INTRODUCTION
The Faceless Assessment Scheme (the Scheme) under the Income Tax Act, 1961 (the IT Act) was launched by the Government of India in 2019. Later the Scheme was amended by a notification of the Central Board of Direct Taxes (CBDT) in 2021 vide Notification No. 6 of 2021 [F. No. 370149/154/2019-TPL] / SO 741(E), dated 17.02.2021.
The Scheme aims at enhancing the efficiency, transparency and accountability in the income tax assessment procedure, and is a major step towards achieving ‘Transparent Taxation- Honouring the Honest’, a platform launched by the Prime Minister in 2020. Phase I of the Scheme was inaugurated in October, 2019 and the Scheme has been fully implemented from August, 2020.
Hitherto, cases for assessment under the IT Act were chosen manually, subject to approval by the Commissioner of Income Tax, which was later replaced by selection via Computer Aided Selection for Scrutiny (CASS). The Income Tax Department (the Department) pivoted to testing e-assessment in five metro cities on a pilot basis.
Based on the experience and learning from the same, the Scheme was launched in 2019, whereby assessments would be done completely electronically, right from issuance of notice to the Assessee. The aim for introduction of the Scheme was to cut back human interface in the process to the greatest possible extent.
This has now taken the form of a full-fledged electronic assessment, which not only eliminates direct in-person interface between Assessees and the Department, but also aims to efficiently and optimally use available resources and achieve team-based assessment of cases with dynamic jurisdiction.
The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, (the 2020 Amendment) inserts Section 144B in the IT Act thereby amending the IT Act to make necessary provisions for the Scheme. Changes in the 2020 Amendment have been proposed by the Finance Bill, 2022, which is discussed in this article subsequently.
SALIENT FEATURES OF THE FACELESS ASSESSMENT SCHEME
The Scheme introduces key changes in the assessment system. It marks a paradigm shift towards application of technology in the law and enforcement of taxation in India. The salient features of the Scheme are elaborated as follows:
Data Driven Selection and Automated Random Allocation of Cases
The Scheme relies on the use of artificial intelligence (AI) and data analytics to choose cases for assessment. It replaces the old selection procedure whereby cases were selected for assessment manually by officers of the Department.
The selected cases under the Scheme are allocated in an automated and random fashion to the Assessment Units (AUs) through computers. This is a major step towards elimination of in-person interaction between the Assessees and the Department.
Abolition of Territorial Jurisdiction and Introduction of Dynamic Jurisdiction
The Scheme abolishes the concept of territorial jurisdiction of the Assessing Officers (AO). This means that Assessee and the AO are not located in the same city. The returns of an Assessee are scrutinised by an AO of a different city anonymously.
Further, a dynamic jurisdictional mechanism has been introduced under the Scheme, whereby the passing of Draft Assessment Order (the DAO), review of the DAO and its finalisation are all done in different cities. This is done in order to make the assessment process more transparent and curb intra-Departmental corruption.
E-notices bearing Document Identification Number
Under the Scheme, notices issued to the Assessee are communicated through electronic modes, particularly e-mails. Every notice issued carries a different Document Identification Number.
No Human Interface
The Scheme obliterates any need for visiting the Department or communicating in-person with any Department official. The entire assessment process is done online, right from issuance of notice to finalisation of Assessment Order.
Team-based Assessments
Assessments carried out under the Scheme are done by a team forming the AU. The DAO drafted by the AU is reviewed on a team-basis as well. This ensures decentralisation of the assessment procedure within the Department, as well as within individual AU.
Functional Specialisation
Under the Scheme, different parts of the assessment are carried out by different specialised units to achieve functional specialisation, efficiency and accuracy.
Single Point of Contact
The Scheme establishes National Faceless Assessment Centre (the NFAC) as the single point of contact between the Assessees and the Department. This is also in a virtual, faceless manner. Having a single point of contact ensures centralisation of operations and ease of compliance and communication from the perspective of the Assessee.
Furthermore, the NFAC also serves as the nodal point of contact between the various Units involved, and all communication between the units is done through the NFAC.
Ease in Compliance
The Scheme also seeks to achieve ease of tax compliance by uniformity in application of law, as well as by making it easier for the Assessees to undergo the assessment procedure.
PROCEDURE INVOLVED IN FACELESS ASSESSMENT
Section 144B of the IT Act lays down a comprehensive procedure involved in the Scheme. It starts with a non-obstante clause and has overriding effect on the other provisions of the IT Act. The process involved in faceless assessment can be summarised as follows:
1. Issue of e-notice
The faceless assessment procedure begins by issuance of e-notice under Section 143(2) of the IT Act. This notice is digitally signed by an officer of the NFAC and carries its logo. It is communicated to the Assessee through their registered account on www.efilingindia.gov.in, as well as an instant alert being sent to the Assessee on their phone through SMS and/or e-mail.
Issuance of this notice implies that the Assessee’s case has been chosen for scrutiny and assessment under the Scheme.
2. Filing of response by the assessee
After going through the notice, and checking for the NFAC logo and officer’s digital signature, the Assessee has to file a comprehensive reply to the issues mentioned in the notice within fifteen days from the receipt of the e-notice. The reply has to be filed electronically through the Assessee’s registered account on e-filing.
3. Preparation and review of Draft Assessment Order
The NFAC assigns the case to a specific assessment unit in a Regional Faceless Assessment Centre (RFAC) through an automated system. The involved AU goes through the reply to e-notice submitted by the Assessee and prepares a DAO based on the same.
The AU is also empowered to request the NFAC conducting enquiry or verification by the Verification Unit (the VU), and may seek assistance from the Technical Unit (the TU).
The AU may request the NFAC to gather further information, documents, etc. from the Assessee or any other specified person. Where the NFAC has been requested to obtain further information from the Assessee or any other specified person, it sends a notice to obtain the required information or documents.
The person upon whom the notice is served is required to file a reply to the same within specified time. Where the NFAC has been requested to conduct enquiry or verification by the VU, it assigns the request to a VU in any one RFAC through an automated allocation system, and sends the report received from the VU to the concerned AU. Similar process is followed when a request for technical assistance is received by the NAFC.
Based on the relevant material and reports as available, the AU draws up a DAO and sends it to the NAFC. The DAO also includes details of the penalty proceeds to be initiated, if any. The DAO then undergoes preliminary review through the Risk Management Strategy (RMS) tool, which is completely computer-based. Based on the examination of the DAO, the NAFC may decide to either finalise the assessment with no modifications, or if variations prejudicial to the interests of the Assesee are proposed, issue a Show Cause Notice (SCN) to the Assessee as to why the proposed variation should not be made.
The NFAC may also assign a case for Review by the Review Unit (‘RU’). If no review by the RU is required, then a final assessment order based on the DAO is sent to the Assessee. If review by the RU is needed, the RU goes through the DAO and suggests modifications in the same, after which the Assessee receives the final assessment order.
4. Issuance of Show Cause Notice and Personal Hearing
An SCN may be issued by the AU if it is dissatisfied with the replies submitted by the Assessee. The AU may require the Assessee to modify its income. The Assessee can file a reply to the SCN, and may also request for a personal hearing. Subject to approval of request for personal hearing, the hearing is compulsorily conducted via video conferencing.
5. Final Assessment Order
After the aforementioned part of the procedure is completed, and replies to the DAO and/or Show Cause Hearing notice, as the case may be, has been taken into consideration, a DAO, or final DAO, or revised DAO, as the case may be, is sent to the Assessee, with relevant documents attached as annexures.
The Assessee then has to file his acceptance of the Order as per Section 144C of the IT Act. Upon receipt of such acceptance, the NAFC finalises the DAO and serves a copy of such order and notice for initiating penalty proceedings against the Assessee, if any.
A demand notice is also issued against the Assessee which specifies any sum payable by the Assessee, or any refund due to him, on the basis of the assessment carried out.
If the Assessee is not satisfied by the finalised DAO, objection can be filed before the Dispute Resolution Panel (DRP), which sends instructions to the NFAC to be forwarded to the concerned AU. The AU prepares another DAO and sends it to the NFAC, which finalises it and sends the same to the Assessee.
This concludes the assessment procedure. All records regarding the assessment are sent to the Assessment Officer having territorial jurisdiction, who then carries out post-assessment work.
6. Rectification and Appeal
If the Assessee is dissatisfied by the final Assessment Order, an appeal challenging the same can be filed through e-appeal before the NFAC, which proceeds with the appeal as per the Faceless Appeal Scheme.
There may also be a case where the Assessee wants to file a rectification application with respect to the final Assessment Order. Such application needs to be filed before the Assessment Officer having territorial jurisdiction, to whom the assessment records were sent at the earlier stage.
7. Feedback
The Department and the NFAC have also incorporated a feedback mechanism. The Assessee can provide feedback regarding the assessment procedure by sending an e-mail to feedback.notice.nfec@incometax.gov.in.
CONSTITUTIONAL VALIDITY OF THE SCHEME
Constitutional validity of the Scheme has been challenged before various High Courts, including the Bombay High Court, the Madras High Court and the Kerala High Court.
It is contended by the Petitioners that the Scheme is ultra vires for being manifestly arbitrary, against the principles of natural justice, opaque and violative of administrative law in general.
It has also been argued that the Scheme creates reasonable apprehension in the minds of the taxpayers that it will have adverse effects on the decision-making, and that it would hit the Assessees in the worst possible manner and extent.
Consequently, the High Courts have issued notice to the Central Government in this regard. The Central Government, as submitted before the Madras High Court, maintains the stand that the Scheme is not arbitrary and does not violate the principles of natural justice in any manner. The Scheme does not lack legislative competency and does not discriminate between the taxpayers.
The writ petitions are sub judice as of now, and needless to say, the fate of the Scheme is dependent on the outcomes of these petitions.
AMENDMENTS BY THE FINANCE BILL, 2022
Section 144B(9) of the IT Act, as inserted by the 2020 Amendment, is a non-obstante clause which invalidates non-est any assessment made under Section 143(3) or Section 144(2) of the IT Act, if not carried out in accordance with the Scheme, as laid down under Section 144B of the IT Act.
This provision is an embodiment of the principles of natural justice. An exception to this provision are cases transferred by the NFAC to the jurisdictional Assessing Officers under Section 144B(8) of the IT Act.
However, since the provisions of Section 144B of the IT Act came into force, i.e. 01.04.2021, many assessments were completed without following the procedure laid down in Section 144B. This resulted in a wave of writ petitions before various High Courts challenging the non-compliant assessment orders on the grounds of violation of principles of natural justice, as well as violation of Section 144B(9) of the IT Act. All these petitions were decided in favour of the Assessees.
To mitigate this ‘issue’, the Finance Bill, 2022, under its Clause 42(b), proposes to strike out Section 144B (9) of the IT Act with retrospective effect, from the date it came into force on 01.04.2021.
The objective for this proposal is to curb unnecessary litigation arising due to technical issues due to use of information technology. It is important to note that this retrospective amendment cannot affect the cases already adjudicated by the Courts.
AMLEGALS REMARKS
The Scheme marks a paradigm shift in the enforcement of direct taxation in India. The provisions enhance transparency, accountability and efficiency in the assessment procedure. It can also be seen as a leap towards achieving a Digital India.
A complete overhaul of the existing system was bound to result in some hiccups, as evidence by the tsunami of litigation that has ensued. Instead of retrospectively amending Section 144B(9) of the IT Act, which only addresses the issue of unnecessary litigation, a better solution would have been to strengthen the technological systems available with the Department and the NFAC, as well as the technical skills of the officers.
This would benefit the Department, as well as the Assessees. Even with the omission of Section 144B(9) of the IT Act, the Indian Courts would not stop applying the principles of natural justice, as their application does not require any statutory recognition.
-Team AMLEGALS, assisted by Ms. Gazal Sancheti (Intern)
For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or aditi.tiwari@amlegals.com.
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