The term jurisdiction refers to the statutory authority granted to an officer under the law to take specific actions or make decisions regarding a particular matter. It is a fundamental principle that jurisdiction cannot be conferred or waived merely by the consent of the parties involved. The legality of jurisdictional authority can be challenged at any stage of proceedings.
It is essential to distinguish between jurisdiction and venue. While jurisdiction signifies statutory authority or power, venue refers to the specific location or territorial area where the assessment is conducted. The venue aspect of the jurisdiction of an Assessing Officer is determined by several factors such as the territorial jurisdiction over the place of business or residence, assigned jurisdiction under section 127, category of taxpayer like salaried individuals, contractors, celebrities, or partners in a firm, the scale of income or loss returned in the tax filings, and the evolving nature of jurisdiction. There can be differences in jurisdiction at the time of return filing, initiation of assessment proceedings, and the final passing of the assessment order. The Tax Recovery Officer may also be empowered to function as an Assessing Officer under the provisions of the Taxation Laws (Amendment) Act, 2006.
Section 124 of the Income Tax Act specifically addresses the venue aspect and not the statutory authority involved in jurisdiction. When it comes to challenging the jurisdiction of an Assessing Officer, the assessee must do so within the time frame outlined in section 124(3). Objections raised in this regard are to be adjudicated by senior tax authorities such as the Director General, Chief Commissioner, or Commissioner of Income Tax.
Section 124(5) introduces the concept of concurrent jurisdiction. Under general principles, a taxpayer is assessed by the officer having jurisdiction over the place where they reside or carry on business. However, in cases where the assessee operates through multiple branches, the relevant Assessing Officers of those branch locations may conduct the assessment. Nevertheless, it is a settled position that multiple assessments should not be undertaken simultaneously by officers from different locations for the same assessee.
The authority to transfer a case from one Assessing Officer to another is vested in high-ranking officers such as the Principal Director General, Director General, Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, and Commissioner under section 127. Such transfers can occur at any stage of the assessment proceedings. This section ensures that administrative flexibility is maintained while upholding procedural fairness.
With the introduction of the faceless assessment system, the concept of territorial jurisdiction has largely become irrelevant for regular assessments under section 143(3) and best judgment assessments under section 144. The Finance Act 2018 brought in a PAN-India E-Assessment Interface aimed at reducing personal interactions between taxpayers and tax officials, thereby eliminating undesirable practices and ensuring more transparency. In light of this, the importance of jurisdiction in traditional terms is no longer significant under the faceless assessment regime.
The faceless assessment framework is now governed by a broad legal structure that includes clause (7A) of section 2, section 92CA, and a host of other sections such as 120, 124, 127, 129, 131, 133, 133A, 133C, 134, 142, 142A, 143, 144A, 144BA, 144C, along with provisions under Chapter XXI. These provisions apply to assessments under the Faceless Assessment Scheme, subject to certain modifications and exceptions as notified by the Central Board of Direct Taxes (CBDT). The governing framework was formalized through Notification No. 62/2019 dated 12 September 2019.
To facilitate faceless assessments, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, introduced section 144B into the Income Tax Act, effective from 1 April 2021. Subsection (3) of section 144B mandates the CBDT to establish a National Faceless Assessment Centre and various functional units, such as assessment units, verification units, technical units, and review units, each with its designated areas of responsibility. The scope of the faceless assessment mechanism has since been expanded to include best judgment assessments under section 144 and reassessments under section 147, as per the Finance Acts of 2020 and 2022.
Section 129 addresses scenarios where an Income Tax Authority is replaced during the pendency of proceedings. The successor officer is permitted to continue the proceedings from where the predecessor left off. However, in such cases, the assessee has a legal right to request that the previous proceedings or a part thereof be reopened and reheard before a final decision is made. The successor officer is required to notify the assessee about their intention to continue the proceedings before passing any order. Failure to provide such an opportunity to the assessee would render the proceedings procedurally defective.
In the case of CIT v. Shankar D. Dhanwatey, it was held that when a successor officer continues the assessment proceedings, the assessee must be granted an opportunity to be heard afresh, especially when requested. This reinforces the procedural safeguards for taxpayers.
In Smt. Sarita Jain v. CIT, the Delhi High Court ruled that jurisdiction is a matter of statutory authority and not a subject of consent. An Assessing Officer cannot acquire jurisdiction merely because the assessee does not object to it. Similarly, in the case of Mrs. Mukutla Lalita v. CIT, the Andhra Pradesh High Court held that transferring a case without adhering to the procedural requirements of section 127 is not valid, and any action taken post such transfer can be challenged.
The absence of due satisfaction during assessment proceedings, such as in cases of penalty initiation, can render the proceedings invalid. In D.M. Manasvi v. CIT and CIT v. Super Metal Re-Rollers (P.) Ltd., courts emphasized that valid satisfaction is a prerequisite for the initiation of such proceedings, and any lapse in this regard affects the legality of the order.
Principles of Natural Justice in Income Tax Assessment
The principles of natural justice form the foundation of fair legal and administrative procedures. One of the most fundamental tenets of natural justice is the right to a fair hearing, commonly encapsulated in the Latin phrase “audi alteram partem,” which means no one should be condemned unheard. This principle, although unwritten in many laws, is embedded in Indian constitutional jurisprudence through Articles 14 and 21, which guarantee equality before the law and protection of life and personal liberty, respectively. The consistent application of natural justice is vital in income tax assessments, especially in protecting the rights of taxpayers during investigations, hearings, and adjudications.
The application of natural justice is not a mere procedural formality but a substantive obligation upon tax authorities. Whenever an action or decision affects the rights or obligations of a taxpayer, the tax authority must provide the taxpayer with an opportunity to present their side. This includes the right to receive notice, access evidence, make submissions, and respond to material that may be used against them. Ignoring or bypassing this obligation can render the entire assessment invalid.
Natural justice must also be upheld in the context of faceless assessments. In Pradip Kumar Saha vs. Union of India & Others, the Calcutta High Court held that completing the faceless assessment well before the deadline mentioned in the notice and without giving the assessee proper opportunity to respond constitutes a violation of the principles of natural justice. The court quashed the assessment and remanded the matter to allow the assessee to present their objections and submissions afresh.
The principles of natural justice are particularly relevant when the Assessing Officer relies on third-party information or statements to make an addition to the income of the assessee. If an adverse inference is drawn based on a third-party confession or deposition without furnishing a copy of such statement to the assessee and without offering an opportunity for cross-examination, the assessment is liable to be struck down. In the landmark decision of R.B. Shreeram Durga Prasad & Fatehchand Nursing Das v. Settlement Commission, the Supreme Court declared that reliance on third-party statements without disclosure and opportunity to rebut amounts to a violation of natural justice, making the order null and void.
In Prakash Chand Nahta v. CIT, the Madhya Pradesh High Court reinforced that any reliance on material not furnished to the assessee and without allowing rebuttal cannot sustain an addition. Similarly, in Dr. C. Balakrishnan Nair v. CIT, the Kerala High Court invalidated a block assessment due to a violation of natural justice during the jurisdictional stage of initiating search and seizure. Such a defect, occurring at the threshold, vitiates all subsequent proceedings.
When the violation of natural justice occurs during validly initiated proceedings, the defect may be curable, but only by the authority that committed the procedural lapse. In Guduthur Brothers v. ITO, the Supreme Court held that such curable defects do not nullify the proceedings entirely but must be rectified by affording a fresh hearing. In CIT v. N. Krishnan and C.G.G. Panicker v. CIT, the Kerala High Court upheld similar principles, emphasizing that procedural safeguards must be respected.
The requirement to furnish reasons for reopening assessments, if demanded by the assessee, is also rooted in natural justice. In Mithlesh Kumar Tripathi v. CIT, the Allahabad High Court held that while there may not be an express statutory requirement to provide reasons along with the notice under section 148, the principles of natural justice demand that such reasons be supplied if requested, even before the assessee files a return.
Once an assessment order is passed in violation of natural justice, the defect cannot be cured in an appeal. In Tin Box Co. v. CIT, the Supreme Court held that the appellate authority cannot rectify the failure of the Assessing Officer to provide a fair hearing. The defect goes to the root of the matter and vitiates the entire assessment.
Natural justice also has implications in the context of constitutional remedies. Even when an alternative remedy such as appeal is available, the High Court may exercise its writ jurisdiction under Article 226 in certain circumstances. In Pirai Choodi v. ITO, the Madras High Court listed three such contingencies where writ jurisdiction is permissible: where a fundamental right is at stake, where principles of natural justice are violated, or where the impugned action is taken without jurisdiction or involves a challenge to the vires of a statute.
The importance of natural justice is also highlighted in cases involving high-pitched assessments, reopening of assessments, and rejection of explanations. Any action taken without giving adequate opportunity to the assessee can be struck down bthe y the courts. For instance, if the Assessing Officer relies on assumptions or unverified information without allowing the assessee to rebut the same, the assessment is invalid.
Faceless assessment, while a modern advancement aimed at improving transparency and reducing corruption, does not absolve the tax authorities of their duty to follow natural justice. Despite being a digital and centralized process, the principles of fair hearing, transparency, and right to respond must be strictly adhered to. Courts have held that faceless assessments completed in haste or without due process are as flawed as traditional assessments conducted arbitrarily.
The role of show-cause notices in upholding natural justice is also crucial. A vague or incomplete notice, or one that does not inform the assessee of the grounds for proposed addition or disallowance, fails the test of fairness. The assessee must be informed of what is being proposed and the reasons for the same. Only then can they effectively exercise their right to respond.
When a search operation is initiated and assessments are framed under block assessment procedures, the need for following natural justice is heightened. The magnitude of potential additions and the consequences thereof demand strict procedural compliance. If an assessee is denied the opportunity to explain documents or statements seized during search, the resultant assessment is susceptible to judicial scrutiny.
Reassessment Under Section 147 and Relevant Case Laws
Overview of Reassessment
Reassessment under Section 147 of the Income Tax Act empowers the Assessing Officer (AO) to reopen an assessment if he has reason to believe that any income chargeable to tax has escaped assessment. This provision acts as a corrective mechanism to cover cases where income has not been taxed due to oversight or concealment.
The AO must record reasons before initiating reassessment proceedings. After the amendment by the Finance Act, 2021, a new procedure involving notices under Sections 148A(b) and 148 has been introduced.
Judicial Scrutiny of “Reason to Believe”
The phrase “reason to believe” is a condition precedent for invoking Section 147. Courts have consistently held that such belief must be based on tangible material.
Case: CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC)
The Supreme Court held that the concept of “change of opinion” cannot justify reopening. There must be fresh material to indicate escapement of income.
Case: GKN Driveshafts (India) Ltd. v. ITO (2003) 259 ITR 19 (SC)
The Court laid down the procedure to be followed when a reassessment notice is challenged. The assessee must first file objections before approaching courts.
Reassessment After 4 Years
If four years have elapsed since the end of the relevant assessment year, reassessment is permissible only if the assessee failed to disclose fully and truly all material facts necessary for assessment.
Case: Hindustan Lever Ltd. v. R.B. Wadkar (2004) 268 ITR 332 (Bom)
The Bombay High Court ruled that failure to disclose material facts must be evident from the record. Routine reassessment beyond 4 years is not permissible.
Case: Indian Oil Corporation v. ITO (2004) 271 ITR 72 (Bom)
Reopening of assessment based on audit objections alone was not permitted in the absence of fresh facts or concealment.
Impact of Finance Act, 2021
The Finance Act, 2021 introduced a new regime under Sections 148, 148A, and 149. It mandates that before issuing a notice under Section 148, the AO must conduct an enquiry and provide an opportunity to the assessee to explain why reassessment should not be initiated.
Case Law on Procedural Lapses
Procedural lapses in reassessment proceedings often lead to quashing of notices.
Case: PCIT v. Meenakshi Overseas (P) Ltd. (2017) 395 ITR 677 (Del)
Reassessment was held to be invalid as it was based solely on information from investigation wings without independent application of mind by the AO.
Best Judgment Assessment Under Section 144
Nature and Applicability
Best judgment assessment is made under Section 144 when the assessee fails to furnish a return, does not comply with notices under Sections 142(1) or 143(2), or fails to produce books or documents required.
The AO, in such cases, is empowered to make an assessment based on the best of his judgment using available material.
Requirements of Fairness
Although termed “best judgment,” the assessment must be reasonable, not arbitrary.
Case: State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC)
The Supreme Court held that the best judgment assessment must be based on rationality and not on caprice or whim.
Case: Kachwala Gems v. JCIT (2007) 288 ITR 10 (SC)
In this case, the Court upheld best judgment assessment based on the assessee’s failure to maintain stock records and discrepancies in accounts.
Judicial Safeguards
The AO must record the reasons for invoking Section 144, and the assessee should be given a reasonable opportunity of being heard.
Case: Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC)
The Court emphasized the need for adherence to principles of natural justice even in best judgment assessments.
Assessment in Search and Seizure Cases (Block Assessment)
Block Assessment Under Chapter XIV-B
Before its abolition in 2005, block assessment was conducted for search and seizure cases covering ten previous years. Post-amendment, search assessments are now governed under Sections 153A to 153D.
Current Framework under Section 153A
Under the new regime, if a search is initiated under Section 132, the AO is required to assess or reassess six assessment years preceding the year of search and the relevant year of search.
Case: CIT v. Kabul Chawla (2016) 380 ITR 573 (Del)
The Delhi High Court ruled that additions under Section 153A must be based on incriminating material found during the search. No addition can be made in the absence of such material if the assessment is already completed.
Case: PCIT v. Meeta Gutgutia (2017) 395 ITR 526 (Del)
The Court followed Kabul Chawla and emphasized that completed assessments cannot be disturbed without incriminating evidence.
Procedural Compliance
Assessment under Section 153A must be completed within prescribed time limits and with appropriate sanction under Section 153D.
Case: CIT v. Smt. Vandana Verma (2023) 451 ITR 456 (All)
Failure to obtain proper approval under Section 153D before passing assessment orders was held to be fatal, making the assessment invalid.
Faceless Assessment Scheme and Legal Challenges
Introduction of Faceless Assessment
The Faceless Assessment Scheme was introduced to eliminate interface between the taxpayer and the Income Tax Department, bring transparency, and ensure efficiency. It was implemented via notifications under Section 144B.
Judicial Oversight on Faceless Assessments
Faceless assessments must adhere to the principles of natural justice and statutory procedures.
Case: Sanjay Aggarwal v. National Faceless Assessment Centre (2021) 434 ITR 1 (Del)
The Delhi High Court held that failure to consider the assessee’s request for adjournment and not providing relevant documents was a violation of natural justice.
Reassessment and Income Escaping Assessment
Reassessment, or income escaping assessment, refers to a process under which the Assessing Officer (AO) can reopen an already completed assessment if he has “reason to believe” that some income has escaped assessment. Section 147 of the Income-tax Act, 1961 governs this. Before the Finance Act, 2021, the AO had wider discretionary powers to reopen cases for up to six years (or 16 years in certain cases involving assets located outside India). The new law, applicable from April 1, 2021, restricts the time limit to three years from the end of the relevant assessment year, which may extend to ten years only in cases where income escaping assessment amounts to Rs. 50 lakh or more. One of the critical requirements under the old regime was the AO having “reason to believe” rather than “reason to suspect.” In the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC), the Supreme Court held that there must be tangible material to justify the reopening. A mere change of opinion cannot be a ground for reassessment. This principle is foundational in protecting the sanctity of completed assessments. After the Finance Act, 2021, new procedures have been added, including conducting an “inquiry with prior approval” under Section 148A before issuing a notice under Section 148. The AO must provide an opportunity of being heard to the assessee. In Union of India v. Ashish Agarwal [2022] 444 ITR 1 (SC), the Supreme Court upheld the new reassessment law’s application and laid down transitional provisions for notices issued between April 1, 2021 and June 30, 2021. The court directed that such notices should be treated as show-cause notices under the new Section 148A(b). This decision harmonized reassessment procedures during the transition period.
Best Judgment Assessment
Best Judgment Assessment is an assessment made by the AO based on available material when the assessee fails to comply with statutory notices or does not furnish the required information. Sections 144 and 145 of the Income-tax Act govern this. The AO has to act judicially and base his findings on rational reasoning. In State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC), the Court laid down that although the AO has wide discretion, it must not be arbitrary. The assessment must be based on some material and not on conjecture. In CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC), it was held that the AO should not act dishonestly or vindictively. There should be an honest estimate based on reasonable grounds. Section 145(3) empowers the AO to reject books of account if he is not satisfied with the correctness or completeness of the accounts. In Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC), it was observed that rejection of books must be based on clear deficiencies and not whimsically. Once books are rejected, the AO is free to make a best judgment assessment using comparable cases or industry trends.
Rectification of Mistakes
Section 154 allows rectification of any mistake apparent from the record. This can be done by the AO, the Commissioner (Appeals), or the ITAT. However, the mistake must be obvious and not debatable. In T.S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC), the Court stated that a decision on a debatable point of law is not a mistake apparent from the record. Only glaring and self-evident mistakes can be corrected. Rectification can be initiated within four years from the end of the financial year in which the order was passed. It may also be made suo motu by the authority concerned or on an application by the assessee. However, if the rectification adversely affects the assessee, principles of natural justice must be followed, and the assessee must be given an opportunity of being heard. In CIT v. Hero Cycles (P) Ltd. [1997] 228 ITR 463 (SC), it was reiterated that rectification must not amount to a review. If an issue requires elaborate reasoning or interpretation, then it falls outside the purview of rectification.
Revisionary Powers of Commissioner
The Commissioner of Income-tax can revise assessment orders under two sections – Section 263 and Section 264. Section 263 empowers the Commissioner to revise orders that are erroneous and prejudicial to the interests of the Revenue. This provision has been widely used to counter wrong or incomplete assessments. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC), the Court laid down that both conditions – error and prejudice – must exist for the invocation of Section 263. If the AO has conducted inquiries and taken a view, the order cannot be revised merely because the Commissioner holds a different opinion. Section 264, on the other hand, allows revision in favor of the assessee. The Commissioner may, either on his motion or on application by the assessee, revise any order. However, this power is discretionary and subject to certain limitations. For instance, if the assessee has filed an appeal, Section 264 cannot be invoked. The revision must be filed within one year from the date of the order sought to be revised. In Dwarka Nath v. ITO [1965] 57 ITR 349 (SC), it was held that the power under Section 264 is wide and can be exercised to provide relief in deserving cases even if no appeal is filed. The provision is seen as a measure of equity within the tax administration.
Appeals and Appellate Procedure
Taxpayers dissatisfied with assessment or reassessment orders have recourse to appellate remedies. The first appeal lies to the Commissioner of Income-tax (Appeals) under Section 246A. The appeal must be filed within 30 days of receiving the order. The CIT(A) has wide powers, including enhancement of assessment. In CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), the Court stated that the appellate authority has plenary powers to dispose of the appeal in a manner it deems fit. The second appeal lies to the Income-tax Appellate Tribunal (ITAT) under Section 253. ITAT is a quasi-judicial body with nationwide benches. It deals with factual and legal issues and is not bound by civil procedure code but must follow natural justice principles. From ITAT, further appeal lies to the High Court under Section 260A, but only on substantial questions of law. Finally, an appeal to the Supreme Court may be made under Section 261 with leave. In ITO v. M.K. Mohammed Kunhi [1969] 71 ITR 815 (SC), it was held that ITAT has inherent power to grant stay of demand during the pendency of appeal. Courts have emphasized that appellate forums are crucial in correcting mistakes and ensuring fair administration.
Penalties and Prosecution
Non-compliance with assessment procedures or furnishing of inaccurate particulars can lead to penalties and, in extreme cases, prosecution. Sections 270A, 271AAC, 271AAB, and 276C, among others, cover various types of penalties and prosecution for defaults. Section 270A deals with underreporting and misreporting of income. The penalty is 50% of tax for underreporting and 200% for misreporting. Misreporting includes misrepresentation, suppression of facts, failure to report international transactions, etc. In Mak Data Pvt. Ltd. v. CIT [2013] 358 ITR 593 (SC), it was held that voluntary disclosure does not exonerate the assessee if it is made after detection. The intention to conceal is inferred from facts. Prosecution provisions are invoked for willful attempts to evade tax. Section 276C provides for rigorous imprisonment of up to seven years along with fine. In K.C. Builders v. ACIT [2004] 265 ITR 562 (SC), the Court held that if penalty is cancelled by the Tribunal, prosecution cannot survive. Thus, penalty and prosecution are interlinked, and their validity depends upon the underlying assessment.
Assessment in Search and Seizure Cases
Search assessments under Section 153A are special assessments carried out following a search under Section 132. They override regular assessment provisions and apply to six assessment years preceding the year of search. These assessments are based on incriminating materials found during the search. In CIT v. Sinhgad Technical Education Society [2017] 397 ITR 344 (SC), it was held that in absence of incriminating material, no addition can be made in completed assessments. Post the Finance Act, 2021, new provisions under Section 153A and 153C have been replaced by Sections 148 and 148A, thereby bringing search assessments also under the regular reassessment regime. These changes reflect the government’s effort to bring consistency and reduce litigation.
Faceless Assessment Scheme
Introduced to enhance transparency and efficiency, the Faceless Assessment Scheme aims to eliminate physical interface between taxpayers and the department. Under Section 144B, assessments are carried out electronically with functional specialization, dynamic jurisdiction, and team-based review. This has reduced arbitrariness and corruption. In Lakshya Budhiraja v. NFAC Delhi [2022], the Delhi High Court quashed the order passed without providing personal hearing, stating that even under faceless regime, principles of natural justice must be upheld. Courts have emphasized that though assessments are faceless, fairness and the right to be heard remain non-negotiable.
Conclusion
Income Tax Assessment is a foundational mechanism of tax administration. Its various forms, regular, summary, reassessment, best judgment, are designed to ensure compliance, equity, and revenue mobilization. Judicial precedents play a pivotal role in interpreting these provisions, safeguarding taxpayer rights, and curbing abuse of power. With reforms like faceless assessments and digitized proceedings, India’s tax assessment landscape is evolving rapidly. However, adherence to legal principles, supported by case law, remains essential for a balanced and just tax system.