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Budget 2023: Faceless assessments are game changing, but should be less taxing

Budget 2023-24: Faceless income tax proceedings are a success. But Budget 2023 must signal to the tax department the virtues of fair hearing, predictability in final orders, and focused proceedings

January 24, 2023 / 09:20 PM IST
The Government was forced to make faceless proceedings mandatorily applicable during the lockdown phase. 
(Representative image)

The Government was forced to make faceless proceedings mandatorily applicable during the lockdown phase. (Representative image)

The process of conducting tax proceedings electronically started in 2015. Paperless Assessment Proceedings scheme was launched through which selected non-corporate taxpayers were allowed to respond to various tax notices and assessments electronically.

Thereafter, a high-level committee was set up to prepare a road map for conducting the entire income tax proceedings in a faceless and nameless manner. Based on the recommendations, e-assessment scheme was introduced in 2018 paving the way for assessment proceedings to be conducted digitally.

Improvisations aplenty, some judicial strictures too

Subsequently, further improvisation rectified the practical difficulties faced by taxpayers and tax administrators, while expanding the scope of e-proceedings. What started with automation of assessment proceedings has been expanded to penalty proceedings as well as proceedings conducted by the Dispute Resolution Panel.

It is pertinent to note that COVID-induced lockdowns made it mandatory for the tax authorities to follow faceless assessment and appellate schemes. The Government was forced to make faceless proceedings mandatorily applicable during the lockdown phase. While the scheme has been functioning well, several lapses were also noticed which were brought to the public domain when the aggrieved taxpayers sought relief from courts.

While coming down hard on the tax administration, the courts have provided a few guidelines. If implemented in their true spirit, these could become a gamechanger and a significant influencer for adoption of electronic assessment and appellate proceedings.

A Right To Personal Hearing

Faceless proceedings provided taxpayers an opportunity of personal hearing through video conferencing, at their option.

* However, from the perusal of the facts submitted by several taxpayers, it was observed that the opportunity of personal hearing was not granted, even when taxpayers had requested for the same.

* Several taxpayers had approached the Courts challenging the constitutional validity of orders passed without granting personal hearing.

In Sanjay Aggarwal v. NFAC and in Piramal Enterprises Ltd v. ACITthe High Courts of Delhi and Bombay have categorically held that it was incumbent upon the tax authorities to accord a personal hearing to taxpayers in cases where such a request was made. Completing the assessment proceedings without granting that opportunity constituted a violation of the principles of natural justice, the courts ruled.

In Mantra Industries Ltd v. NFACthe Bombay HC even warned the tax department that it will impose costs on the concerned tax officers for their failure to provide personal hearing. More recently, the Delhi HC in the case of Bharat Aluminium Company Ltd v. Union of India has put the controversy to rest by holding that personal hearing is mandatory even when a specific request has not been made by the taxpayer. The Court held that it is the vested right of the taxpayers, which shall have to be honoured by the tax department.

Sting In The Tail: Final Assessment Surprises

Another important issue that damages the efficacy of faceless proceedings is surprise additions in the final assessment order. There are instances of a completely new addition/disallowance in the final orders passed upon conclusion of the assessment proceedings. According to the aggrieved taxpayers, these issues were not even been raised during the proceedings.

The Bombay HC in Shreeji Investment & Advisory Services v. NFAC quashed the order by holding that making an addition without informing the taxpayer is a gross violation of the principle of natural justice because the taxpayer was unable to present its perspective.

High Courts have even quashed assessment orders where the taxpayers were given only a couple of days’ time or cases where the orders disregarded the submissions made by the taxpayers that were filed either within or a few days after the unreasonable time period provided by the tax authorities.

Making Faceless Smarter

Despite some of these unwanted issues, it must be stated that faceless schemes have been a runaway success. Many corporate taxpayers have fully embraced these schemes quicker than anticipated. The tax department should also be credited for amending the nature of enquiries made.

Earlier, tax authorities used to make roving enquiries during assessment proceedings and would expect repetitive presence, sometimes on a daily basis, during the finalisation of proceedings, which used to cause undue hardships. In contrast, there is a more focused and issue based approach, which has become very efficient and makes the entire assessment more focussed.

* Once the system settles, it may be worthwhile for the tax administration to schedule the proceedings throughout the year and not wait till the end of the limitation period.

* Another aspect that may require attention of the tax administration is to prepare a set of focussed questions for the taxpayer based on the facts and circumstances of their case and their prior assessment history instead of preparing a detailed list of items. This may save a lot of unnecessary time, effort and costs for both sides.

It is abundantly clear that faceless schemes are here to stay. Hence, it is incumbent upon both the taxpayers as well as tax administrators to ensure that it is developed in a simple and fair way, which is acceptable to both sides. In order to achieve this objective, the Finance Minister must address those issues that still cause misgivings.

SR Patnaik is Partner & Head-Taxation and VP Thangadurai is Principal Associate at Cyril Amarchand Mangaldas. Views are personal and do not represent the stand of this publication.

SR Patnaik is Partner & Head – Taxation, Cyril Amarchand Mangaldas.
VP Thangadurai is Principal Associate at Cyril Amarchand Mangaldas. Views are personal and do not represent the stand of this publication.
first published: Jan 24, 2023 10:12 am