; and (c) adjournment is allowed in genuine cases.Sanjay Sanghvi, Partner, Khaitan & Co.
These very violations have led to another key change to the faceless assessment scheme – one that’s to the tax department’s advantage.
Section 144B (9) says that an assessment order will be regarded as invalid if the procedure laid down for faceless assessment isn’t followed - for instance, issuance of a show-cause notice to the taxpayer, preparing a draft assessment order basis the taxpayers' submissions etc.
The government has proposed to omit this provision retrospectively from April 1, 2021.
It’s surprising that this provision is proposed to be omitted with retrospective effect, Sandeep Bagmar, partner at DS Advocates, pointed out. Bagmar is among those who had challenged the faceless assessment scheme before the Madras High Court.
The Bombay High Court in a few decisions declared the assessment order as non-est since it was passed in violation of the prescribed procedure. Similar issues are sub-judice before various other high courts, namely Delhi and Madras. The Finance Bill proposal will take away vested rights of the assessees to get courts to declare the order as non-est where procedure under section 144B is not followed.Sandeep Bagmar, Partner, DS Advocates
The third change pertains to the Risk Management Strategy - proposed to be eliminated.
As per the existing framework, assessments have to be completed by the National Faceless Appeal Centre basis the Risk Management Strategy specified by the tax department. Since this strategy has not been made public, it became the basis of the constitutional challenge before the Madras High Court. It was argued that the framing of such strategy provides a wide ambit to directly interfere in the quasi-judicial process of making an assessment. And that assessments based on an opaque strategy are violative of the Constitution.
The Finance Bill proposal says the basis on which the NaFAC will review assessment orders will be based on the guidelines prescribed by the Central Board of Direct Taes, Bagmar said.
'If the guidelines are issued and made public, there would be transparency in the manner in which NaFAC will exercise its powers. If the guidelines are only in the manner of facilitation of assessment, then the NaFAC would not be an authority exercising revisionary powers unlike that in the existing scheme', he explained.
Finally, the Finance Bill has proposed to do away with some circuitous procedures in the existing framework.
The proposal says that suggestions made by the review unit shall be sent to the same assessment unit which originally proposed the draft assessment order. Under the exiting provision, the NaFAC is mandated to send modifications by the review unit to the assessment unit which was not involved in preparing the draft assessment order.
The review unit is tasked with checking if relevant and material evidence has been brought on record, relevant points of fact and law have been duly incorporated, the issues requiring addition or disallowance have been included etc.
The assessment unit has also been given the power to accept or reject the suggestions made by the review unit.
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