Natural Justice in Tax Proceedings | Mandatory Opportunity of Hearing Under Section 144 : Income Tax Appellate Tribunal

The Income Tax Appellate Tribunal, Ahmedabad Bench has reaffirmed that natural justice principles are sacrosanct in tax assessment proceedings, particularly when assessments are completed under Section 144 of the Income Tax Act, 1961. The judgment underscores that failure to provide adequate opportunity of hearing renders the entire assessment void ab initio, necessitating remand for fresh adjudication.

Background & Facts

The Dispute

The appellant, an individual engaged in handicraft sales, faced an assessment order under Section 144 for the assessment year 2017-18. The Assessing Officer (AO) made an addition of ₹13,58,650 under Section 69A for cash deposits during the demonetization period (November-December 2016), treating them as unexplained money. The appellant had not filed a return of income, and the case was selected based on cash transaction alerts.

Procedural History

The timeline of proceedings reveals systemic lapses:

• 10 March 2018: Notice under Section 142(1) issued to the appellant
• 14 June 2019: Reminder notice sent
• Assessment Order (2019): Passed under Section 144 without recorded service of notice
• 29 July 2024: CIT(A) dismissed the appeal for non-prosecution without adjudicating merits

Relief Sought

The appellant challenged the assessment on two primary grounds:

1. Violation of natural justice: No opportunity of hearing was provided before passing the Section 144 order
2. Jurisdictional defect: The AO lacked territorial jurisdiction, rendering the proceedings void

The Legal Issue

The Tribunal confronted two critical questions:

1. Whether an assessment order under Section 144 can stand when the assessee was not afforded a reasonable opportunity of being heard as mandated by Section 144(1) and principles of natural justice
2. Whether the appellate authority erred in dismissing the appeal for non-prosecution without examining the merits of the case, particularly when the appellant demonstrated sufficient cause for delay

Arguments Presented

For the Appellant

The appellant's counsel advanced the following contentions:

• Procedural irregularity: The AO failed to establish service of Section 142(1) notice, a prerequisite for valid assessment under Section 144
• Natural justice violation: The appellant was never given an opportunity to present evidence or arguments, contrary to the audi alteram partem principle
• Appellate failure: The CIT(A) mechanically dismissed the appeal without considering the 12 substantive grounds raised in the memorandum
• Jurisdictional infirmity: The AO (Ward-4, Anand) lacked territorial jurisdiction over the appellant, a Srinagar resident

For the Revenue

The Departmental Representative (DR) relied on:

• Presumption of service: Argued that notice issuance creates a presumption of service under the General Clauses Act, 1897
• Finality of assessment: Contended that the Section 144 order attained finality due to the appellant's failure to respond
• Procedural economy: Urged that remand would cause undue delay in revenue collection

The Court's Analysis

The Tribunal conducted a meticulous examination of procedural fairness and statutory compliance:

1. Notice Requirement Under Section 144 The judgment emphasized that Section 144(1) explicitly conditions assessment on the AO being "satisfied about the correctness and completeness of the accounts" after giving the assessee an opportunity of being heard. The Tribunal observed:

"The Assessing Officer has issued only one notice and has not stated anywhere in the assessment order that the assessee was served with the notice. This omission is fatal to the validity of the assessment."

1. Natural Justice as Non-Derogable Right Relying on the Supreme Court's dictum in Maneka Gandhi v. Union of India, the Tribunal held that procedural fairness is an integral component of Article 14 of the Constitution. The judgment noted:

"The principles of natural justice are not empty formalities. They are designed to ensure that administrative actions are just, fair, and reasonable. When an assessee is deprived of an opportunity to present his case, the entire proceeding stands vitiated."

1. Appellate Authority's Duty The Tribunal criticized the CIT(A)'s mechanical dismissal under Section 250(4), highlighting that Section 250(5) mandates adjudication on merits. The judgment clarified:

"The CIT(A) erred in dismissing the appeal for non-prosecution without examining the substantive grounds raised. This approach defeats the very purpose of appellate review."

1. Remand as Remedy The Tribunal invoked its powers under Section 254(1) to remand the matter, directing the AO to:

• Verify all documents/evidence afresh
• Provide the appellant a reasonable opportunity of hearing
• Adjudicate the issues in accordance with law

The Verdict

The appeal was partly allowed for statistical purposes. The Tribunal:

1. Set aside the Section 144 assessment order and the CIT(A)'s appellate order
2. Remanded the case to the Assessing Officer for de novo adjudication
3. Directed strict compliance with natural justice principles and statutory procedures

What This Means For Similar Cases

Opportunity of Hearing Is Mandatory, Not Discretionary

The judgment reinforces that:

• Section 144 assessments cannot be completed without affording the assessee a genuine opportunity to be heard
• Service of notice must be proved on record; mere issuance is insufficient
• Practitioners should:
  • Demand proof of notice service in all Section 144 cases
  • Challenge assessments where the AO fails to record compliance with Section 144(1)
  • Argue for automatic remand when natural justice violations are established

Appellate Authorities Cannot Evade Merits Adjudication

The Tribunal's ruling clarifies that:

• Section 250(5) imposes a positive duty on CIT(A) to decide appeals on merits
• Dismissal for non-prosecution is permissible only after considering the grounds raised
• Assessees should:
  • Insist on written reasons when appeals are dismissed for non-prosecution
  • Seek remand orders when the appellate authority fails to examine substantive issues

Remand Is the Appropriate Remedy for Procedural Violations

The judgment establishes that:

• Procedural defects render assessments void ab initio, not merely voidable
• Remand is the preferred remedy when:
  • Notice service is not proved
  • Opportunity of hearing is denied
  • Jurisdictional infirmities exist
• Revenue authorities must:
  • Maintain detailed records of notice service and hearing opportunities
  • Avoid mechanical assessments under Section 144
  • Ensure territorial jurisdiction before initiating proceedings