Faceless Assessment Must Be Faceless in Law and Fact: Telangana High Court Quashes Income Tax Orders for Procedural Illegality

“If the law mandates a thing to be done in a particular manner, it must be done in that manner only” –  In a resounding affirmation of the statutory sanctity of the faceless assessment regime under Section 144B of the Income Tax Act, the Telangana High Court struck down a series of assessment orders passed by the Income Tax Department for violating both the procedural mandates of the Finance Act, 2021 and the principles of natural justice. The Division Bench comprising Justice P. Sam Koshy and Justice Narsing Rao Nandikonda delivered a reportable common order in Writ Petition Nos. 39706, 38716, 39666 of 2022 and 1219 of 2023, quashing all impugned orders passed under Section 143(3) read with Section 144B of the Act.

The petitioners, including K. Yadagiri and others, challenged the assessment orders primarily on two grounds: first, that the assessments were not conducted in a faceless manner as mandated by the amended statutory scheme effective from 01.04.2021, and second, that the orders suffered from violations of natural justice, with additions and disallowances made without adequate prior disclosure or opportunity to respond.

“Statutory Mandate of Faceless Assessment Not Optional – Any Violation is Void in Law”

The Court was unambiguous in holding that once Section 144B, introduced by the Finance Act, 2021, came into force on 01 April 2021, all assessments initiated thereafter had to be conducted through the National Faceless Assessment Centre (NFAC), not by jurisdictional officers. The impugned assessments, however, were carried out by jurisdictional Assessing Officers, rendering the entire process procedurally illegal and ultra vires.

“There can be no estoppel against the law. If the law requires that something be done in a particular manner, it must be done in that manner only. If not done in that manner, it would have no existence in the eye of law,” the Bench observed, relying heavily on Tata Chemicals Ltd. v. Commissioner of Customs, (2015) 11 SCC 628, and reaffirming the settled doctrine from Chandra Kishore Jha v. Mahaveer, (1999) 8 SCC 266.

Referring to its own earlier judgment in Kankanala Ravindra Reddy v. ITO, the Court reiterated that the faceless assessment scheme is not merely procedural but jurisdictional, and any deviation from it nullifies the assessment order.

“Mechanical Disallowances Without Disclosure Cannot Stand – Natural Justice is Not a Formality”

On the second issue, while the Court rejected the argument that the petitioners were denied adequate opportunity to respond (citing multiple notices and responses exchanged), it came down heavily on the Revenue for introducing new disallowances and additions in the final order without any prior quantification or specific disclosure.

In particular, the addition of ₹30.26 lakh under Section 40A(3) for alleged cash payments in violation of the ₹10,000 limit, was never mentioned or quantified in the show cause notice under Section 144B(1)(xii). The Court held that such procedural ambush violates natural justice, especially where no opportunity is granted to explain or justify specific transactions.

Likewise, with respect to the additions under Section 68 for alleged unexplained cash credits of ₹134 crore, the Bench noted that the petitioners had submitted PAN, addresses, confirmations, and contact numbers of all 11 advance-paying parties. Yet, the Assessing Officer made no effort to issue notices under Section 133(6) or to verify the information.

“Mere mechanical rejection without conducting any independent enquiry despite having full details on record amounts to non-application of mind and is violative of natural justice,” the Court remarked.

Further, the Bench highlighted a contradiction in the AO’s reasoning: the Revenue accepted the interest component of a particular advance as genuine business expenditure, yet rejected the principal amount of the same advance as unexplained. The Court termed this “legally and logically inconsistent.”

“Violation of Section 144B is a Jurisdictional Defect, Not a Procedural Irregularity”

Though the Court held that the petitioner was given multiple opportunities and that natural justice was not wholly denied, it ultimately quashed the assessment orders solely on the ground that they were not conducted in a faceless manner as mandated by Section 144B.

The Division Bench reiterated the principle that when a power is given to an authority to be exercised in a particular manner, it must be exercised in that manner and no other, adding that any deviation nullifies the entire proceeding.

The Court also relied on the Supreme Court’s ruling in Union of India v. Ashish Agarwal, (2022) 444 ITR 1 (SC), where the Apex Court had clearly directed that all assessments and reassessments post-01.04.2021 must follow the substituted provisions under the Finance Act, 2021.

Conclusion: Faceless Cannot Be Facade – Assessment Quashed for Breach of Statutory Mandate

Ultimately, all four writ petitions were allowed, and the impugned assessment orders along with all consequential actions were set aside as void ab initio for failure to comply with Section 144B. The Court concluded:

“The procedure adopted by the Revenue is neither tenable, nor sustainable. The notices and orders passed without adherence to the substituted provisions are per se illegal and accordingly stand quashed.”

In doing so, the High Court sent a clear message that compliance with the faceless assessment scheme is not optional, and any departure from it strikes at the root of jurisdiction.

Implications for Tax Practitioners and the Revenue

This judgment is a strong precedent for taxpayers whose assessments post-01.04.2021 were carried out by jurisdictional officers rather than the NFAC, and reinforces the taxpayer’s right to procedural due process in the digital age. It also compels the Revenue to strictly adhere to the faceless regime, ensuring greater transparency, accountability, and objectivity in assessment proceedings.

Date of Decision: 21 November 2025