Natural justice and Income tax assessment procedure

1 The principles of natural justice are enshrined in two hoary Latin maxims – nemo judex in causa sua and audi alteram partem. Translated literally, these maxims mean respectively that – (i) no one can be a judge in his own cause, and (ii) let the other side be heard. In other words, the first is to the effect that no Judge should have personal interest in a case before him, and the second that no one should be condemned unheard. Thus, not only the assessment order but each and every action taken by the AO in the course of assessment should stand the test of appeal on the grounds of impartiality and fairness. Negatively, these two rules may also be called rules against bias and arbitrariness.

2 The assessment proceedings are quasi judicial proceedings and therefore every action of the AO is tested on the touchstone of natural justice. It is all the more so because the assessment proceeding before the AO is not an adversarial proceeding where both the appellant and the respondent get a chance to have their say. The AO is a revenue tribunal and he is therefore investigator – cum – prosecutor -cum – inquiry officer, rolled into one. He owes his jurisdiction and his powers to the provisions of the Act. Every action of his must conform to the procedure laid down in the Act read with the Rules and the CBDT Circulars. Therefore, all his actions must pass the test of procedural fairness. The non-observance of principals of natural justice or the prescribed procedure is itself a prejudice to the assessee. Any act or a decision in the course of an assessment on any particular point which is adverse to the assessee must be made only after bringing that point duly to the notice of the assessee and hearing him on it. If it is not done, the courts may take an adverse view even if the decision is right. A large number of assessments where good investigation has been carried out go waste because the appellate authorities set aside or annul the assessment orders on `grounds of failure of natural justice’.

3 The principle of audi alteram partem has been well-recognised by the legislature and a large number of procedural provisions in the Act have expressly incorporated this principle. For example, Chapter XVI of the Act dealing with the procedure for assessment incorporates this principle in sub-section 3 of Section 142 which reads as :-

The assessee shall, except where the assessment is made under s.144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) (or any audit under sub-section (2A) and proposed to be utilised for the purposes of the assessment.”
Similarly Sections 144A, 154, 158, 163, 170, 171, 263 and 275 specifically provide for hearing. This list is not exhaustive but is merely illustrative. The courts have however held that even where the statute does not provide for hearing, the principles of natural justice demand that hearing should ordinarily be given unless it is implicitly or expressly excluded. However, ‘hearing’ means reasonable hearing and `fairness’ does not require plurality of hearings. The Supreme Court observed in the celebrated Kraipak case :

‘Rules of natural justice are to secure justice and to prevent miscarriage of justice. They supplement the law and do not supplant it.’

4 Prima facie indications of `fairness’ on the part of the AO are: i) adequate notice, ii) opportunity of hearing, and iii) speaking order. The assessment order must be a speaking order. A speaking order is one in which each and every point of controversy has been properly dealt with. The order itself bears evidence to ‘due application of mind’ on the part of the authority. Due application of mind has been judicially defined to mean that there is something in the order which shows that the point or the issue has been duly considered by the AO after taking into account the objections of the assessee.

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Chargeability of share application money in whose hands ?

Share application money which is taxed as Undisclosed in the hands of a private company can also be taxed as undisclosed income in the hands of applicants by issuing notice u/s. 148?.

The broad scheme of the Act is to charge all income to tax but only in the hands of the same person.

So share application money received by Private Limited Company has to be taxed in whose hands? The Supreme Court in CIT v. Steller Investment Ltd. [251 ITR 263] has given answer by stating that even if it be assumed that the subscribers to the increased capital are not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income in the hands of the company.

Thereafter, the Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 CTR 195] has held that, if share application money is received by assessee – company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessment in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company.

However, from the facts, it is clear that it has been wrongly taxed in the hands of the company instead of in the hands of applicant shareholders. Therefore, Assessing Officer can tax undisclosed income in the hands of applicant shareholders by reopening the assessment as per law.

At this juncture, it is necessary to refer the judgement of the Supreme Court in ITO v. Ch. Atchaiah [218 ITR 239], wherein the Hon’ble Court has observed that “where a person is taxed wrongfully, he is no doubt entitled to be relieved in accordance with law but that is different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer has taxed the said income in the hands of another person contrary to law”.

Conduct of Assessment Proceedings electronically in time-barring scrutiny cases

As a part of Government’s initiative towards E-governance, Income-tax Department has brought digital transformation of its business processes to a significant extent through the Income-Tax Business Application (ITBA) project which provides an integrated platform to conduct various tax¬ proceedings electronically through the ‘e-Proceeding’ facility available on it. As a digital platform for conduct of scrutiny assessment proceedings in an end to end manner is now available, CBDT has decided to utilize it in a widespread manner for conduct of proceedings in scrutiny cases. This Order covers various aspects of conducting scrutiny assessments electronically in cases which are getting barred by limitation during the financial year 2017-2018.

2. Assessment proceedings in following time-barring scrutiny cases, pending as on 1st October,2017 where hearing have not been completed, would be carried out through the ‘e-Proceeding‘ facility on ITBA-

(i) The time-barring scrutiny cases in seven metro cities namely Ahmedabad, Bengaluru, Chennai, Kolkata, Hyderabad, Delhi and Mumbai where assessment proceedings are already underway through the ‘e-mail based communication’ and where assessee is having ‘e-Filing’ account, proceedings in such cases shall be migrated to the ‘e¬ Proceeding’ module of Towards this end, intimation to this effect shall be issued to the concerned assessee by the Assessing Officer, electronically by 8th October, 2017,

(ii) In respect of pending time-barring ‘Limited Scrutiny‘ cases with Assessing Officers stationed at the place where headquarters of Principal Commissioners of Income-tax are located (excluding the cases falling in para above), an option is now available to the concerned assessees (having an ‘e-Filing’ account) to furnish their consent to the Income-tax Department for conduct of assessment proceedings through the ‘e¬ Proceeding’ facility of The format of communication for this purpose is enclosed at annexure–B. This communication shall be issued electronically by the Assessing Officers to the concerned assessees by 8th of October, 2017. The last date for submitting consent by the assessees through their ‘e-Filing’ account is 15th October, 2017. Once this option is exercised by the assesse within the stipulated time-frame all further proceedings in that case would be carried out through ‘e-Proceeding‘. In cases where department has issued letters seeking consent of the assessee, further manual proceedings shall be kept on hold till the assessee has given his response in the matter or till 15th October, whichever is earlier.

3. In time-barring scrutiny assessments under ‘e-Proceeding‘, the concerned assessees can voluntarily opt out from ‘e-Proceeding‘ at a subsequent stage under intimation to the Assessing Officer.

4. Proceedings in other time-barring scrutiny cases which are not covered under Para 2, cases under Para 2 where the concerned assesse has opted for manual proceedings at the initial stage or subsequently and all time-barring assessments under section 153A/153C of the Act, shall continue as per the existing Further, specific proceedings in course of all time-barring assessment cases abcaus.in such as proceeding before the Transfer Pricing Officer, before the Range Head under section 144A of the Act etc. shall also be conducted manually.

Source : CBDT’s Instruction No.8/2017 dt.29.9.2017

Salient features of E-Proceedings of Scrutiny

• As part of e-governance initiative to facilitate conduct of assessment proceedings electronically, Income-tax Department has launched ‘e-Proceeding’ facility. It is a simple way of communication between the Department and assessee, through electronic means, without the necessity to visit Income-tax Office for conduct of assessment proceedings. This taxpayer friendly measure would substantially reduce the compliance burden for the assessee.

• In assessment proceeding, `e-Proceeding’ would enable seamless flow of Letter(s)/Notice(s), Questionnaire(s), Order(s) etc. from Assessing Officer to the account of the concerned assessee in ‘e-Filing’ website. On receipt of Departmental communication, assessee would be able to submit the response along with attachments by uploading the same, on ‘e-Filing’ portal. The response submitted by the assessee would be viewed by the Assessing Officer electronically in Income Tax Business Application (ITBA) module. This would, besides saving precious time of the assessee, would also provide a 24X7 anytime/anywhere convenience to submit response to the Departmental queries in course of assessment proceedings.

• Assessee would retain complete information of all e-submissions made during the course of assessment proceedings through ‘E-Proceeding’ facility for reference & record purpose in his e-Filing portal account.

• This initiative is environment friendly as assessment proceedings would become paperless.

• Assessees who are not yet having an account on the `e-Filing’ website of the Income-tax Department, may get themselves registered by following simple instructions in the `e-Filing’ website

( Source : CBDT’s Instruction No.8/2017 dt.29.9.2017 )

Procedural aspects while conducting assessment proceedings through ‘e- Proceeding‘ of scrutiny

Enquiry before assessment in electronic mode:

For enquiries before assessment in terms of section 142(1)(ii) of the Act, notice shall be issued electronically and delivered upon the assessee in his ‘e-Filing’ account. While filing the response electronically in compliance with notice under section 142(1)(ii) of the Act, the concerned assessee shall verify it in the manner prescribed under Rule 14 of Income-tax Rules, 1962.

Use of digital signature by Assessing Officer:

All departmental orders/communications /notices being issued to the assessee through the ‘e-Proceeding‘ facility are to be signed digitally by the Assessing Officer.

Notices/letters/communications to be issued manually only in exceptional situations:

The manual issue and service of departmental communications should be invoked only where for any reason it was not possible to get the communication served electronically under intimation (giving reasons) to the Range Head in ITBA.

Time for compliance:

Online submissions may be filed till the office hours on the date stipulated for compliance

Availability of facility for electronic submission of documents in time barring situation or where case has been finally heard by the Assessing Officer:

The facility for electronic submission of documents through ‘e-Proceeding‘ shall be automatically closed seven days before the time barring date. In other situations, upon completion of proceedings, before passing the final order, concerned Assessing Officer, on his volition, shall close thee-submission facility after mentioning in electronic order sheet that ‘hearing has been concluded’. However, if required, in exceptional circumstances, the concerned Assessing Officer may enable further filing of submissions electronically under intimation to the Range Head in ITBA.

In assessment proceedings being carried out through the ‘e-Proceeding’ facility, a particular proceeding may take place manually infollowing situation(s):

(i) where manual books of accounts or original documents have to be examined;
(ii) where Assessing Officer invokes provisions of section 131 of the Act or a notice is issued for carrying out third party enquiries/investigations;
(iii) where examination of witness is required to be made by the concerned assessee or the Department;
(iv) where a show-cause notice contemplating any adverse view is issued by the Assessing Officer and assesse requests for personal hearing to explain the matter.

Maintenance & Production of ‘Records’ in the context of ‘e-Proceedings’:

In time-barring ‘Limited Scrutiny‘ cases or the cases in seven metro stations under ‘e-mail based communication’ where proceedings now would be through the ‘E-Proceeding‘, the records related to the earlier case proceedings shall continue to be treated as part of the assessment In these cases case¬ records as well as note sheet of subsequent proceedings through ‘e-Proceeding’ shall be maintained electronically . Where records of a case under ‘E-Proceeding‘ are required to be produced in Appellate proceedings, before C&AG Audit etc., two separate records i.e. Manual-Part A (if available) & Electronic-Part B (printout copies) may be produced .

( Source : CBDT’s Instruction No.8/2017 dt.29.9.2017 )

Format for Migration of ongoing scrutiny proceedings from ‘e-mail based communication’ to ‘e-Proceeding’ on Income-Tax Business Application (ITBA) platform

Annexure- A
PAN No………….. Dated ………………………….
To
Dear Taxpayer,
Subject: Migration of ongoing scrutiny proceedings from ‘e-mail based communication’ to ‘e-Proceeding’ on Income-Tax Business Application (ITBA) platform of Income-tax Department for Assessment Year -regd.-

Greetings from the Income-tax Department. We thank you for your co-operation and look forward to bring a significant change in your interface with the Department.

2. Towards this end, as a part of Government’s initiative towards E-governance, from this financial year, Income-tax Department has decided to deepen use of digital platform for conduct of scrutiny assessment proceedings. Accordingly, the pending scrutiny proceedings (which are getting barred by limitation during the financial year 2017-18), being conducted through ‘e-mail based communication’, stand migrated to the ‘e-Proceeding’ facility on ITBA platform of Income-tax Department. Hence you are requested to effect necessary compliances with departmental communications electronically through your ‘e-Filing’ account.

3. A brief note on salient features of ‘e-Proceeding’ is enclosed. Detailed information on various aspects of this new initiative for conducting assessments electronically is also available in Instruction No. ../ of CBDT dated

4. In case you wish to opt out from this scheme at any subsequent stage the same can be done with prior intimation to the undersigned through your ‘e-Filing’ account in (www.incometaxindiaefiling.gov.in).

( Source : CBDT’s Instruction No.8/2017 dt.29.9.2017 )

Format of intimation to the assessee regarding Conduct of ongoing ‘Limited Scrutiny’ assessment proceeding for Assessment

Annexure – B
PAN No……………………….. Dated………………………….
To
Dear Taxpayer,
Subject: Conduct of ongoing ‘Limited Scrutiny’ assessment proceeding for Assessment
Year………………………. Electronically-exercise of option-regd.-

Greetings from the Income-tax Department. We thank you for your co-operation and look forward to bring a significant change in your interface with the Department.

2. Towards this end, as a part of Government’s initiative towards E-governance, from this financial year, Income-tax Department has decided to suitably use digital platform for conduct of scrutiny assessment proceedings in a widespread manner. In this regard, with reference to the pending ‘Limited Scrutiny’ proceedings in your case which are getting barred by limitation on 31.12.2017, an option is now available to you to make compliance with departmental communications electronically through `e-filing’ facility on income Tax Business Application of Income-tax Department.

3. A brief note on salient features of `e-Proceeding’ is enclosed. Detailed information on various aspects of this new initiative for conducting assessments electronically is also available in Instruction No. / of CBDT dated

4. In case you wish to participate in this taxpayer friendly measure, you are required to intimate the jurisdictional Assessing Officer through your `e-Filing’ account on (www.incometaxindiaefiling.qov.in) latest by 15th October, 2017,

5. Please note that if you do not respond by the said date, the assessment proceedings in your case shall continue to be conducted manually.

6. In case you wish to opt out from ‘E-Proceedings’ at any subsequent stage the same can be done with prior intimation to the undersigned through your ‘e-Filing’ account.

(Source : CBDT’s Instruction No.8/2017 dt.29.9.2017 )