Bombay High Court on Enhanced Additions in Faceless Assessments: Order Set Aside for Want of Opportunity

Background of the Dispute

In KEM Hospital And Seth G. S. Medical College Employees Co-op Credit Society Ltd. Vs National Faceless Assessment Centre, the Bombay High Court examined whether an assessment framed under Section 144 read with Section 144B of the Income Tax Act, 1961 could validly enhance the quantum of addition beyond what was proposed in the show cause notice, without affording the assessee an additional chance to respond.

The assessee approached the High Court challenging:

  • The final Assessment Order dated 28.09.2022 passed under Section 144 read with Section 144B,
  • The Notice of Demand issued on the same date under Section 156, and
  • The Show Cause Notice for penalty issued under Section 270A.

The core grievance was that while the show cause notice (SCN) proposed an addition of ₹2,69,05,368, the final Assessment Order enhanced this addition to ₹9,81,95,173, allegedly without giving the assessee any prior notice or opportunity to explain why such a steep enhancement should not be made.

Chronology of Events

Initial Show Cause and Response

  1. A Show Cause Notice dated 05.03.2022 was issued proposing an addition of ₹2,69,05,368 to the assessee’s income.
  2. The assessee furnished a detailed reply on 03.08.2022, enclosing its balance sheet and Profit and Loss Account, among other records, in support of its stand.

Final Assessment and Connected Actions

Thereafter, on 28.09.2022:

  • A final Assessment Order was passed under Section 144 read with Section 144B,
  • The total addition to income was enhanced to ₹9,81,95,173, significantly higher than what was initially proposed,
  • A demand notice under Section 156 was issued on the same date, and
  • A separate Show Cause Notice was issued initiating penalty proceedings under Section 270A.

The assessee then invoked the writ jurisdiction of the Bombay High Court to challenge all these actions on the specific ground of violation of principles of natural justice.

The High Court considered two principal issues:

  1. Whether an assessment order passed under Section 144 and Section 144B can validly make an addition exceeding the amount specified in the original Show Cause Notice, without giving a separate opportunity to the assessee to meet the enhanced proposal.

  2. Whether the impugned Assessment Order dated 28.09.2022 was liable to be quashed on account of such denial of opportunity.

These questions were examined in the backdrop of:

  • Section 144 (Best judgment assessment),
  • Section 144B (Faceless assessment scheme),
  • Section 156 (Notice of demand), and
  • Section 270A (Penalty for under-reporting and misreporting of income).

Assessee’s Contentions

The assessee argued that: