Karnataka High Court Converts Assessment Order Into Fresh Show Cause Notice, Strikes Down Demand and Penalty Notices in Faceless Assessment Case

Background and Overview

In a significant ruling that underscores the importance of procedural fairness in faceless assessment proceedings, the Karnataka High Court intervened in the matter of Dover India Private Limited Vs Assessment Unit, granting meaningful relief to the assessee on grounds that the principles of natural justice were not duly observed during the course of the assessment.

The impugned Assessment Order dated 24.03.2026, passed under Section 143(3) and Section 144B of the Income Tax Act, 1961, was challenged before the High Court along with the consequential Demand Notice and Penalty Notice issued on the same date. The Court's intervention in this case sends a clear signal regarding the procedural obligations of the Revenue authorities, particularly in the context of faceless assessments where opportunities for hearing must be meaningfully extended.

Key Issues Raised Before the Karnataka High Court

The assessee, represented by learned counsel Ms. Manasa Ananthan, raised two substantive procedural grievances before the Court, which formed the foundation of the challenge:

1. Denial of Video Hearing Opportunity

The assessee had specifically requested an opportunity of hearing via video conferencing, as is contemplated under the faceless assessment framework. However, this request was not honored, and the assessment proceedings were concluded without extending any such opportunity to the assessee. The denial of a video hearing, when specifically sought, constitutes a fundamental procedural lapse.

2. Addition Made Without Issuance of Prior Show Cause Notice

The Show Cause Notices issued during the course of the assessment proceedings referred to certain specific proposed additions. While the assessee filed responses to those notices, the final Assessment Order — apart from dealing with those additions — incorporated an additional disallowance that had never been mentioned or proposed in any prior Show Cause Notice. This additional disallowance was introduced for the first time in the final order itself, thereby depriving the assessee of any opportunity to contest or address it beforehand.

This dual procedural failure — denial of video hearing and introduction of a fresh disallowance without prior notice — formed the core of the assessee's grievance before the Karnataka High Court.

The Court's Reasoning and Observations

The Karnataka High Court, after hearing Ms. Manasa Ananthan for the petitioner and Sri M. Dilip and Sri Vinayaka S. Pandit, learned standing counsels for the respondents, was of the opinion that the circumstances outlined by the assessee were sufficient to warrant relief.

The Court noted that: