Faceless Assessment Scheme | Mandatory Show Cause Notice Under Section 143(3) IT Act Essential for Valid Assessment : ITAT Delhi

The Income Tax Appellate Tribunal, Delhi, has reaffirmed a foundational principle of tax jurisprudence: procedural fairness under the Faceless Assessment Scheme is not optional but mandatory. The Tribunal set aside all additions made by the Assessing Officer because no show cause notice was issued prior to finalizing the assessment, thereby violating the statutory mandate and principles of natural justice.

Background & Facts

The Dispute

The assessee, Tumlare Software Services Pvt. Ltd., filed its original income tax return for Assessment Year 2018-19 on 30.11.2018 based on unaudited books of accounts. This was necessitated by the discovery of serious fund misappropriation by prior management during FY 2017-18, which led to the appointment of a new management team and a new statutory auditor. The previous auditor was removed, and a fresh audit was initiated only after the FIR was lodged with the Economic Offence Wing on 06.02.2018. The new auditor, Deloitte Haskins and Sells LLP, was formally appointed on 17.01.2019 and completed the statutory audit report on 27.11.2019. The revised return, reflecting audited figures, was filed during the assessment proceedings on 30.12.2020.

Key Facts

• The assessee is a software services company incorporated on 01.01.1999, engaged in application development, maintenance, and IT security.
• Original return filed on 30.11.2018 (due date) based on unaudited books.
• FIR lodged with EOW, New Delhi, on 06.02.2018 regarding fund misappropriation.
• New statutory auditor appointed on 17.01.2019; audit report submitted on 27.11.2019.
• Revised return filed on 30.12.2020, disclosing higher turnover of Rs. 13,42,41,894 (vs. Rs. 11,78,26,561 in original return) and increased expenses of Rs. 11,40,51,371.
• Tax paid on revised computation: Rs. 60,42,119 (vs. Rs. 36,60,740 in original return).
• Assessing Officer issued notices under Section 143(2) on 23.09.2019 and Section 142(1) on 01.02.2020 and 22.12.2020.
• No show cause notice or draft assessment order was issued under the Faceless Assessment Scheme.
• Assessing Officer made six additions totaling Rs. 8,78,81,894:
  • Computer maintenance: Rs. 29,32,481
  • Building maintenance: Rs. 3,59,622
  • Auditor payments: Rs. 51,72,500
  • Deficit in sale of services: Rs. 1,64,15,333
  • Directors’ payments under Section 40A(2)(b): Rs. 72,29,654
  • Disallowance under Section 40(a)(ia): Rs. 1,83,06,669

Procedural History

• 30.11.2018: Original return filed for AY 2018-19.
• 06.02.2018: FIR lodged with EOW, New Delhi.
• 17.01.2019: New statutory auditor appointed.
• 23.09.2019: Notice under Section 143(2) issued.
• 27.11.2019: Statutory audit report submitted.
• 30.12.2020: Revised return and audited financials submitted.
• 22.12.2020: Notice under Section 142(1) issued.
• 07.04.2021: Final assessment order passed under Section 143(3) without show cause notice.
• 21.07.2023: Ld. CIT(A) deleted all additions, holding that no opportunity was given to the assessee.
• 09.02.2026: Hearing before ITAT Delhi.
• 06.05.2026: ITAT Delhi dismissed the Revenue’s appeal.

The Parties' Positions

For the Revenue

The Revenue contended that:

• The assessee filed a belated audit report and revised return, which was an afterthought.
• The CIT(A) erred in not invoking Rule 46A of the ITAT Rules to call for additional evidence.
• The additions were justified due to discrepancies between unaudited and audited figures.
• The failure to issue a show cause notice was a procedural irregularity, not fatal to the assessment.

For the Assessee

The assessee argued that:

• The delay in filing the audit report was due to legitimate circumstances - discovery of fraud and replacement of management.
• The Faceless Assessment Scheme 2019 mandates issuance of a show cause notice before any variation prejudicial to the assessee is proposed.
• The Assessing Officer made all additions without any opportunity to be heard, violating natural justice.
• Judicial precedents from the Delhi High Court and other High Courts consistently hold that non-compliance with the show cause requirement renders the assessment void.
• The Apex Court in S.A. Builders Ltd. v. CIT prohibits the Revenue from acting as an armchair businessman.

Relief Sought

The Revenue sought to set aside the CIT(A)’s order and restore the Assessing Officer’s additions totaling Rs. 8,78,81,894. The assessee sought confirmation of the CIT(A)’s order and quashing of the assessment order in its entirety.

The Legal Issue

The central question was whether an assessment order passed under Section 143(3) of the Income Tax Act, 1961, without issuance of a show cause notice under the Faceless Assessment Scheme 2019, is legally valid and enforceable.

Arguments Presented

For the Appellant (Revenue)

The Revenue relied on the technicality that the assessee filed a belated audit report and revised return, suggesting mala fide intent. It argued that Rule 46A of the ITAT Rules could have been invoked to obtain additional evidence, and that the CIT(A) erred by not doing so. It further contended that the Assessing Officer’s observations on discrepancies were based on material on record and that procedural lapses do not vitiate substantive findings.

For the Respondent (Assessee)

The assessee cited multiple judicial precedents, including KL Trading Corporation v. National E-Assessment Centre and SAS Fininvest LLP v. National E-Assessment Centre, to establish that the Faceless Assessment Scheme mandates a show cause notice before any adverse variation. It emphasized that the Assessing Officer had access to all documents - including the FIR, auditor appointment, and revised computation - yet chose to make additions without inviting any explanation. The assessee argued that the failure to comply with the statutory procedure under Section 144B and the Faceless Scheme rendered the assessment void ab initio.

The Court's Analysis

The Tribunal conducted a meticulous review of the procedural history and the statutory framework governing faceless assessments. It noted that the Faceless Assessment Scheme, introduced under Section 144B, explicitly requires that:

"provide an opportunity to the assessee, in case any variation prejudicial to the interest of assessee is proposed, by serving a notice calling upon him to show cause as to why the proposed variation should not be made."

The Tribunal observed that the Assessing Officer made six distinct additions - including disallowances of legitimate business expenses and adjustments to turnover - without issuing any show cause notice or draft assessment order. The entire assessment was passed on the basis of assumptions, without applying the mind to the explanations already submitted by the assessee.

The Tribunal rejected the Revenue’s argument that Rule 46A could have cured the defect. It held that Rule 46A applies only when additional evidence is required, not when the fundamental right to be heard has been denied. The Tribunal emphasized:

"The Assessing Officer rejected the plea of the assessee for the reason that assessee has filed the belated audited report and revised return of income at the time of assessment proceedings only, according to Assessing Officer, it is nothing but after-thought. The Assessing Officer has not considered the materials already available on record on its merits."

The Tribunal further relied on the Delhi High Court’s decision in KL Trading Corporation, which held that failure to issue a show cause notice under the Faceless Scheme is a jurisdictional defect. It also cited S.A. Builders Ltd. v. CIT to reinforce that the Revenue cannot assume the role of a businessman and disallow expenses merely because it deems them excessive without evidence.

The Tribunal concluded that the Assessing Officer’s actions were arbitrary, violated the principles of natural justice, and contravened the statutory mandate of the Faceless Assessment Scheme. The CIT(A)’s order, which correctly identified these procedural failures, was therefore upheld.

The Verdict

The Revenue’s appeal was dismissed. The ITAT Delhi confirmed the order of the CIT(A) dated 21.07.2023, which deleted all additions totaling Rs. 8,78,81,894. The assessment order dated 07.04.2021 was set aside. No further directions were issued as the matter was concluded by the deletion of additions.

What This Means For Similar Cases

Procedural Compliance Is Non-Negotiable

• Practitioners must now treat the absence of a show cause notice under the Faceless Assessment Scheme as a jurisdictional defect, not a mere irregularity.
• Any assessment order passed without a show cause notice is void ab initio and can be challenged even in writ petitions.
• The burden shifts to the Revenue to prove that a show cause notice was issued - silence or non-filing of such notice is fatal.

Judicial Precedents Are Binding on Assessing Officers

• The decisions of the Delhi High Court in KL Trading Corporation and SAS Fininvest LLP are now binding on Assessing Officers across India.
• Assessing Officers cannot rely on assumptions or internal notes to justify disallowances - they must issue a show cause notice and consider submissions.
• The use of revised returns and audited financials during assessment cannot be used to bypass procedural safeguards.

Taxpayers Must Document Procedural Violations

• Taxpayers should maintain a log of all notices received and verify whether a show cause notice or draft assessment order was issued via the e-filing portal.
• If no such notice is found, the taxpayer should raise this as a preliminary objection in appeals before CIT(A) and ITAT.
• The ITAT’s reliance on the e-filing portal screenshots as evidence confirms that digital records are admissible and decisive.