Conception of new faceless regime
The government had introduced the faceless assessment regime from 2018, thereby eliminating the physical interface between the Assessing Officer (“AO”) and the assessee. Suitable amendments were made in the Income Tax Act, 1961 (“IT Act”), authorising the government to notify a suitable scheme for this purpose, which led to the setting up of a Centralised Communication Centre i.e. an internet-based, independent, centralised communication centre for issuance of e-notices to taxpayers, thus doing away with the need for the traditional face to face appearance by an assessee before the designated income tax authority. These preliminary steps finally culminated in the launch of the Faceless Assessment Scheme, 2019.
Interestingly, in keeping with its intentions of conducting important proceedings under the IT Act in a faceless manner, a proposal was made to make the first appeal process i.e. appellate proceedings before the Commissioner of Income Tax (Appeals) (“CIT(A)”) faceless i.e. eliminating physical interface between an appellant and the CIT(A).
Finance Act 2020 brought in certain amendments, vesting powers with the government to notify a proper scheme for this purpose. The Central Board of Direct Taxes (“CBDT”), vide its notification dated September 25, 2020[1], notified the Faceless Appeal Scheme 2020 “(the “Scheme”/ “Faceless Appeal Scheme”). While the appeals before the CIT(A) were already being filed online through the official income tax portal, now even the adjudication of such appeals, right from the issuance of notice for the hearings to subsequent adjudication, will be carried on through a centralised communication centre, without any physical interaction between the CIT(A) and the appellant. The Scheme entails setting up of a National Faceless Appeal Centre (“NFAC”), serving as a central point of communication and responsible for assigning the appeals to specific Appeal Units (“AUs”), consisting of CIT(A)s, in Regional Faceless Appeal Centres (“RFAC”) through an automated allocation system.
Faceless Appeal Scheme, 2020
1. Admission/ Rejection of appeal
2. Obtaining information from Appellant
3. Additional ground of appeal/ additional evidence, if any, filed by appellant
4. If AU intends to enhance an assessment/ penalty/ reduce the amount of refund
5. Rectification Application
An appeal against an order passed by the NFAC under this Scheme needs to be filed before the Income Tax Appellate Tribunal (“ITAT”), having jurisdiction over the jurisdictional AO. Interestingly, the government has proposed to make even the proceedings at the second appellate level faceless, which is as under:
Faceless ITAT proceedings
The ITAT is the final fact-finding authority, which implies that a finding of fact arrived at by the ITAT is final and conclusive and the subsequent appellate authorities such as the High Court or the Supreme Court cannot reappreciate the factual evidence and substitute their own factual findings for the finding recorded by the ITAT. Therefore, the appellate proceedings carried on at the ITAT level form a very crucial part of the overall appeal process under the IT Act.
The changes introduced through the Finance Act of 2021 bring certain drastic changes in the overall functioning of the ITAT, such that they empower the government to notify a scheme for the disposal of appeals before the ITAT in a faceless manner by March 31, 2023. The Hon’ble Finance Minister in her 2021 Budget Speech had clarified that a National Faceless Income Tax Appellate Tribunal Centre shall be established and all communication between the ITAT and the appellant shall be made electronically and wherever personal hearing is needed, it shall be done through videoconferencing. A detailed scheme is yet to be notified in this regard.
Fast paced reforms in unchartered territory
The government seems to be religiously pushing forward tax reforms with each Budget. It’s aim appears to be to put in place an efficient, transparent and accountable taxation system, both at the assessment level as well as the appellate levels. As per the government, the said measures are intended to reduce cost of compliance for taxpayers, increase transparency in disposal of appeals, ensure that personal prejudices do not affect the outcome and help in achieving even work distribution, thereby resulting in better utilisation of resources.
In a span of merely two to three years, we have seen several proposals for making income tax proceedings entirely faceless, from the assessment stage to the appellate level. However, the government cannot go any further as the High Courts and the Supreme Court have complete independence to regulate their processes and procedures. In fact, it is pertinent to note that the ITAT does not function under the administrative control of the government. It is a quasi-judicial authority that operates independently and is free to lay down its own procedure as stated in Section 255 of the IT Act. It remains to be seen how and by whom the new rules shall be formulated and how they will be approved. If any legal powers or authority granted to the ITAT are taken away, we might witness a fierce legal challenge in the High Court or the Supreme Court.
The elimination of face to face interaction between the assessees and the tax officers, including the CIT(A), can be conducive in bringing much needed transparency in the system. It can also help in eliminating corruption at the root level. However, as far as the proposal for faceless ITAT proceedings is concerned, the fact that the assessee might not be able to make a physical appearance and argue in person before the members of the ITAT can be a bit concerning. This is because the ITAT is generally seen to be the first real place where an assessee is allowed to advance arguments before an independent adjudicating authority, i.e. which functions independently without any intervention from the government and is unperturbed by the quantum of taxes involved in any case. In complex matters involving millions of dollars equivalent of tax revenue, assessees advance lengthy and in-depth arguments, expecting to avail relief. Maintaining the sanctity of such proceedings in a virtual setup might not be as easy or even possible. Thus, it is desirable that the option of faceless ITAT proceedings is not thrust upon assessees, rather they are given an option to exercise their choice of conducting the proceedings in physical or virtual mode, as is preferable to them as per their own judgement.
The implementation of the new system is currently in progress and it will take some time for all the parties involved to adopt and adapt to the new system. The government will also need to learn from its experiences with the Faceless Assessment Scheme and try to make the new systems workable. It is also important for the government to learn from its past experience and improvise the Faceless Appeal Scheme to make it better and not worry about potential revenue loss, if any. It should also offer genuine guidance and assistance to taxpayers through the entire process, whether it be technical assistance in making the necessary filings or attending virtual hearings or responding to the grievances or suggestions of the taxpayers promptly. It is imperative that the government ensures that the taxpayers have guidance available from the tax authorities every step of the way.
In addition, the government needs to adopt a liberal approach while approving/ rejecting requests for any personal hearing made by the assessees. Right to be heard and right of the assessee to get a fair hearing cannot be curbed or stifled in any manner. It also needs to ensure that the concerned assessees get a fair and sufficient opportunity to send replies and respond to any queries or findings of the tax authorities during the course of any assessment proceedings or appellate proceedings under the new faceless regime. Tax officers should be directed to be liberal in their approach and address all inconveniences faced by the taxpayers and should not hide behind technicalities while considering the claims made by the taxpayers.
A discretion has been vested with the tax authorities, while allowing any requests for a personal hearing. This has led to objections being raised by the assessees over the discretionary powers of the authorities. The Delhi High Court has also admitted a writ petition, recently challenging the faceless appeal scheme on several grounds, including that oral hearings are discretionary under the Scheme and violative of an appellant’s right to a hearing and principles of natural justice, which attempts to strike at the very core of the Scheme.
ITAT Bar Associations and other associations of tax practitioners across India have made representations to the finance minister, law minister and Prime Minister’s Office to do away with the Faceless ITAT appeal mechanism. The representations stated that the existing open court system – where both the sides of the litigation produce their arguments and counter-arguments in the open court – is important as the ITAT is the highest and the last fact-finding authority under the IT Act, dealing with varied matters involving complicated issues of facts, law, international taxation, transfer pricing, etc. The proposed scheme seeks to replace open court hearings with the mere filing of written submissions. Mumbai ITAT Bar Association, in its press release, has demolished reasonings provided in the proposal, including raising efficiency and transparency, by eliminating interface between parties and optimising resources and introducing dynamic jurisdiction. The press release also claimed that the ITAT, which is acknowledged as having all the trappings of a Court, cannot be made faceless.
It is, therefore, necessary for the government to consider the relative advantages and disadvantages carefully and implement the Faceless Appeal Scheme only after it is absolutely convinced of its utility. It may be worthwhile to see the functioning of the Faceless Assessment Scheme for a few years and challenges experienced both by the taxpayers as well as the tax administrators and thereafter, come up with a proposal for Faceless Appeal Scheme. While it is important to reduce the litigation timeline, it should not be at the cost of weakening the ability of taxpayers to get justice.
[1] CBDT Notification No. 76/2020 dated September 25, 2020