How the Faceless Assessment Scheme Works

To facilitate faceless assessments, the National Faceless Assessment Centre (NFAC) was created to centrally control e-assessments, with regional centers operating in metropolitan cities. The NFAC can issue show-cause notices to taxpayers under Section 143(2) of the Act, requiring a response within 15 days.

The NFAC handles cases where the assessee:

1. Has furnished an Income Tax Return (ITR) under Section 139 or in response to a notice under Section 148(1) and a scrutiny assessment notice has been issued under Section 143(2) by the Assessing Officer (AO).
2. Has not furnished an income return in response to a notice issued under Section 142(1) for enquiry by the AO.
3. Has failed to furnish an ITR in response to a reassessment notice under Section 148(1) and a notice is issued under Section 142(1) for enquiry by the AO.

The scheme includes provisions for appeals and personal hearings through Commissioners of Income Tax (Regional Faceless Assessment Centre), sanctioned by the Pr. CCIT (NFAC). Verification Units, Technical Units, and Review Units conduct inquiries, provide technical assistance, and re-evaluate income determination proposals, respectively.

Section 144B (1) outlines the procedure for conducting faceless assessments, covering regular assessments under Section 143(3), income escaping assessments under Section 147, and best judgment assessments under Section 144, except for cases involving search and survey, and international taxation charges.

The Beginning of the Controversy

The controversy began with the Ashish Agarwal judgement by the Supreme Court, which addressed the legitimacy of reassessment notices issued under the Income Tax Act, 1961, after the Finance Act, 2021. While the notices were technically invalid under the amended law, the Supreme Court treated them as show-cause notices under the new Section 148A(b). This allowed the reassessment process to proceed without undue hardship to taxpayers or interference with revenue collection.

However, the judgment also raised questions about the jurisdiction of JAOs and FAOs, particularly regarding the issuance of notices and the conduct of reassessment proceedings. The core debate revolves around Clause 3 of Notification No. 18/2022-Income Tax, which defines the scope of faceless assessments and the automated allocation of reassessments under Section 148.

Clause 3 of the Scheme states:

“3. Scope of the Scheme.––For the purpose of this Scheme,–(a) assessment, reassessment or recomputation under section 147 of the Act, (b) issuance of notice under section 148 of the Act, shall be through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee.”

Divergent Views of High Courts

High Courts across India have presented divergent views regarding jurisdictional issues, creating legal uncertainty.

Views Against Concurrent Jurisdiction

1. Telangana High Court: In Kankanala Ravindra Reddy, the High Court emphasized that the Ashish Agarwal judgement directed tax authorities to strictly adhere to the reassessment procedure outlined in the Finance Act, 2021. The court rejected the argument that jurisdictional assessing officers retained concurrent authority to conduct reassessment proceedings. A similar stance was taken in Venkataramana Reddy Patloola v. Deputy Commissioner of Income Tax & Others.

2. Hexaware Decision: The court ruled a notice invalid because it did not comply with Section 151A of the Act, emphasizing that concurrent jurisdiction would be unfair and lead to random allocation of cases. The court also clarified that the office memorandum dated 20/02/2023, which made erroneous statements, was not binding.

3. Interpretation of Clause 3: The court highlighted the distinction between subclauses (a) and (b) of Clause 3, noting that notices under Section 148 must adhere to the automatic allocation system, while the latter part of subclause (b) relates to assessment and reassessment under Section 144B, not notices.

Views for Concurrent Jurisdiction

1. Gujarat High Court: The court opined in favor of the revenue, accepting the concurrent jurisdiction view. It observed that the faceless scheme does not apply to cases where notice is issued under Section 148 in the context of Section 132, which involves search and seizure. In such cases, the Jurisdictional Assessing Officer (JAO) is required to record their satisfaction based on material for affirmation of opinion in an honest and bonafide manner. The court noted that information arising out of search and survey cases is not required to be uploaded on the portal, but should be sent directly to the JAO for taking action under the Act.

2. Delhi High Court: The court favored a harmonious construction of the provisions of the Act, stating that Section 144B should not be viewed in isolation. The court held that it is a procedural arrangement focused on how a faceless assessment may be conducted rather than drawing exclusionary powers from the statute.

Conclusion

The conflicting judgments from various High Courts underscore the tension between technological efficiency and jurisdictional authority in tax administration. The issue is expected to reach the Supreme Court for final resolution. A hybrid approach combining faceless and traditional assessments may be a pragmatic long-term solution, ensuring taxpayer rights while maintaining departmental efficiency. This approach could balance the benefits of technology with the need for clear jurisdictional lines, ultimately fostering a more equitable and efficient tax system in India.