Draft Assessment Order Required Only For 'Eligible Assessees' Under Faceless Assessment: Kerala High Court

The Kerala High Court has held that tax authorities conducting faceless assessments are not required to issue a draft assessment order before finalising proceedings in the case of ordinary assessees.

Justice Ziyad Rahman A.A., while dismissing writ petitions filed by a partnership firm engaged in the real estate business, observed that the requirement applies only to "eligible assessees" specifically defined under the Income Tax Act.

"The requirement of issuing a draft assessment order before finalizing the proceedings is necessitated only in the case of an 'eligible assessee' as defined under Section 144(C)(15)(b) of the Act," the court held.

The dispute arose from assessment proceedings relating to the Assessment Year 2020-21 against a partnership firm engaged in the construction of apartments, villas and commercial complexes.

After the firm filed its income tax return, the National Faceless Assessment Centre issued notices seeking clarifications on stock valuation and calling for financial and business records. The firm furnished replies and supporting documents. A show-cause notice was later issued proposing three variations in the assessment and inviting its response.

Objections to the same were filed an order was passed on September 28, 2022. This was followed by demand proceedings

During the pendency of the challenge before the High Court, the department also initiated rectification proceedings and passed a rectification order, which was separately challenged.

Before the court, the firm contended that the assessment proceedings were vitiated because no draft assessment order had been served before finalisation of the assessment. It also argued that the assessment was barred by limitation and that it had not been afforded an opportunity of hearing.

Rejecting the limitation challenge, the court noted that the Finance Act, 2022 had extended the time available for completing assessments for the relevant assessment year until September 30, 2022. Since the assessment order was passed on September 28, 2022, it was within the prescribed period.

Examining the faceless assessment framework, the court found that the statute does not generally mandate service of a draft assessment order on every assessee.

"On going through the statutory stipulations contained under Section 144B(1) of the Act where, the procedure to be followed for faceless assessment is contemplated, it can be seen that, nowhere it is made mandatory that a draft assessment order is to be served upon the assessee," the court observed.

The court noted that the requirement to serve a draft assessment order applies only to "eligible assessees" as defined under Section 144C(15)(b) of the Act. Since the partnership firm did not claim to fall within that category, it could not insist on issuance of a draft assessment order before completion of the assessment.

"Since there is a distinction made between the 'eligible assessee' and other assessee, as per the provisions of the Act and that the requirement of issuance of draft assessment order is made only in respect of an 'eligible assessee', which term is clearly defined under the Income Tax Act itself, unless it is shown that, the petitioner is an 'eligible assessee', he cannot insist that a draft assessment should have been issued to it, before finalizing the assessment," the court observed.

The court further found that the statutory requirement applicable to assessees who are not eligible assessees is service of a show-cause notice setting out the proposed variations. That requirement had been complied with in the present case.

"Going by the statutory procedure applicable to an assessee, who is not an eligible assessee as referred to above, the requirement is that, the assessee should be served with a show cause notice intimating about the proposal," the court held.

The court also rejected the contention that no opportunity of hearing had been granted, noting that the show-cause notice informed the firm that it could seek a personal hearing through video conferencing. No such request was made.

Holding that the firm's challenge to the merits of the assessment involved factual disputes requiring examination by the statutory appellate authorities, the court dismissed the writ petitions while preserving its right to avail statutory remedies.

For Petitioner: Advocates Aswin Gopakumar, Anwin Gopakumar, Aditya Venugopalan, Nikitha Susan Paulson, Mahesh Chandran, Gautham Krishna E.J., Avinash Kurungot, Ijas Muhammed, and Dona Mary E.J, Advocates

For Respondent: Advocates Christopher Abraham, Additional Standing Counsel for the Income Tax Department, assisted by P.R. Ajith Kumar, Advocate