Bombay High Court
Piramal Enterprises Limited vs Additional ... on 30 July, 2021
Bench: S.P. Deshmukh, Abhay Ahuja
1 WPL 11040-21 - Judgment.odt
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION (L) NO.11040 OF 2021
Piramal Enterprises Limited, ]
having its address at Piramal Antana ]
Agastya Corporate Park, Kamani Junction ]
Kurla, Mumbai - 400 070. ] ... Petitioner
Versus
1. Additional/joint/Deputy/Assistant ]
Commissioner of Income-tax/Income-tax Officer ]
National e-Assessment Centre, ]
having address at Room No.401, 2nd Floor, E-Ramp, ]
Jawaharlal Nehru Stadium, Delhi 110 003, ]
Email id : [email protected] ]
and [email protected] ]
2. Deputy Commissioner of Income-tax, ]
Circle 8(2)(1), Mumbai, ]
having address at Room No.624, 6th Floor, ]
Aaykar Bhavan, Maharshi Karve Road, Mumbai, ]
Maharashtra - 400020. ]
Email id : [email protected] ]
3. Principal Commissioner of Income-tax-8, ]
having address at Room No.611, 6th Floor, ]
Aaykar Bhavan, Maharshi Karve Road, Mumbai, ]
Maharashtra - 400020. ]
Email id : [email protected] ]
4. Central Board of Direct Taxes, ]
North Block, New Delhi. ]
5. Union of India, ]
through the Secretary, Department of Revenue, ]
Ministry of Finance, Government of India, ]
North Block, New Delhi - 110 001. ]... Respondents
Mr. Percy Pardiwala, Senior Advocate a/w Mr. Madhur Agarwal i/b Ms.
Priyanka Bore for Petitioner.
Mr. Sham Walve for Respondents.
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CORAM :-
SUNIL P. DESHMUKH &
ABHAY AHUJA, JJ.
RESERVED ON :- 12 JULY, 2021
PRONOUNCED ON :- 30 JULY, 2021
(THROUGH VIDEO CONFERENCING)
ORAL JUDGMENT (PER : SUNIL P. DESHMUKH, J.) :-
1. The petitioner - a registered company - is before the court
aggrieved by the draft assessment order dated 22/04/2021 (for the
assessment year 2017-18) under Faceless Assessment System / e-
Assessment.
2. Petitioner carries on various businesses including
pharmaceuticals comprising manufacturing pharmaceutical formulations
as well as trading in pharmaceutical goods. It purchases raw material for
manufacturing its formulations as well as purchases goods for trading.
3. The petitioner had filed its original return of income for the
assessment year 2017-18 in November 2017 declaring NIL income. The
petitioner has filed a revised return of income in March 2019 for said
assessment year electronically in the prescribed fixed format.
4. According to petitioner, in its profit and loss account, it
breaks up expenditure in broad categories viz; cost of material consumed,
purchase of stock in trade and change in inventory of finished goods,
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work in progress and stock in trade. Its details are disclosed in schedule
to profit and loss account. In the balance-sheet, inventory (closing stock)
comprises the items raw material, work in progress, finished goods, stock
in trade and spares and is given in consolidated figures.
5. It is referred to that petitioner has tendered and uploaded
profit and loss account and balance-sheet by filling up relevant columns of
the format of return of income. Columns in the return of income are pre-
determined and inflexible and since it provided for only one column for
purchase, it was not possible for petitioner to show purchases of raw
material and purchases of trading goods separately. There is no column
to show opening and closing stocks of stock in trade. In the
circumstances, in the profit and loss account, as there are no sufficient
columns to give details of transactions, the petitioner had made
disclosures in certain columns and schedule to annual accounts.
6. The petitioner submits that the aforesaid disclosures are
made for understanding as to the amount shown in profit and loss
account of income tax return tallies with annual accounts. It is being
submitted that such a method of disclosure in return of income does not,
in any way, affect the income declared or the correctness of amount
declared in the profit and loss account or the return of income. Since the
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return of income comprises fixed line items, the petitioner had to make
the disclosures as aforesaid in particular form which practice it has been
following from the beginning of filing of return of income electronically.
The petitioner discloses all types of inventories (closing stocks) as is
disclosed in annual accounts, in the balance-sheet.
7. It is referred to, it is considered that there is substantial
difference between the value of receipts from services in the service tax
return received from CBEC and the values disclosed in income-tax return.
It is contended that while the petitioner had sought material to
understand the basis of respondent no.1 coming to such consideration,
the respondent no.1 had not furnished any material / information and
arbitrarily addition was made.
8. It is stated petitioner had also filed along with return transfer
pricing audit report in Form 3-CEB showing international transactions
entered into and their arm's length price. It is submitted that the
transactions of granting corporate guarantee in respect of borrowing of
Associate Enterprises ('AE'), the petitioner had charged the transaction @
0.75% or 0.50% of the guarantee amount. The petitioner has made suo-
motu adjustment @ 0.25% for certain guarantees given for the
performance of AEs as being the arm's length price of the international
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transactions. The transfer pricing officer under his order dated
29/01/2021, proposed adjustment of Rs.23.62 crore rejecting submission
of petitioner with respect computation of arm's length price and
computed corporate guarantee and performance guarantee @ 1.68% and
accordingly proposed the adjustment.
9. The petitioner's case was selected for scrutiny assessment and
during the course of submissions, petitioner wanted to opt out of e-
proceedings and to have physical submission but its case was transferred
to e-proceedings / faceless assessment.
10. The petitioner also refers to that during course of assessment
proceeding, various show-cause notices were issued from time to time
seeking details and the petitioner had filed its replies with submissions
with respect to issues sought to be raised.
11. Petitioner states, it received a purported draft assessment
order in the form of a show-cause notice dated 25/03/2021 stating that
certain additions are proposed to be made while completing assessment,
purporting to give opportunity to show cause, up to 26/03/2021.
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12. The notice, inter alia, also states that the petitioner may file
response in writing and may also file request for personal hearing through
video conferencing. The notice proposed to disallow a sum of Rs.167.57
crore under section 14A of the Income Tax Act, 1961 (for short, 'IT Act')
and an amount of Rs.430.35 crore based on difference of turnover
disclosed by the petitioner and information received from CBEC, addition
to value of closing stock as there being difference between value of
closing stock, in the profit and loss account, in the income tax return and
in the balance-sheet, addition with respect to opening stock as the
opening stock in the profit and loss account in the income tax return is
more than the closing stock disclosed in the income tax return of earlier
year and transfer price adjustment of Rs.23.62 crore.
13. In its letter dated 26/03/2021, the petitioner asked for time
up to 09/04/2021 as a day's time was not sufficient with respect to issues
raised in the proposed draft assessment order. On 28/03/2021, the
petitioner submitted a letter seeking hearing through virtual conferencing
in the assessment proceedings for AY 2017-18. The petitioner refers to
that it filed responses to notice on 07/04/2021 and 08/04/2021 giving
explanation, particulars and details with respect to the issues.
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14. The petitioner received a draft assessment order dated
22/04/2021 under section 144C(1) read with 143(3) of the IT Act
disallowing sum of Rs.167.57 crore under section 14A of the Act, adding
Rs.362.72 crore to income rejecting submissions of the petitioner stating
that burden was on petitioner to reconcile the data with the service tax
returns holding that request of the petitioner for further time for
reconciliation is not justifiable, adding a sum of Rs.343.10 crore on
account of closing stock, with addition of Rs.810.33 crore on account of
opening stock and transfer pricing addition of Rs.23.62 crore.
15. The petitioner is, thus, before the court contending that
impugned draft assessment order dated 22/04/2021 by respondent no. 1
for assessment year 2017-18 is ex-facie illegal, untenable, unsustainable,
unreasonable and contrary to the provisions of the IT Act and infringes
petitioner's rights under Articles 14 and 19 of the Constitution of India,
invoking Articles 226 and 227 of the Constitution of India.
16. The revenue has filed its reply through Deputy Commissioner
of Income Tax, Circle 8(2)(1), Mumbai, wherein it has been referred to
that the case of petitioner for Assessment Year (AY) 2017-18 had been
selected for complete scrutiny and verification, as according to Computer
Assisted Scrutiny Scheme (CASS), various aspects had cropped up on
account of issues referred to in the reply.
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17. It is contended that adjustment of Rs.23.62 crore was based
on transfer pricing officer's order under section 92CA(3) before which the
petitioner had been issued notices from time to time and the petitioner's
submissions were duly considered and are incorporated in transfer pricing
order.
18. It has been referred to that in CASS, additional income in
respect of closing stock has been properly made having regard to the
differences of values appearing in profit and loss account and balance
sheet. Similar is the case of the opening stock, as there have been
differences in the opening stock of the current year which should have
been generally the same, as the closing stock of the preceding year. It is
sought to be submitted that after satisfaction, there has been disallowance
under section 14A of the Act r/w Rule 8D in the draft assessment order.
The assessee had failed to furnish computation as per rule 8D and instead
had furnished scientific working of disallowance which is less than
expenses already debited in profit and loss account for earning exempt
income, as such, 1% of investment less expenses had been added to total
income.
19. It is contended that a show cause notice issued on
25.03.2021 to the petitioner. However, pursuant to the same, there had
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been no compliance on 26.03.2021. On 28.03.2021, the petitioner had
sought an adjournment and submitted response on 07.04.2021 urging to
explain specific points through video conferencing and had also filed
response on 08.04.2021. All responses and replies filed in response to the
notice were duly considered and examined and accordingly, draft
assessment order was passed under section 144C(1) r/w 143(3) on
22.04.2021 and assessee had been given 30 days time from the date of
receipt of draft assessment order to file its acceptance of variations made
to the total income or to file objections, if any, as per the provisions of
section 144C(2). Draft assessment order passed on 22.04.2021 is valid
and in accordance with law.
20. It is contended that assessee will be given principles of
natural justice before passing final assessment order after filing objection
to variations in total income under section 144C(2) of the Income Tax
Act.
21. Mr. Percy Pardiwala, learned senior advocate for petitioner,
submits that impugned order is passed in contravention in principles of
natural justice and contends that opportunity of personal hearing is an
essential requisite before passing an order prejudicing interest of the
assessee. He submits that petitioner had requested for personal hearing
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in response to the notice dated 25/03/2021, inter alia, through video
conferencing. He submits that despite requests, on many occasions for
hearing, physical as well as through video conferencing, the same have
not been heeded and / or attended to and directly order detrimental to
the interest of the petitioner has been passed.
22. Mr. Pardiwala submits that respondent no.1 has failed to
appreciate the response to the show-cause notice-cum-draft assessment
order dated 25/03/2021 on the issues on which additions to income have
been made in impugned draft assessment order dated 22/04/2021. He
submits that the impugned order is devoid of proper reasoning and does
not take into account the submissions and its underlying purport.
23. He submits that respondent no.1 has made additions to
income in excess of Rs.1,000 crores with respect to opening stock and
closing stock without appreciating the case of petitioner that there have
been no incorrect disclosures. He submits that respondent no.1 has failed
to appreciate that balance-sheet in the annual accounts disclosing correct
figures of opening stock and closing stock and the income tax return are
cumulative which do not change the amount of income chargeable to tax.
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24. He goes on to submit that an Assessing Officer cannot
proceed to make disallowance under section 14A by applying Rule 8D of
Income Tax Rules without recording subjective satisfaction. Despite
scientific working apportioning the cost to the tune of Rs.3,26,18,604/-
been given, respondent no.1 has proceeded to disallow Rs.167 crore
under Rule 8D. He submits that this is completely arbitrary and irrational
and is contrary to binding principles laid down by superior courts. The
order is without application of mind.
25. He submits that addition of Rs.362.72 crore is on the basis of
alleged information received from CBEC of the sales tax returns of the
petitioner. The petitioner has given details of sales tax returns filed by it
which show that petitioner had rendered services to the extent of
Rs.272.41 crore. The basis for computing Rs.567.76 crore by respondent
no.1, despite being sought, yet has not been given to the petitioner. He
submits that reconciliation was not possible unless the petitioner is given
proper and relevant information.
26. He submits that this court as well as other High Courts have
consistently taken a view that 0.5% is a reasonable arm's length price for
determination of guarantee fees and as such, finding of respondent no.1
that corporate guarantee fees should be computed at 1.68% is contrary to
the decisions of high courts and earlier decision in petitioner's own case.
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27. Mr. Pardiwala, during course of his submissions, has taken us
through the provisions of sections 144B and 144C. From the provisions of
section 144B(1), he submits that relevant in present controversy would be
the provisions from section 144B(1)(xvi) whereunder National Faceless
Assessment Centre ('NFAC') shall, if the draft assessment order prejudicial
to the interest of the assessee is proposed, issue a show-cause notice as to
why proposed variation should not be made giving an option to the
assessee to ask for personal hearing according to sub-clause (b) of clause
(xiv) of sub-clause(1) of section 144B.
28. He submits, after receipt of show-cause notice, assessee is
supposed to furnish response as referred to in sub clause (xxii) within
specified time, inter alia, requesting opportunity for personal hearing. In
case, no response is furnished, the NFAC can proceed with the draft
assessment order / final draft assessment order as referred to in clause
(xxiii)(a)[A], [B]. However, if response is furnished and request for
hearing is made, NFAC, under clause 144B(1)(xxiii)(b) has to assign
responsibility to the Assessment Unit. After considering the response and
after giving opportunity of being heard, Assessment Unit shall send
revised draft assessment order to NFAC. He submits that after receipt of
the revised draft assessment order, NFAC shall, in case of variation in the
revised draft assessment order is prejudicial to the interest of the assessee
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in comparison to the draft assessment order or final draft assessment
order, follow the procedure under sub-clause (b) of clause (xvi) of sub-
section (1) of section 144B.
29. He submits that in the present scenario, an opportunity of
hearing as is available and allowed pursuant to section 144B(xvi)(b) is
getting lost.
30. He submits that as in e-assessment system / faceless
assessment system, information given in fixed format of the department
appears to be taken into account and the particulars given provided
schedules and appendices do not appear to have been appreciated,
hearing is eminently imperative as there are several issues which would
be required to be addressed to and explained. There are certain aspects
which can be peculiarly explained and understood during oral
submissions and thus a hearing is a must which is allowed in the scheme,
however, is not afforded and is wanting in the present case.
31. Mr. Pardiwala purports to refer to and rely, for aforesaid
proposition, on a decision rendered by Delhi High Court in the case of
Moser Baer India Ltd. Vs. Additional Commissioner of Income-tax,
reported in [2009] 176 Taxman 473 (Delhi). This case concerns
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determination, by Transfer Pricing Officer (TPO) pursuant to section
92BA, of arm's length price of international transaction without granting
opportunity of personal hearing to the assessee. He submits that in said
case, the importance of personal hearing has been discussed with quite
some elaboration. He points out that in aforesaid decision, judgments in
the case of Travancore Rayon Ltd. Vs. Union of India reported in AIR
1971 862 (7) and in the case of Indian Transformers Ltd. Vs. Asstt.
Collector reported in 1983 (14) ELT 2293, by Supreme Court and Kerala
High Court respectively are considered showing that oral hearing is a
must on account of complexities involved in determination of arm's length
price. He draws attention to paragraphs 6.1 and 7.3 from said judgment
in Moser Baer (Supra), reading, thus :-
"6.1 As regard the objection taken by the respondent,
with respect, to the maintainability of the writ petition, it is our
view that, in the event, we were to hold that the impugned
order(s) of the TPO were passed in breach of the principles of
natural justice and hence, a nullity in the eye of law, the writ
petition would be a proper remedy. See observations of the
Supreme Court in the case of State of U.P. v. Mohd. Nooh AIR
1958 SC 86 and Whirlpool Corporation v. Registrar of Trade
Marks, Mumbai and Ors. (1988) 8 SCC 1.
7.3 Keeping in mind the test as enunciated by the
Supreme Court in the case of Mohinder Singh Gill (supra) and
State of Orissa v. Dr. (Miss) Binapani Dei (supra), we have no
doubt in our minds that the provisions of Sub-section (3) of
Section 92CA cast a duty in no uncertain terms on the TPO to
afford an opportunity of an oral hearing. This is clearly so in
view of the fact that as courts have carved out this important
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safeguard in favour of the aggrieved parties even where the
statute is silent, unless there is exclusion of such a right by way
of an explicit provision or by necessary implication. In the
present case, however, given the words of the statute, we have
no doubt that the grant of oral hearing by the TPO is
mandatory. The reason for coming to such conclusion, apart
from the clear wordings of Sub-section (3) of Section 92CA, is
that, apart from the civil consequences, that, the determination
of ALP would have on the assessee, any adjustment by the
Assessing Officer to the ALP determined, by the assessee based
on the determination by the TPO under Sub-section (3) of
Section 92CA, would result in imposition of penalty under
Section 271(1 )(c) read with explanation 7 of the Act. The
Assessing Officer, after the amendment brought about by
virtue of Finance Act, 2007, has no choice but to proceed to
compute total income of the assessee under Sub-section (4) of
Section 92C in "conformity" with the ALP determined by the
TPO. In view of the consequences which result from the
determination of the ALP by the TPO, which are undoubtedly
severe, there can be no doubt that an oral hearing is a must."
32. He submits that there is strong possibility of a submission
from the other side about an opportunity of hearing been available with
Dispute Resolution Panel. Yet, according to him, the same would not
dispense with hearing by the authority which is to determine the income
assessible to tax according to procedure when the statutory scheme makes
provisions for the same.
33. Mr. Pardiwalla submits that there is no distinction under the
scheme between the eligible assessee and other assessee so far as
opportunity of hearing is concerned in the scheme under section 144B.
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34. Mr. Pardiwalla cites a few decisions from Delhi High Court
viz;
(a) Sanjay Aggarwal Vs. National Faceless Assessment Centre,
Delhi, reported in [2021] 127 taxmann.com 637 (Delhi) wherein, taking
into account provisions in clauses under section 144B(1) for faceless
assessment, it has been observed to the effect that a look at relevant
provisions would give a sense as to why legislature has provided personal
hearing in the matter in a case where variation is proposed in the orders
of draft assessment, final draft assessment or revised draft assessment.
Opportunity is made available to assessee by serving a notice calling upon
him to show-cause and assessee or his representative is allowed to request
for personal hearing to present oral submissions on its case before income
tax authorities in any unit. Taking stock of the situation, Delhi High Court
had concluded that it was incumbent on the revenue to accord personal
hearing to the petitioner and its lack would result in setting aside
impugned order. In aforesaid case, it appears that a show-cause notice-
cum-draft assessment order had been issued on 13/04/2021 and
thereafter the petitioner had responded to making several requests for
personal hearing which were not heeded and the notice culminated into a
draft assessment order notice dated 22/04/2021 and the petitioner
contended that impugned order had been passed without affording
personal hearing to the petitioner.
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(b) In Lemon Tree Hotels Limited Vs. National Faceless
Assessment Centre, Delhi & Anr in W.P.(C ) 5427/2021 (Delhi High
Court), petitioner's case was that upon show-cause notice-cum-draft
assessment order dated 13/03/2021, several replies were furnished and
having regard to the complexity in the matter, a request for personal
hearing was also made. It is observed in paragraph 7 of the decision,
after taking into account section 144B(7)(vii) and clause (xii) sub-clause
(h), prima facie once an assessee requests for a personal hearing, the
officer in-charge, under the provisions of clause (viii) of section 144B(7),
would have to ordinarily grant personal hearing.
(c) In the case of Satia Industries Limited Vs. National Faceless
Assessment Centre, Delhi in W.P.(C ) 5587/2021 & CM APPL.17382/2021
(Delhi High Court), it has been considered that since an adverse view was
taken, and petitioner's income got varied, provisions of section 144B(7)
get triggered, and that such an aspect had received attention in the
judgment dated 27/05/2021 in the matter of Ritnand Balved Education
Foundation (Umbrella Organization of Amity Group of Institutions) Vs.
National Faceless Assessment Centre & Ors., in W.P.(C ) 5537/2021 (Delhi
High Court), wherein the high court has observed that impugned
assessment order and consequential notices of demand and penalty were
flawed being in contravention of provisions of section 144B(7)(vii) of the
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Income Tax Act and the standard operation procedure (SOP) for personal
hearing through video conferencing under the faceless assessment
scheme, 2019 issued by the CBDT under Circular dated 23/11/2020. It
has been also observed that since statute itself makes provision for
personal hearing, the respondent revenue cannot veer away from the
same. As such, impugned assessment had been set aside directing
granting of personal hearing to the petitioner or its representative via
video conferencing with the concerned officer with a prior notice therefor.
(d) In YCD Industries Vs. National Faceless Assessment Centre,
Delhi, reported in [2021] 127 taxmann.com 606 (Delhi) , the High Court
has observed as under :-
"16.1. The statute [i.e. Section 144B(1)(xiv), (xv),
(xvi)b and (xxii)] provides for issuance of a show cause
notice-cum-draft assessment order, and an opportunity to the
petitioner/assessee to respond to the same where income of
the assessee is varied by the respondent/revenue. Admittedly,
the petitioner's income was varied to its prejudice with the
addition of Rs.90,25,535/-. As a matter of fact, had the show
cause notice cum draft assessment been served on the
petitioner, its authorised representative could have requested
for a personal hearing in the matter. The respondent/revenue,
to our minds, could not have side-stepped such safeguards put
in place by the legislature.
16.2 The justification proffered by Mr. Bhatia that
notices were issued prior to the passing of the impugned
assessment order, does not impress us. This submission flies
in the face of the schematic design of the statute."
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(e) Similar was a case in RKKR Foundation Vs. National Faceless
Assessment Centre, Delhi, reported in [2021] 127 taxmann.com 643
(Delhi).
35. Learned Senior Advocate Mr. Pardiwala lays stress on
judgment of the Supreme Court of India in the case of Sahara India
(Firm) Vs. Commissioner of Income-tax, Central-I, reported in [2008] 169
Taxman 328 (SC) with a view to bring under focus necessity and
importance of having opportunity of pre-decisional hearing to an assessee
even in the absence of any express provision and requirement of following
principles of natural justice and their reading into the provisions. The
decision has been rendered by three judge bench of Supreme Court, in
view of order passed by a two judge bench of said court where the
division bench had found it necessary, since it could not align itself with
another two judge bench decision in the case of Rajesh Kumar Vs. Dy. CIT
reported in [2006] 157 Taxman 168. Rajesh Kumar (supra), ruled that an
assessee should have an opportunity of pre-decisional hearing before
issuing directions under section 142(2A) of the Income Tax Act. The
three judge bench, in paragraphs 12 and 19, has observed, thus :-
"12. In Swadeshi Cotton Mills v. Union of India [1981] 1 SCC
664, R.S. Sarkaria, J., speaking for the majority in a three-
Judge Bench, lucidly explained the meaning and scope of the
concept of "natural justice". Referring to several decisions, his
Lordship observed thus :
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"Rules of natural justice are not embodied rules. Being
means to an end and not an end in themselves, it is not
possible to make an exhaustive catalogue of such rules.
But there are two fundamental maxims of natural justice
viz. (i) audi alteram partem and (ii) nemo judex in re
sua. The audi alteram partem rule has many facets, two
of them being (a) notice of the case to be met; and (b)
opportunity to explain. This rule cannot be sacrificed at
the altar of administrative convenience or celerity. The
general principle - as distinguished from an absolute
rule of uniform application - seems to be that where a
statute does not, in terms, exclude this rule of prior
hearing but contemplates a post- decisional hearing
amounting to a full review of the original order on
merits, then such a statute would be construed as
excluding the audi alteram partem rule at the pre-
decisional stage. Conversely if the statute conferring the
power is silent with regard to the giving of a pre-
decisional hearing to the person affected and the
administrative decision taken by the authority involves
civil consequences of a grave nature, and no full review
or appeal on merits against that decision is provided,
courts will be extremely reluctant to construe such a
statute as excluding the duty of affording even a
minimal hearing, shorn of all its formal trappings and
dilatory features at the pre-decisional stage, unless,
viewed pragmatically, it would paralyse the
administrative process or frustrate the need for utmost
promptitude. In short, this rule of fair play must not be
jettisoned save in very exceptional circumstances where
compulsive necessity so demands. The court must make
every effort to salvage this cardinal rule to the
maximum extent possible, with situational
modifications. But, the core of it must, however, remain,
namely, that the person affected must have reasonable
opportunity of being heard and the hearing must be a
genuine hearing and not an empty public relations
exercise."
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19. Again in C.B. Gautam v. Union of India a question arose
whether in the absence of a provision for giving the concerned
parties an opportunity of being heard before an order is
passed under the provisions of Section 269UD of the Act, for
purchase by the Central Government of an immovable
property agreed to be sold on an agreement to sell, an
opportunity of being heard before such an order could be
passed should be given or not. Relying on the decision of this
Court in Union of India v. Col. J.N. Sinha case (supra) and
Olga Tellis (supra) it was held that :
"Although Chapter XX-C does not contain any express
provision for the affected parties being given an
opportunity to be heard before an order for purchase is
made under Section 269UD, not to read the
requirement of such an opportunity would be to give too
literal and strict an interpretation to the provisions of
Chapter XX-C and in the words of Judge Learned Hand
of the United States of America "to make a fortress out
of the dictionary." Again, there is no express provision in
Chapter XX-C barring the giving of a show cause notice
or reasonable opportunity to show cause nor is there
anything in the language of Chapter XX-C which could
lead to such an implication. The observance of
principles of natural justice is the pragmatic
requirement of fair play in action. In our view, therefore,
the requirement of an opportunity to show cause being
given before an order for purchase by the Central
Government is made by an appropriate authority under
Section 269UD must be read into the provisions of
Chapter XX-C. There is nothing in the language of
Section 269UD or any other provision in the said
Chapter which would negate such an opportunity being
given. Moreover, if such a requirement were not read
into the provisions of the said Chapter, they would be
seriously open to challenge on the ground of violations
of the provisions of Article 14 on the ground of non-
compliance with principles of natural justice. The
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22 WPL 11040-21 - Judgment.odt
provision that when an order for purchase is made
under Section 269UD reasons must be recorded in
writing is no substitute for a provision requiring a
reasonable opportunity of being heard before such an
order is made."
And in paragraph 24, it has been concluded;
"24. The upshot of the entire discussion is that the exercise of
power under Section 142(2A) of the Act leads to serious civil
consequences and, therefore, even in the absence of express
provision for affording an opportunity of pre-decisional
hearing to an assessee and in the absence of any express
provision in Section 142(2A) barring the giving of reasonable
opportunity to an assessee, the requirement of observance of
principles of natural justice is to be read into the said
provision. Accordingly, we reiterate the view expressed in
Rajesh Kumar's case (supra)."
36. Mr. Pardiwalla has also pointed out that this court has
followed said decision in the case of Principal Commissioner of Income-
tax Vs. Vilson Particle Board Industries Ltd., reported in [2020] 116
taxmann.com 12 (Bombay).
37. He then refers to a decision of this court in the case of Sahara
Hospitality Limited Vs. Commissioner of Income Tax reported in [2012]
25 Taxmann.com 299 (Bombay). Said decision has been rendered in the
context of section 127 - power to transfer cases - under the Income Tax
Act. After referring to various citations, it has been considered by the
court, the Supreme Court had held that a reasonable opportunity should
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23 WPL 11040-21 - Judgment.odt
be given to assessee wherever it is possible to do so. The conspectus, the
court had considered, led to that the word 'may' in section 127 should be
read as 'shall' and had observed that requirement of giving an assessee a
reasonable opportunity of being heard wherever it is possible to do so is
mandatory and the discretion of authority is only as to what is a
reasonable opportunity in a given case.
38. He submits that although there have been written responses
and submissions explaining situation, the impugned draft assessment
order does not take the same into account in proper perspective and does
not give reasons for disagreement with the response.
39. He submits that the impugned order is completely contrary to
the principles of natural justice and contrary to law and urges to set aside
impugned notices and the impugned order and that there is no equally
efficacious remedy against the impugned notices and the impugned order.
40. He, therefore, submits that the writ petition be allowed, the
order be set aside and the matter be sent back to the position as had been
obtaining before 22/04/2021 and to pass an appropriate draft assessment
order after hearing the petitioner.
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41. Mr. Sham Walve, learned Counsel appearing for the revenue
defending the impugned order, reiterates the submissions in the reply and
strenuously contends that there is substantial difference between the
values of gross receipts from services shown in service tax return received
from CBEC and values disclosed in income tax return which are
significantly less in income tax return. While assessee was asked to
reconcile the difference between the two, it was expected that the
assessee would reconcile figures with its own books of accounts, the
assessee - company has failed to do the same. Assessee's submission that
services received will not form part of revenue, being an expense had
been accepted.
42. He submits that it is basic that opening stock should match
with the closing stock of preceding year and closing stock is derived on
the basis of opening stock, purchases and consumption of the stock, that
should be matched with the inventories in the balance sheet. It is
incorrect to say that due to inflexibility of the software, the petitioner has
put incorrect figures. The additions are based on facts, submissions and
documents available on record.
43. He submits that transfer pricing is a highly fact based process.
The rates fixed for another assessee cannot be adopted. The transfer
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25 WPL 11040-21 - Judgment.odt
pricing officer has followed decisions while benchmarking transaction of
corporate guarantee restricting adjustment in the matter to 1.68%.
44. Mr. Walve contends that the allegation about opportunity of
personal hearing through video conferencing not being given is not
correct and proper and the assessee would have opportunity of personal
hearing through video conferencing after filing objections to variations in
total income under section 144C(2) and before passing final assessment
order.
45. Mr. Walve submits that instead of approaching the High Court
under the writ petition, the assessee ought to have filed its objections to
the variations with the Dispute Resolution Panel (DRP) and urges this
court not to indulge into request by petitioner.
46. It is contended that the draft assessment order is valid, as per
law and is legal and thus, the writ petition is opposed with request to
dismiss the same.
47. Sum and substance of the submissions on behalf of petitioner
is that personal hearing in the present matter is essential to properly
appreciate the nature and manner in which the transactions are carried
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26 WPL 11040-21 - Judgment.odt
out and intricacies of the same can be better explained and brought forth
as well as misconstruction by the authorities can be sorted out with
proper understanding of the matter. In personal hearing and by oral
submissions various aspects, operations/workings which could not be
properly appreciated though inscribed under the responses can be
resolved. In many a case, it would be possible to appreciate unrealised
aspects during hearing and can be effectively explained. According to
petitioner, this is precisely the reason as to why personal hearing is
included.
48. Perusal of provisions of section 144-B(1), would envince,
National Faceless Assessment Centre (NFAC), shall serve a notice on an
assessee u/s. 143(2) of IT Act and asessee may file response within a
period of fifteen days to NFAC and in the events referred to in clause (iii)
(a), (b) or (c), NFAC is to intimate the assesee about that assessment
would be completed according to procedure u/s.144-B(1). It is an
indication of intention to give prominence to the procedure under section
144-B(1).
49. Under sub-section (1) of section 144B, it appears to be
prescribed that upon completion of process from clauses (i) to (xiii), the
Assessment Unit (AU) is supposed to make a draft assessment order
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27 WPL 11040-21 - Judgment.odt
(DAO), after taking into account all relevant material available on record
or to the best judgment in case of the matter falling under sub-clause
(xiii) wherein the AU is intimated about failure of response from the
assessee.
50. Clause (xvi) of section 144-B(1) would show that, NFAC on
examination of DAO would decide on further course of action to be taken,
viz; NFAC may finalise assessment in accord with DAO if there is no
variation prejudicial to interest of the assessee is proposed as per sub
clause (a) OR in case variation prejudicial to the interest of assessee is
proposed, would provide opportunity to the assessee by serving a notice
to show cause according to sub-clause (b) OR under sub-clause (c) decide
to assign any DAO to a Review Unit (RU), whether prejudicial to interest
of assessee or not.
If the matter is referred to RU, the process according to
clauses (xvii) to (xx) is to take place culminating into, a final draft
assessment order (FDAO) by an Assessment Unit.
51. When draft assessment order (DAO) or final draft assessment
order (FDAO) is prejudicial to the interest of the assessee, it entails an
opportunity to show-cause pursuant to sub-clause (b) of clause (xvi),
giving option under clause (xxii) to assessee of furnishing response to
NFAC.
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28 WPL 11040-21 - Judgment.odt
52. Procedure as contained in clause (xxiii) is to be followed in
the cases where DAO or FDAO is prejudicial to the interest of assessee
after notice has been served on the assessee.
53. It would be seen that, up to clause (xxii) there is no
segregation or distinction in treatment to be given to assessees bifurcating
them into two categories viz; 'eligible assessee' and 'others' (other than
eligible assessee).
54. Sub-clause (a) of clause (xxiii) prescribes courses to be
adopted by NFAC in the case of non-response to show cause notice by an
assessee. Clause (xxiii) purports to treat the assessees according to their
categorization under sub-clause (a), items (A) or (B). Clause (xxiii), sub
clause (a), item (A) prescribes, in the case DAO or FDAO proposes
variation prejudicial to an eligible assessee, to forward DAO or FDAO to
the eligible assessee and in the case of others, pursuant item (B) NFAC
may finalize DAO or FDAO and serve a copy of assessment order on the
assessee.
55. Sub-clause (b) of clause (xxiii), appears to obligate NFAC,
irrespective of categorization appearing under sub-clause (a) of clause
(xxiii), where response from an assessee is received, to send the same to
the AU.
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29 WPL 11040-21 - Judgment.odt
56. If there is response to show-cause notice, sub clause (b) of
clause (xxiii) comes into operation pursuant to which matter goes to the
AO and hearing assumes significance and is meaningful and the provision
of sub-section (7) clause (vii) would come into play. In case of response
after show-cause notice, the matter would go back to the AU and pursuant
to clause (xxiv) the AU is supposed to take into account response of the
assessee and then a revised DAO (RDAO) emerges for further treatment in
accordance with clause (xxv).
57. It appears that under clause (xv) sub-clause (a) item (A)
contemplates similar treatment to an eligible assessee as in item (A)
under clause (a) of clause (xxiii) and the matter has to be forwarded to
the assessee in case variations proposed in the case of eligible assessee are
not prejudicial to the interest in comparison to DAO or FDAO and in case
of other assessees under item (B) of sub-clause (a) of clause (xxv), similar
treatment as accorded under item (B) of sub-clause (a) of clause (xxiii) is
given if the RDAO is not prejudicial in comparison to DAO or FDAO.
However, in case of variations irrespective of whether assessee is eligible
assessee or other, are prejudicial to the interest of assessee in comparison
to DAO or FDAO, there is a further provision for opportunity to the
assessee by serving notice, to receive treatment mutatis mutandis in
accordance with clauses (xxii), (xxiv) and (xxv).
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30 WPL 11040-21 - Judgment.odt
58. Sub-section (7) of section 144B for the purpose of faceless
assessment under clause (vii) provides that in case where variation is
proposed in draft assessment order, an opportunity is to be provided to
the assesee by serving a notice to show-cause and the assessee or his
representative can request for personal hearing so as to make his oral
submissions or to present his case before the income-tax authorities in any
unit. Further sub-section (7) provides under clause (ix) for hearing
through video conferencing or video telephone including use of any
telecommunication application software which support video
conferencing or video telephone.
59. Sub section (7), clause (vii) stipulates as under :-
"(7) For the purpose of faceless assessment -
(i) .....
(ii) .....
(iii) .....
(iv) .....
(v) .....
(vi) .....
(vii) in a case where a variation is proposed in the draft
assessment order or final draft assessment order or revised
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 or final draft or revised draft assessment order, the
assessee or his authorised representative, as the case may be,
may request for personal hering so as to make his oral
submissions or present his case before the income-tax
authority in any unit;"
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31 WPL 11040-21 - Judgment.odt
60. Plainly reading aforesaid provision would show that
whenever assessee requests for personal hearing so as to make oral
submissions or to present case, it is before income-tax authority in any
unit. Sub-section (7), clause (viii) shows that request for personal
hearing is to be approved by the authorities referred to therein upon its
opinion that the request is covered by sub-clause (h) of clause (xii).
Clause (xii) empowers authorities with prior approval of the Board to lay
down the standards, procedures and processes for effective functioning of
National Faceless Assessment Centre and others, inter alia, circumstances
in which personal hearing referred to in clause (vii) shall be approved.
61. Legislature is not unwary of situations arising, requiring
personal hearing and oral submissions and thus, has provided for the
same under the faceless assessment scheme under section 144B. It
emerges that where response is given by the assessee to show-cause
notice, the process under sub-section (7) would follow.
62. Learned senior counsel Mr. Pardiwala, during the course of
hearing, had drawn attention to 'Standard Operating Procedure' ( SOP )
for Assessment Unit under Faceless Assessment Scheme, 2019' under
Circular F.No.PR.CCIT/SOP/2020-21 dated 19.11.2020 providing for,
under its clause T, that reasonable time is to be given to an assessee to
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32 WPL 11040-21 - Judgment.odt
comply with principles of natural justice. He had also referred to Circular
F. No. PR. CCIT/NCAC/SOP/2020-21 dated 23.11.2020 to contend that
personal hearing is to be allowed when there is response to DAO.
63. Principles of natural justice firmly run through fabric of
section 144B(1) of the Income Tax Act, 1961. Whenever DAO, FDAO is
prejudicial to the interest of assessee or RDAO is prejudicial to the interest
of assessee in comparison to DAO or FDAO, upon a response to show-
cause notice, personal hearing for oral submissions or to present its case
before income tax authority is strongly entwined in the provisions on a
request from an assessee unless it is absurd, strategised and/or intended
to protract assessment etc. It would also emerge from various decisions,
referred to above, ordinarily, such a request would not be declined.
Judgments cited on behalf of petitioner referred to
hereinbefore give exposition on significance and importance of principles
of natural justice.
64. Section 144-B of the Income Tax Act, 1961 captioned
'Faceless Assessment' commences vide its sub-section (1) with a non-
obstante clause and compulsively requires assessment u/ss 143(3) and
144 shall be by prescribed procedure contained in sub-section (1) of
section 144-B in the cases referred to in sub-section (2) thereof.
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33 WPL 11040-21 - Judgment.odt
65. Sub-section (9) of section 144B declares that assessment
made under section 143(3) or under section 144(4) referable to sub-
section (2) other than sub-section (8) on or after 1 st day of April, 2021
shall be non est if such assessment is not made in accordance with the
procedure laid down under section 144B. There is a telling / pronounced
rigour, to follow the procedure under section 144B, lest the assessment
would be non est.
66. Going by the provisions under section 144B, when hearing
has been envisioned and incorporated, it is imperative to observe
principles of natural justice as stipulated.
67. In the present matter, it is not disputed that show-cause
notice had been issued to the petitioner on 25/03/2021 to which the
petitioner has responded to from time to time vide letters dated 26 th
March, 2021, 28th March, 2021 requesting for personal hearing and by
sending responses dated 7th and 8th April, 2021. There is nothing to
reflect upon that after receipt of response to show-cause-notice dated 26 th
March, 2021, 28th March, 2021, 7th and 8th April, 2021, prescribed
procedure has been followed. The petitioner appears to be losing out on
an opportunity as would be available to it under clause (xxiii)(b) read
with sub section (7) sub-clause (vii).
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68. In the circumstances, when an assessee approaches with
response to show cause notice, the request made by an assessee, as
referred to in clause (vii) of sub section 7 of section 144B, would have to
be taken into account and it would not be proper, looking at the
prescribed procedure with strong undercurrent to have hearing on a
request after notice, to say that petitioner would have opportunity
pursuant to section 144C in the present matter, would intercept operation
of the scheme contained under section 144B.
69. Foregoing discussion leads to that impugned draft assessment
order dated 22.04.2021 is unsustainable. The petition is allowed in terms
of prayer clause (a) leaving it open to the authorities to carry forward the
process in accordance with section 144B of the Income Tax Act, 1961 by
giving opportunity of hearing to the petitioner.
(ABHAY AHUJA, J.) (SUNIL P. DESHMUKH, J.)
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