Allahabad HC: INR 10K Penalty on Tax Authority for Cancellation Earlier Order U/S 263

The Allahabad High Court on Wednesday imposed a fine of Rs. 10,000 on an Income Tax Department officer for not adhering to the natural justice while terminating the previous Assessment Order and initiating fresh proceedings under Section 263 of the Income Tax Act, 1961.

The petitioner’s assessment was conducted under Section 143(3) of the Income Tax Act. Subsequently, the Principal Commissioner of Income Tax (PCIT) issued a notice to the petitioner under Section 263 (Revision of order prejudicial to revenue) of the Income Tax Act, the reason is that the petitioner’s case selection for scrutiny through Computer Aided Scrutiny Selection (CASS).

Consequently, the PCIT, through the impugned order, cancelled the previous assessment issued by the Assessing Authority. This cancellation by the PCIT was carried out on the grounds that the said order was passed erroneously as it went detrimental to the interest of the Revenue. The Assessing Authority was instructed to issue revised directives.

The counsel for the petitioner argued that the impugned order was just based on having different perspectives and violation of principles of natural justice. The argument further stated that the proper procedure outlined in Section 263 of the Income Tax Act of 1961 was not adhered to prior to the issuance of the impugned order.

It was argued further that the signature of the counsel representing the petitioner was not matching. The signature before the PCIT was not matching with signature on the manual order sheet and on the affidavit filed. It was submitted by the petitioner that its counsel was not given a chance to present before PCIT. An undecided adjournment application was filed as the petitioner received the notice on the final day of submission of the reply. There were no directives given on the adjournment application. Therefore, the PCIT has violated principles of natural justice, contended the counsel for the petitioner.

The questions raised concerning the violations of principles of natural justice were denied by the counsel of the Department and stated that the Petitioner’s reply was considered while passing the contended directive, even though it was submitted the next day. Additionally, the counsel argued that the Assessing Authority’s order was prejudicial to the Revenue’s interests, making the proceedings under Section 263 of the Act lawful.

A single-member bench of Justice Piyush Agrawal observed that no directives were issued on the adjournment application. Moreover, the Department did not provide any explanation for having different sets of order sheets: one electronic, bearing the adjournment application, and one manual, signed by the petitioner’s counsel.

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“Learned counsel for the petitioner has specifically denied the signature on the manual order sheet and has relied on the signature on the adjournment application (Annexure No. 5 to the writ petition), on perusal of which creates a doubt on two counts; firstly, the signature is different and secondly, there was no occasion for adopting two different modes of maintaining order sheet; one computer generated order sheet and another manual order sheet. This aspect creates a serious doubt about the functioning of the respondent – authority,” noted the Court.

The Court further observed the mistakes in the impugned directive stating that there was no reply submitted by the petitioner as has already shown in the paragraph above. Whereas the next statement of the Court, in the paragraph below, says that the reply of the petitioner had been considered.

“Once the respondent – authority himself records that no response has been filed in pursuance of the notice under section 263 of the Income Tax Act dated 27.03.2022, a contrary finding, as recorded in paragraph no. 5 of the impugned order, cannot be accepted in the eyes of law,” the Court said.

The Supreme Court’s decision in the Whirlpool Corporation v. Registrar of Trade Marks Mumbai case was taken as a reference and the bench relied upon the decision provided where it highlighted a breach of fair treatment principles, as the petitioner was denied a chance to present their case.

The Court also observed that the order issued under Section 263 of the Act did not mention any detriment that had happened to the Revenue.

Consequently, the Court overturned the disputed verdict and instructed the Respondent to submit Rs. 10,000 to the Allahabad High Court Legal Services Committee.