Introduction
In a landmark judgment, Varadarajaperumal Pradeepkumar v. Income-tax Officer[i], the Madras High Court (‘MHC’) dealt with a writ petition (‘WP’) challenging an income tax assessment order (‘impugned order’). The case highlighted the complexities and potential unfairness of tax laws. The case revolved around a show cause notice (‘SCN’) issued to Mr. Varadarajaperumal Pradeepkumar (‘Petitioner’), which alleged that the SCN issued was more pre-determined than a typical SCN, suffering from the vice of pre-determination, which was bad in law and accordingly, the impugned order stood vitiated.
Brief Facts
During the relevant assessment year, the Petitioner conducted business operations as a distributor for M/s. Bharathi Telemedia Ltd. provided Direct to Home (‘DTH’) services under the trade name of M/s. Accurate Enterprises, a proprietary concern.
The central government, during the financial year (‘FY’) 2016-17, enacted the Specific Bank Notes (Cessation of Liabilities) Ordinance 2016, cancelling the legal tender status of Rs.1000 and Rs.500 denomination currency notes w.e.f. 31.12.2016.
The Petitioner filed its return of income as per the act on 01.11.2017. The petitioner’s case was selected for complete scrutiny under CASS for the assessment year (‘AY’) 2017-18, and the notice was issued under s. 142(1) of the Income-tax Act (‘Act’), calling upon the petitioner to furnish the relevant details maintained during FY 2015-16 and 2016-17.
The petitioner appeared multiple times and provided the required documents and explanations.
On 17.03.2021, the petitioner received an intimation under s. 245 of the Act indicating that the AY 2020-21 refund would be adjusted against the outstanding tax demand. When the petitioner approached the respondent to enquire about the reasons/basis for the adjustment demand, he was informed that an assessment order dated 29.12.2019 (‘impugned order’) was passed for the AY 2017- 18, and tax dues in terms thereof were adjusted.
The petitioner argued that the SCN dated 17.12.2019 did not specify any proposal. It was a pre-determined conclusion treating the cash deposits as unexplained income and lacked a time limit for the petitioner to respond, rendering it defective. This violated the principles of natural justice and fairness as outlined in a. 14 of the Constitution of India (‘Constitution’).
Further, it was the case of the petitioner that the impugned order was served only on the email address of the petitioner’s CA, which had not been actively used for a long time, resulting in the petitioner not being aware of the impugned order until much later. Further, one of the bank accounts considered for unexplained income was claimed to belong to the electricity board and not the petitioner.
Aggrieved by the same, the petitioner filed this WP challenging the impugned order being invalid on the face of the record.
Held
The MHC disposed of the WP, set aside the impugned order, and directed the petitioner to submit its objection within 8 weeks from the date of receipt of the order by treating the assessment order as SCN.
The MHC reviewed the SCN and noted that the SCN indicated pre-determination, lacking a proposal and implying a concluded decision. Further, it held that the service of the assessment order to the Chartered Accountant’s outdated email address was invalid.
The MHC referred to the decision of the Hon’ble Supreme Court in Siemens Ltd v. State of Maharashtra[ii] and emphasized that pre-determined notices are in violation of a. 14 of the Constitution.
The MHC observed that the SCN failed to specify a response time, rendering it defective. It finally set aside the impugned order with directions to the Petitioner to file his objections within eight weeks of the order by treating the impugned order as SCN, failing which the impugned order shall be restored.
Our Analysis
This ruling highlighted the importance of due process and fair opportunities for taxpayers to respond to notices. The recognition of pre-determination in the SCN emphasized the need for impartial and open-minded assessment procedures. It reinforced the constitutional guarantee of equality before the law as enshrined under a. 14 of the constitution.
The decision impacts future assessments, ensuring that notices must be clear, proposal-oriented, and adequately served. The MHC’s directive to treat the assessment order as a SCN and allow objections aimed at balancing administrative efficiency with taxpayer rights.
End Notes
[i] 2024 162 taxmann.com 609 (Madras)
[ii] (2006) 12 SCC 33
Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.