Opinion: Who can issue an assessment notice?

♦ Journey so far

The manner of conducting assessment proceedings in India has changed significantly. Currently, we are in the era of the faceless assessment regime. This regime has a long history dating back to the government's pilot project from 2015, which carried out initial assessment in five metro cities through issuance of notices over the taxpayers' registered email addresses. The government gradually embarked upon assessment reforms, ranging from scope expansion of email-based assessments, launch of an e-assessment scheme that was later amended to the faceless assessment scheme and finally legislation of the faceless regime via insertion of section 144B into the Income-tax Act, 1961 (the Act).

Amongst such back and forth in amendments, there have been many discussions on various litigative issues or interpretations in the provisions of the faceless regime law. One most widely deliberated topic is the validity of the notices issued. This topic has been challenged repeatedly in the courts from various angles; one of the most crucial angle being the appropriate authority to issue a notice during the proceedings.

Various amendments to the relevant provisions—along with notifications and circulars issued time to time by the CBDT—have tried to lay down who is the appropriate authority to initiate the faceless scrutiny assessment proceedings. Notably, certain amendments were made under the provisions of scrutiny assessment before the faceless assessment regime was enforced; however, the effect of such amendments was observed after the faceless assessment regime was implemented. To illustrate, Finance Act, 2016, introduced (i.e., before the faceless assessment regime) the Prescribed Income-tax Authority (PITA) under section 143(2) of the Act; the PITA is any income-tax authority not below the rank of an Income-tax Officer (ITO) who has been authorised by the CBDT to act. Later, CBDT issued notification no. 25, dated 31 March 2021 (after the faceless assessment regime was implemented), authorising the Assistant or Deputy CIT of the National Faceless Assessment Centre (NFAC) to act as the PITA. Finally, said notification was superseded by notification no. 56/ 2022, dated 28 May 2022, which notified the Assistant or Deputy CIT (International Taxation), Circle – 1(1)(1), Delhi, as the PITA.

Given the matrix of amendments to the provisions of the Act, expansion of authorities to issue notice and restriction to the class of cases covered under faceless assessment, some questions regarding legal interpretation need detailed deliberation:

1.		Who in effect has the authority to initiate faceless assessment proceedings in the case of a taxpayer?
2.		Which cases are outside the jurisdiction of faceless assessment?
3.		What should be the way forward in cases where the proceedings are not conducted in a way as they were legislatively intended?

♦ Setting the context

1.		The provisions of section 144B of the Act in relation to the faceless assessment regime were introduced by the Finance Act, 2021. They require the NFAC to intimate the taxpayer that assessment in its case will be completed in accordance with the procedure laid down under this section.
2.		Said provision has given the NFAC the power to assign the selected case to a specific assessment unit (AU) through an automated allocation system. It also provides that, under section 143(2) or 142(1) of the Act, a notice will be served to the taxpayer through the NFAC itself.
3.		CBDT issued notification no. 61/ 2022, dated 10 June 2022, giving the AUs powers concurrent to the powers and functions of an Assessing Officer/ Tax Officer ('TO') facilitate faceless assessment proceedings under section 144B of the Act.
4.		Moreover, through its order dated 22 September 2021, the CBDT provided, inter alia,cases that will be outside the purview of section 144B of the Act. That is, assessment orders must be issued in the cases assigned to Central Charges and International Tax Charges.

♦ Practical implementation and challenges

1.		Point 1 above clarifies that the NFAC must issue an intimation to the taxpayer for the selection of its case under the faceless assessment regime. In addition, the language in point 2 above indicates that the notices under sections 143(2) and 142(1) of the Act under the faceless assessment proceedings need to be passed through the NFAC. Practically, however, the AU issues the notices to the taxpayers under section 143(2) of the Act. Now, the question arises whether such notices can be said to have been issued through the NFAC when the sender is the AU?
2.		Moreover, the provisions of section 144B of the Act do not apparently distinguish between resident and non-resident taxpayers. However, as mentioned in point 4 above, assessment orders required to be issued in cases assigned to International Tax Charges are outside the ambit of section 144B of the Act, and the cases of non-residents are assigned to International Tax Charges. Practically, however, in some cases, non-resident taxpayers also get notices from the AU instead of the PITA [i.e., Assistant or Deputy CIT (International Taxation), Circle – 1(1)(1)]. Now, the question arises whether the notices the AU has issued to non-residents are valid, given that the orders in relation to cases assigned to International Tax Charges are outside the ambit of section 144B of the Act?

Thus, there is not only confusion about the legal interpretation of the 'appropriate authority' to issue a valid notice during assessment proceedings but also various practical challenges in this regard that call for due resolution.

The appropriate resolution to the aforesaid question is vital at this stage. The reason for this is that various judicial precedents¹ have repeatedly held that initiation of proceedings by an authority that has no jurisdiction would vitiate the order passed in consequence of such proceedings. The courts in such cases have quashed the proceedings based on an invalid notice served to the taxpayer.

Therefore, this article aims to highlight the issues and opinions in the industry, which will help one analyse whether the notice a taxpayer has received is issued by an appropriate income-tax authority. The article also suggests various ways in which taxpayers can react to such challenges and practical difficulties on a timely basis.

♦ Analysis

1. Authority having power to issue notice to initiate a scrutiny assessment under section 143(2) of the Act.

•		The provisions of section 143(2) of the Act provide authority to the Assessing Officer or PITA to issue a notice for scrutiny assessment.
•		The Act defines "Assessing Officer" as the

■		Assistant Commissioner, Deputy Commissioner, Assistant Director, Deputy Director, or ITO vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or (2) of section 120 of the Act or any other provision of the Act and
■		Additional Commissioner, Additional Director, Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of section 120 of the Act to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act.

•		Through notification no. 61/ 2022 (Supra), the CBDT has directed the AUs' income-tax authorities about who will exercise the powers and functions of Assessing Officers to facilitate faceless assessment proceedings under section 144B of the Act.
•		Moreover, rule 12E of the Income-tax Rules, 1962, provides that the PITA is any income-tax authority not below the rank of an ITO who the CBDT has authorised to act for the purpose of section 143(2) of the Act.
•		Through its notification no. 56/ 2022 (Supra), the CBDT notified the Assistant or Deputy CIT (International Taxation), Circle – 1(1)(1), Delhi, as the PITA.

Therefore, to determine whether the appropriate authority (Assessing Officer or PITA as defined above) has served the client a notice under section 143(2) of the Act, we need to closely examine the jurisdiction of the authority issuing such notices to satisfy ourselves in this regard. This may be different from case to case, as elucidated in the following paragraphs.

CASE A: Resident taxpayers – Power to issue notice to initiate scrutiny assessment under section 143(2) of the Act is with the NFAC or AU?

•		As mentioned above, the provisions of section 143(2) of the Act bestow power upon the TO or PITA to issue a notice.
•		The provisions of section 144B(3) of the Act provide that the term 'AU', wherever used in this section, will refer to an Assessing Officer having powers so assigned by the CBDT.
•		Through its notification no. 61/ 2022, the CBDT provided a list of various AUs, along with the income-tax authorities therein, that have power concurrent to an Assessing Officer.
•		The provisions of section 144B of the Act also require the notices under section 143(2) or 142(1) of the Act to be served to the taxpayer through the NFAC. The taxpayer is required to file the response to the NFAC, who will forward such response to the AU.
•		It is at this stage that the confusion arises. If the notices are to be served through the NFAC, then it seems the NFAC is not authorised to issue the notices; rather, it is only responsible to provide a platform or medium for such notices to be issued, and the AU may issue such notice. On the other hand, the later part of the provision requires a taxpayer to file the response to the NFAC, who will forward the same to the AU. This alternatively indicates that, considering that the taxpayer is required to file the response to the NFAC, the NFAC is required to issue the notice.

View 1: AU is authorised to serve the notice to the taxpayer

•		The language in sections 144B(1)(i) and 144B(1)(ii) of the Act uses the phrase: 'NFAC shall assign the case selected for the purposes of faceless assessment' and 'NFAC shall intimate the assessee that assessment in his case shall be completed as per prescribed procedure'. This suggests that the NFAC must act in these cases by itself.
•		However, the language in section 144B(1)(iii) of the Act indicates that the 'notice shall be served on the assessee through NFAC'. This suggests that the NFAC may not be required to act by itself, but the necessary action must be routed through it.
•		Thus, with the above logic, a reasonable interpretation is that the responsibility to assign the case to the AU and issue an intimation to the taxpayer lies with the NFAC. However, the notices would be routed only through the NFAC and issued by the AU.
•		It seems that even practical implementation is in line with the above interpretation—the NFAC intimates the taxpayer about the selection of its case to be conducted in a faceless manner. This is also validated by the fact that notices served to the taxpayer are in the same format or template used in the intimation that the NFAC must issue. This suggests that notices are being passed through the NFAC even though the AU has sent said notices.
•		Moreover, section 144B(3) of the Act, while defining the functions and jurisdiction of the NFAC and all its units, provides the following: The NFAC, verification units (VU), technical units (TU) and review units (RU) must 'facilitate the conduct of faceless assessment', andthe role of AUs is to 'conduct the faceless assessment'. This clarifies that the NFAC is only a facilitator, and it is the AU that must conduct the faceless assessment.

Regarding the above, one may take the view that the AU is authorised to serve the notice under section 143(2) of the Act to the taxpayer.

View 2: NFAC is authorised to serve the notice to the taxpayer

•		As iterated above, the NFAC is required to facilitate the conduct of faceless assessment proceedings in a centralised manner, and the AU's role is to perform the function of making assessment. The latter involves, inter alia, identifying points, seeking information, and analysing material the taxpayer has furnished.
•		While performing the above roles, if the AU needs any assistance from the VU, TU, or RU, it must place a request through the NFAC. Moreover, any such request will be assigned by the NFAC to those units. This indicates that the AU may not directly raise a request to other units but express the need to the NFAC, which will assign the request to the concerned unit.
•		In this regard, section 144B (5) of the Act also specifies that all communication between the AU, VU, TU, and RU or between the units and the taxpayer will be through the NFAC.
•		On a conjoint reading of the above two points, a view may be taken that all communication between the units or with the taxpayer may be delivered by the NFAC. Therefore, the expression 'through the NFAC' needs to be read in a harmonious manner, meaning that the term 'through' used in the section is equivalent to 'by'; otherwise, it may lead to a conclusion that the units can communicate directly through a platform, and the point of the NFAC assigning the case may become redundant. As per this logic, one may interpret that the NFAC is required to issue the notices.
•		The above logic is also strengthened by the requirement that the taxpayer must submit the response to the NFAC, which will forward the same to the AU. Therefore, if the response needs to be filed with the NFAC, then the NFAC is also required to issue the notice.

Regarding the above, one may take the view that the NFAC is authorised to serve the notice to the taxpayer under section 143(2) of the Act.

CASE B: Non-resident taxpayers – Power to issue notice to initiate scrutiny assessment under section 143(2) of the Act is with the AU, PITA or jurisdictional TO?

•

The above analysis leads to the following two points:

(a)		The TO or PITA can issue a notice under section 143(2) of the Act.
(b)		The provisions of section 144B of the Act do not apparently distinguish its applicability in the case of a resident or non-resident.

•		However, section 144B(2) of the Act provides that faceless assessment will be made in respect of the territorial area, persons or class of persons, incomes or class of incomes, or cases or class of cases, as may be specified by the CBDT. Regarding this, in its order dated 22 September 2021 (supra), the CBDT excluded, inter alia,the assessment orders in cases assigned to International Tax Charges from the purview of section 144B of the Act.
•		This clarifies that the assessment order in the case of non-residents will maintain the status quo and will not be affected by the provisions of section 144B of the Act.
•		Practically, in some cases, non-resident taxpayers also receive a notice from the AU instead of the PITA [i.e., Assistant or Deputy CIT (International Taxation), Circle – 1(1)(1)]. This raises a question that, where the assessment order is not to be passed in a faceless assessment manner under section 144B of the Act (as per the notification above), whether the assessment notices can be issued by the authority prescribed under faceless assessment?

View 1: AU can issue a notice under section 143(2) of the Act to non-residents

•		The provisions of section 144B of the Act do not exclude non-residents from its applicability.
•		The aforesaid CBDT circular dated 22 September 2021 excludes the assessment order from the applicability of section 144B of the Act. Said circular mentions nothing related to the notices issued thereunder.
•		Moreover, the provisions of section 144B of the Act give powers to AU similar to that of an Assessing Officer.

From the above, one may reasonably interpret that notices the AU has issued to non-residents are valid, subject to the other points mentioned in Case A above, where the AU's jurisdiction may be challenged.

View 2: Only the PITA or jurisdictional Assessing Officer can issue a notice under section 143(2) of the Act to non-residents

•		The Supreme Court in one of its landmark judgements2 has laid out an accepted general principle—the one who decides the case must hear it. However, if view 1 is adopted, this principle would not be adhered to since the AU would issue the notice in scenarios where the PITA or jurisdictional Assessing Officer would pass the final order.
•		Another argument in this regard may be taken: CBDT's notification no. 61/ 2022 (supra) has given the AUs, the power of Assessing Officer only for the conduct of faceless assessment proceedings under section 144B of the Act and not in general or under the entire provisions of the Act. Moreover, the list of income-tax authorities under section 116 of the Act does not include the AUs or NFAC as tax authorities. Section 144B of the Act has created a deeming fiction to treat the AU as Assessing Officer. Such deeming fiction can be restricted to the applicability of only said section and not the entire provisions of the Act.
•		Thus, the AU's jurisdiction may not concur with the jurisdiction of the PITA or jurisdictional Assessing Officer for the purpose of conducting assessment proceedings in the case of non-residents.
•		Considering this logic, the AU may not be treated as the authorised person to issue a notice under section 143(2) of the Act; thus, such power would be restricted only to the PITA or jurisdictional Assessing Officer.

2. Challenging the notices' validity

Given the divergent views and interpretations possible, one may evaluate if the notice can be challenged through a submission while cooperating with providing all the necessary information and clarifications the notice may seek. However, one must be mindful about the necessary provisions of the Act, including sections 292BB and 124 of the Act, to challenge the validity or jurisdiction of the authority issuing the notice. Therefore, where any parameter is missing or any additional facts of the case indicate that the notice's validity may be challenged, one can take an argument at the first stage itself to challenge the notice's validity. This may also help leverage the judicial precedents, if any, that may come subsequently in the case of other taxpayers to ensure an additional ground to challenge the assessment order passed with similar irregularity.

♦ Way Forward:

The validity of notices has been challenged repeatedly in the courts on various grounds arising on account of ambiguous language of the law, default by the departments or other reasons. This is an important area of deliberation, because, in effect, the notices are a form of communication between the department and the taxpayer; therefore, they should be transparent, clear, and adequately served to the taxpayer. The authorisation to specific authorities to issue a notice has been designed for these very reasons, and they should be abided. If not, the taxpayer can challenge the same in the courts by filing a writ application or taking an argument in the submission itself, to the effect that the taxpayer is filing the submission while challenging the notice's validity but without prejudice. The challenge should be however, taken up at the very first stage of receiving any invalid notice; if not, it may be interpreted that the taxpayer has cooperated with the proceedings without any objections.

Disclaimer: Please note that the views expressed in this article are the personal opinion of the authors and does not represent a view of any organisation or any other person. No assurance is given if such view is acceptable by any judicial or tax authorities. It is advisable to have independent research before reaching any conclusion.