Going faceless is one of the key reforms the present government swears by for bringing efficiency and effectiveness in the administration of assessment and appeals under the Income Tax law. To implement this policy, Section 144B was introduced to provide the procedure for faceless assessment with effect from April 1, 2021.
However, the implementation of faceless assessment till now has been a mixed blessing. Taxpayers and the Income Tax Department (ITD) faced various legal and procedural difficulties in the operation of the faceless assessment, which resulted in litigation by way of writ petitions before various High Courts.
Considering this situation, Budget 2022 has proposed to revamp the existing Section 144B. Some of the key changes proposed in section 144B are highlighted in the ensuing paragraphs.
Scope widened to include reassessment proceedings under Section 147
Presently, Section 144B includes within its ambit scrutiny assessment under Section 143(3) and best judgment assessment under Section 144. Though the definition of assessment includes reassessment, there was some ambiguity as to whether the faceless scheme applies to reassessments as well. The new Section 144B proposes to remove this ambiguity by expressly bringing Section 147 as well within its ambit.
Mandatory personal hearing
As per the current Section 144B, allowing a request for a personal hearing made by the taxpayer was the prerogative of the officer concerned. Further, the personal hearing was to be allowed in special circumstances which never came to be notified by the Central Board of Direct Taxes (CBDT). In this context, multiple High Courts have held that personal hearing is mandatorily required to be afforded whenever the request for it is made by the taxpayer. In the proposed Section 144B, the legislature has taken care of this aspect by mandating grant of personal hearing in all circumstances where request is made by the taxpayer. This is a welcome change to ensure adherence to the principles of natural justice by the tax department.
Deletion of provisions declaring assessment proceedings void in case of non-observance of prescribed procedure
The existing provisions state that the assessment proceedings shall be void if the procedure mentioned in Section 144B is not followed. This provision has led to large number of assessments nullified by the courts where prescribed procedure like non-service of draft order and show cause notice (SCN), non-grant of personal hearing to the taxpayer etc was not followed. Under the proposed Section 144B, the said provision is deleted with retrospective effect from April 1, 2021 to save the assessment proceedings from being declared void due to technical glitches. This may even end up reviving past assessments of certain taxpayers which were declared void by the courts and appeals filed by the ITD are still pending.
Regional Faceless Assessment Centres cease to exist
The present scheme required conduct of assessment through an Assessment Unit (AU), a Verification Unit (VU), a Technical Unit (TU) and a Review Unit (RU) located in any one of the Regional Faceless Assessment Centres (RFACs). However, the proposed Section 144B does not make any reference to RFAC. Hence, going forward, all assessments are likely to be carried out centrally by the National Faceless Assessment Centre (NFAC).
No specific time limit mentioned for filing response to notice issued under Section 143(2)
As of now, Section 144B provides a limit of 15 days to a taxpayer for filing a response to a notice issued under Section 143(2). However, no such time limit has been specified in the proposed Section 144B. Thus, assessees will have to file such responses within a reasonable time provided in the notice, subject to any extensions.
Draft order replaced by Income or Loss Determination Proposal (ILDP)
As per the prevailing scheme, the AU is required to prepare the draft order and forward the same to NFAC. In case a variation prejudicial to the taxpayer is proposed, then the draft order along with the SCN are required to be served on the taxpayer. However, under the proposed Section 144B, the AU is required to prepare ILDP and forward it to NFAC where no variation is proposed to the returned income of the taxpayer. In cases where variation is proposed, a two-step procedure is proposed: first, SCN will be served on the taxpayer, and thereafter, the ILDP will be prepared and forwarded to NFAC. Pursuant to the ILDP, a draft order will be prepared and forwarded by the AU to NFAC.
Mechanism for sharing ILDP/draft order with the taxpayer
Significantly, there is no mechanism in the proposed Section 144B to share the ILDP with the taxpayer. The draft order which will be made pursuant to the ILDP would be shared with the taxpayer only when the proposed variations relate to matters covered under the Dispute Resolution Panel (DRP) route.
Simplified procedure for review by RU
Presently, wherever any variations are suggested by the RU, NFAC is required to get one more review done by another AU. This two-level review has made the process of assessment time consuming. However, in the proposed Section 144B, a single review is proposed.
No opportunity of being heard where variations are proposed by RU
Under the existing provisions, the taxpayer is served a SCN to present its case before any variations pursuant to review are made. However, under the new Section 144B, there is no opportunity provided to the taxpayer to contest the variations made pursuant to review by the RU, except wherein the matter is conducted through the DRP route.
Enabling provisions for special audit under Section 142(2A)
The existing provisions make a reference to Section 142(2A) to a limited extent that if a taxpayer does not comply with the direction issued under Section 142(2A), then the best judgment assessment procedure will be followed. However, under the new provision, specific enabling powers are proposed to be granted to the AU for referring to NFAC the matters requiring invocation of Section 142(2A),which would thereafter be conducted by the jurisdictional Assessing Officer.
Objections before NFAC
It is proposed that the taxpayers would be required to file objections against the draft order before NFAC as well for matters covered under the DRP route. This specific requirement is absent under the existing provisions.
Conclusion
The proposed modifications will not only ensure certainty in the conduct of faceless assessment, but will also eliminate unwarranted litigation between the taxpayer and the ITD, especially on account of procedural lapses. However, there are certain other issues, such as absence of any mandate for furnishing of ILDP/DO/review report/technical report to the taxpayers, non-grant of any opportunity of hearing to the taxpayers against the adverse variations proposed by the RU, and a robust IT infrastructure ensuring successful implementation of the above changes, which require immediate attention and corrective measures.
There is no doubt that going faceless in assessments and appeals is the right way forward in tax administration. It calls for a tectonic change in approach on the part of both the taxpayers and the ITD. Hopefully, both will learn and adjust to the new normal quickly. One may expect some more course corrections as the faceless assessment movement gathers momentum.
S Vasudevan and Prachi Goel are Executive Partner and Senior Associate respectively at Lakshmikumaran & Sridharan.