The term “Assessment” under the Income-tax law covers a wide range of functions depending on the nature of assessment to be carried out, and the specific provisions in law governing the same.

CA Dindayal Dhandaria in his article covers implications wherein assessments are required to be partially modified or required to be made de novo. He examines the meaning of “quashing”, “setting aside” and “annulled” as directed by various courts in the context of assessments, in the light of various judicial precedents.

He opines that there exists an erroneous view that an Assessing Officer can make a fresh assessment whenever an assessment order is set aside irrespective of the fact whether the concerned Authority has permitted him to do so or not and states that if such a view is upheld, the words “in pursuance of an order” appearing in Section 153(3) would become otiose.

He further expounds on the issue in the context of recent rulings in faceless assessments, analysing certain judicial precedents related to it, and concludes stating that even in circumstances where the Judicial authority directs the Revenue to make a fresh assessment, the same cannot be done in absence of an enabling provision in the Act.

Assessments: T20 or Test Match?

1. INTRODUCTION

Under the Income Tax Act, 1961, we come across the following types of assessments:

1. Self-assessment –u/s 140A.

2. Summary assessment –u/s 143(1)

3. Scrutiny assessment –u/s 143(3)

4. Best Judgment Assessment –u/s 144.

5. Faceless Assessment – u/s. 144B

6. Re-assessment or Income escaping assessment –u/s 147.

7. Assessment in case of search –u/s. 153A.

8. Protective Assessment

9. Fresh Assessments after setting aside of an order or for the purpose of giving effects to the orders of Appellate Authorities.

Except a self-assessment which is made by an assessee himself, all other types of assessments are made by an Assessing officer (AO), There are specific provisions in the Income Tax Act, 1961 (“the Act”)  for assessments of the types mentioned in serial numbers 2 to 7 above, But there is no such provision for a “Protective assessment” and so, whenever an AO  makes a protective assessment, he makes it under either of the provisions relating to serial numbers 2 to 7.  Besides, an AO is required to give effect to the orders passed under section 250 or section 254 or section 260 or section 262 by Appellate Authorities or Income Tax Appellate Tribunals or Courts, which are classified into the following two categories, for the purpose of this Article:

a) Cases where specific items of additions/variations to the returned income are required to be modified with or without further verification/enquiry; and

b) Cases where the entire assessment is required to be made de novo.

Cases falling in the later category are called “fresh assessments”.  An AO makes a fresh assessment when he gives effect to the impugned orders, and it is different from a “reassessment”. 

2. DISTINCTION BETWEEN ‘QUASHING’ AND ‘SETTING ASIDE’ OF AN ASSESSMENT

An assessment order may either be “quashed” or declared “non est” or “annulled” or “set aside”.  These terms are not synonymous and have different consequences.  The Courts have power to make such directions as they think fit including a fresh assessment, notwithstanding whether an assessment is quashed or declared non est or annulled or set aside by them.  Difficulty arises when the Courts do not give any direction in the matter.  In that event, it becomes inevitable to decide the course of action available to an AO depending upon the meaning of the terms used in the Court orders and the context in which these terms are used. 

For understanding the meaning of the term “annulled”, reference can be made to a decision of the Bombay High Court in [TS-5735-HC-1997(Bombay)-O], wherein the Court held:

“9. An assessment should, therefore, be annulled where the assessment proceeding is a nullity, in the sense that the Assessing Officer had no jurisdiction to take the proceeding and/or to make a final order of assessment himself. Once the assessment is annulled, the order of assessment will cease to exist.”

[Emphasis supplied]

The terms “non est” and “quashed” carry the same meaning at “annulled”.

Certain specific issues covered in an assessment order may be set aside or the entire assessment order can be set aside.   In later case, the difference between “annulling an order” and “setting aside an order” is obliterated and an AO cannot make fresh assessment, unless the Court directs him to do so. 

The distinction between setting aside the entire assessment order and setting aside of certain specific issues thereof is recognised by the provisions of sub-sections (3) and (5) of section 153 of the Act since they prescribe different limitation periods for making a fresh assessment pursuant to the orders of Appellate Authorities, Tribunals and Courts. 

3. WHEN A SECOND INNIING IS PERMISSIBLE

The provisions enabling an AO to make a fresh assessment are found in sub-section (3) of section 153 of the Act which is quoted below for ready reference:

“(3) Notwithstanding anything contained in sub-sections (1) and (2), an order of fresh assessment in pursuance of an order under section 254 or section 263 or section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of nine months from the end of the financial year in which the order under section 254 is received by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or, as the case may be, the order under section 263 or section 264 is passed by the Principal Commissioner or Commissioner:”

[Emphasis supplied]

There is an erroneous view that an AO can make a fresh assessment whenever an assessment order is set aside irrespective of the fact whether the concerned Authority has permitted him to do so or not.  If such a view is upheld, the words “in pursuance of an order” appearing in the above sub-section would become otiose.

4. RECENT DEVELOPMENTS

In the past few months, the validity of several faceless assessments has been challenged before various High Courts in the country on  various grounds of violation of principles of natural justice. In these cases, there were no findings or directions relating to a specific issue. In most of the cases, the Courts held that there was violation of the principles of natural justice.  But the Courts disposed of the cases in different manners and the same are broadly classified into the following four categories:

a) Assessments have been quashed or declared “non-est” or set aside containing no directions about further course of action.

b) Assessments have been quashed or declared “non-est” or set aside giving liberty to AO to make fresh assessment in accordance with law.

c) Assessments have been quashed or declared “non-est” or set aside and leaving the AO to act in accordance with law and refusing to opine whether a fresh assessment can be done or not.

d) Irrespective of the fact that an assessment has been quashed or set aside, the Courts have given direction either to make fresh assessment or to proceed further from a stated stage of the assessment order.

In the above context, the question arises whether the AO is entitled to “SECOND INNINGS”. For answer, read the following case studies. 

5. FEW CASES WHEREIN SECOND INNINGS DENIED

a) [TS-6408-HC-2021(Bombay)-O] is known for the strictures passed by the Hon’ble Bombay High Court . But apart from the strictures, the case deserves to be noted for another reason. After declaring the assessment order as “non est”, the Court did not give any directions for future course of action and left it to the AO to take such steps as advised in accordance with law. Extracts from the judgment:

“8. We are, therefore, compelled to set aside the impugned order dated 8th June 2021 and also the consequential notices. Sub Section 9 of Section 144B of the Act provides that any assessment made shall be non-est if such assessment is not made in accordance with the procedure laid down under this section. Therefore, the order impugned being non-est, the Assessing Officer may take such steps as advised in accordance with law. We are not making any observations on the merits of the case.”

[Emphasis supplied]

From the use of the words “the Assessing Officer may take such steps as advised in accordance with law” and specially, the words “as advised”,  it cannot be contended that the Court directed the AO to make a fresh assessment. 

b) [TS-6003-HC-2021(Delhi)-O], the Court concluded as follows:

“12. Therefore, in our view, given the aforesaid facts and circumstances, it was incumbent upon the respondent/revenue to accord a personal hearing to the petitioner As noted above, several requests had been made for personal hearing by the petitioner none of which were dealt with by the respondent/revenue.

12.1 The net impact of this infraction would be that, the impugned orders will have to be set aside. It is ordered accordingly.

13. This brings us to Mr. Chandra's submission that; the respondent/revenue should be allowed to proceed afresh in the matter, in accordance with the law. To our minds if the law permits the respondent/revenue to take further steps in the matter, the Court, at this stage, need not make any observations in that regard. If and when such steps are taken, and there is a grievance, the petitioner can take recourse to the relevant provisions of the Act.”

 [Emphasis supplied]

Mr. Chandra is Jr. Standing Counsel in this case on behalf of the respondent.  He knew that if an assessment is held to be “non est”, Court’s permission is needed to take further steps. That’s why, he made the above request in this case.

So, it is concluded that there is no distinction between “non est” and “annulment”.

c) [TS-6095-HC-2021(Delhi)-O], the Court set aside the assessment order along with notice of demand and the notice for initiation of penalty proceedings.

Extracts from the judgment:

“5. That being the position, there is no option, but to set aside the impugned assessment order dated 15-4-2021, issued under section 143(3), read with sections 143(3A) and 143(3B) of the Act, along with accompanying notice of demand, issued under section 156 of the Act and notice for initiation of penalty proceedings, issued under section 270A of the Act.

6. It is ordered accordingly. The writ petition and pending application stand disposed of.

7. At this stage, Mr. Bhatia says that the liberty should be given, to the concerned officer, to pass a fresh assessment order. To our minds, if such a leeway is available under the law, there can be no impediment caused, in that regard, at least by this order.

8. It is, however, made clear, that if any such step(s) is/are taken, it would be open for the petitioner to take recourse to an appropriate remedy, available, to it, in law.”

[Emphasis supplied]

Mr. Bhatia was the Sr. Standing Counsel on behalf of the respondent. He knew that if an assessment is set aside in entirety, Court’s permission is needed to take further steps. That’s why, he made the above request in this case.

So, it is concluded that there is no distinction between “set aside” and “annulment” when an assessment order is set aside, in entirety. 

d) [TS-6376-HC-2021(Bombay)-O], after declaring an assessment order as “non est”, quashing and setting aside the same, left it open for Revenue to conduct de novo

Extracts from the judgment:

“16. We find from the impugned assessment order that there are variations from the return filed by Petitioner by containing additions / disallowances. The final assessment order is not made in accordance with the procedure laid down under Section 144B (xvi)(b) of the Act as inspite of the variation being prejudicial to the interest of assessee, no opportunity has been provided to the assessee by having him served with a show cause notice as well as draft assessment order calling upon him to show cause as to why the proposed variation should not be made. Thus, the impugned assessment order dated 18th April, 2021 is non est as the assessment is not made in accordance with procedure laid down under Section 144B of the Act. Hence, we pass following order:-

(a) The assessment order issued by Respondent No.2 dated 18th April, 2021 along with consequential demand notice is quashed and set aside.

(b) The Respondents may take such de novo proceedings as required in accordance with law.”

[Emphasis supplied]

The Court has ruled that “the respondents may take de novo proceedings as required in accordance with law”.  From this, it cannot be contended that the Court gave directions to take de novo proceedings i.e. to make fresh assessment.  The permission to take de novo proceedings is subject to a rider that it is taken as required in accordance with law. So, it would be far-fetched to contend that the Court has granted permission to take de novo proceedings. 

6. CONCLUSION

Needless to state that unless a Tribunal or a Court directs an AO to make a fresh assessment, he cannot do so sans any enabling provision in the Act.