Telangana High Court Sets Aside Income Tax Assessment Against TSIICL Over Denial Of Effective Hearing

The Telangana High Court has set aside an income tax assessment order determining the taxable income of the Telangana State Industrial Infrastructure Corporation Limited (TSIICL) at approximately ₹2,526 crore.

It held that the Corporation was not given an effective opportunity to respond to the proposed additions before the assessment was finalised.

A Division Bench comprising Acting Chief Justice P. Sam Koshy and Justice Narsing Rao Nandikonda observed that merely issuing notices seeking information and explanations would not satisfy the requirement of providing an effective opportunity to contest proposed variations in the assessment.

The bench was hearing a writ petition filed by TSIICL challenging the assessment order dated April 16, 2021, passed by the National e-Assessment Centre, Delhi, for Assessment Year 2018-19.

The Corporation had originally declared an income of approximately ₹70.35 crore, which was subsequently revised to ₹65.63 crore. However, the assessment order determined its total income at approximately ₹2,526.70 crore, resulting in a consequential tax demand.

TSIICL contended that although it had furnished information and explanations in response to notices issued during the assessment proceedings, the authorities had not served a draft assessment order incorporating the proposed additions or provided an effective opportunity to object to the variations ultimately made.

It further submitted that the figures and discrepancies referred to in the earlier notices were different from those ultimately adopted in the assessment order.

The Revenue argued that the Corporation had participated in the assessment proceedings and had been given sufficient opportunities to explain the discrepancies.

It also contended that preparation of a draft assessment order was essentially an internal procedure and that the notices issued were sufficient compliance with the prescribed procedure.

Rejecting the Revenue's contention, the High Court held that notices seeking information and show-cause notices proposing variations serve distinct purposes. A notice calling for information cannot automatically be treated as an opportunity to explain why specific additions should not be made to the assessee's income.

The Bench observed that under the faceless assessment procedure, the Assessment Unit is required to prepare a draft assessment order after considering the material on record. Where a variation prejudicial to the assessee is proposed, the assessee must be given an opportunity to explain why such variation should not be made.

"..the statutory scheme contemplates preparation of a draft assessment order by the Assessment Unit after taking into consideration all the relevant material available on record. The draft assessment order is thereafter required to be transmitted to the National Faceless Assessment Centre, which is required to examine the same in accordance with the risk management strategy specified by the Board", it said.

The Court emphasised that this requirement is a substantive procedural safeguard and not an empty formality. The assessee must be made aware of the specific proposed variations and given an effective opportunity to respond before the assessment is finalised.

The Bench also rejected the argument that the Corporation's non-eligibility under the draft assessment procedure applicable to certain eligible assessees could dispense with the safeguards prescribed for faceless assessments.

It clarified that the procedural requirements governing faceless assessments have to be independently complied with.

"this Court is of the view that the petitioner is entitled to an effective opportunity to respond to the proposed variations in accordance with the procedure prescribed under Section 144B of the Act. The issuance of notices calling for information under Section 142(1) of the Act, by itself, cannot be treated as a substitute for the opportunity contemplated under the faceless assessment procedure", the Court said.

Relying on the Delhi High Court's decision in Interglobe Enterprises Private Limited v. National Faceless Assessment Centre, the Bench reiterated that the procedure prescribed for faceless assessments must be strictly followed.

Finding that the Corporation had not been afforded an effective opportunity to respond to the proposed variations, the Court set aside the assessment order dated April 16, 2021, along with the consequential demand.

The matter was remitted to the competent Assessing Authority for fresh consideration.

The authorities were directed to follow the prescribed procedure, issue the necessary draft assessment order and show-cause notice wherever required, and provide the Corporation with an effective opportunity to submit its objections.

For Petitioner: Sri Y Rantnakar, Advocate

For Respondent: Smt. J. Sunitha, Senior Standing Counsel