This article is written by Shyamsunder Sharma, pursuing an Executive Certificate Course in Introduction to Legal Drafting from LawSikho. 

As major facets of our lives are going “virtual” in the current challenging pandemic times, the taxpayer fraternity faces a paradigm shift in the tax assessment and appeals process in the form of Faceless Assessment and Faceless Appeals Schemes under the Income Tax Act, 1961 (the Act). 

Ever since the Government had embarked on the journey of digitization, in recent years the Income Tax Department has carried out several reforms in Direct Taxes for the simplification of tax processes and for ease of compliance for the taxpayers. Recently, the Hon’ble Prime Minister on 13 August 2020, while launching ‘Faceless Assessment’ and Taxpayers’ Charter as a part of the ‘Transparent Taxation – Honoring the Honest’ platform had also announced launching of ‘Faceless Appeals’ from 25 September 2020.

Under the Faceless Appeals Scheme, the physical interaction between the appellant and the tax department will no longer operate. The scheme is applicable in respect of appeals filed before Commissioner of Income-tax (Appeals) [‘CIT(A)’] under the Act.

Welcome to the new Faceless Appeals regime under income tax appeals! You are poised to witness a new era where everything right from e-allocation of appeal to e-communication of notice, questionnaire, verification, enquiry as well as the final appellate order, the entire process of appeals will be an online affair. Moreover, the authentication of the electronic communication will be under Digital signature. This automation effort reminds me about the quote of Peter Sondergaard.

“Information is the oil of the 21st century, and analytics is the combustion engine.” – Peter Sondergaard, Gartner Research

So truly said by Peter Sondergaard ! His statement is no less matched to the Faceless Appeals system which includes allocation of cases through data analytics and artificial intelligence under the auto jurisdiction with central issuance of notices which would be having Document Identification Number (DIN). This is adequately fuelled by the pool of information in the tax department’s database. 

The new system of faceless appeals, as in case of faceless assessments, shifts cases from territorial jurisdiction to auto allocation with a tax officer anywhere in the country. Hence, the entire process of appeals will be online, eliminating the need for any physical interface between the appellant or their authorised representatives and the Department. 

In this article, we will try to understand the entire process of ‘Faceless Appeals’ scheme introduced recently. 

Having said that, let us now understand the procedure followed until now and how the new scheme would operate and make a difference. Under the Act, once the tax return of income is filed, the tax return may get selected for detailed scrutiny assessment proceedings depending on the criteria for the year. After completion of assessment proceedings, the assessment order is passed by the tax officer. If the adjustment done to income or loss in the assessment orders is not acceptable to the taxpayer, then the appeal against the assessment orders can be filed before the CIT(A). The appeal should ordinarily be presented before the CIT(A) within 30 days of the payment of the tax deducted under section 195(1), or of service of notice of demand, relating to the assessment or penalty objected to or intimation of the order appealed against. 

The filing of appeals before CIT(A) was enabled in an electronic mode from 1 March 2016. However, the complete process was not digitized. A taxpayer can file an appeal through his registered account on the e-filing portal and attend the hearing in person once the hearing is scheduled. Hence, the subsequent process was neither electronic nor faceless. 

Therefore, the Finance Act, 2020 has introduced an e-appeal scheme empowering the Central Government to make a Scheme for the purposes of disposal of an appeal by CIT(A). The procedure for disposal of the appeals is being changed under the Faceless Appeal Scheme from 25 September 2020.

Faceless Appeals Scheme

The move towards Faceless Appeals was introduced by amending section 250 of the Act by introducing sub-clause 6B and 6C to section 250. 

Key features of the Scheme

Ecosystem of Faceless Appeals 

The Faceless Appeals Scheme, 2020 will be operated through the Faceless Appeal Centres. The Central Board of Direct Taxes (‘the CBDT’), vide notification No. 80/2020 and 81/2020 dated 25 September 2020 has specified the Income-tax authorities of the National Faceless Appeal Centre and Regional Faceless Appeal Centre and has directed them to exercise their powers and perform functions in order to facilitate the conduct of the Faceless appeal proceedings.

The entire scheme of the Faceless Appeal will be a confluence of National Faceless Appeal Centre, Regional Faceless Appeal Centre/the Appeal units, the National e-Assessment Centre/the tax officer and the Appellant. The National Faceless Appeal Centre will coordinate with other players of the scheme to drive the entire scheme. Hence, it will act as a nodal agency and shall be a single contact point between other players. 

Now, let us understand the role of each main agencies involved as under:

National Faceless Appeal Centre (NFAC) 

The NFAC shall be a nodal agency and act as an interface between National e-Assessment Centre (NeAC) or the Assessing Officer (AO), the appellant or any other person and the Appeal Units (AU). The NFAC shall act as a central authority and it shall be conferred with the powers to enable the e-appeal proceedings and dispose of the appeal. Accordingly, entire communications shall be only through the NFAC with the AU by the appellant or the NeAC/Assessing Officer. The NFAC shall inform to the appellant about the admission or rejection of an appeal. The appellant or the authorised representative can communicate electronically through e-mails or other specified electronic modes with the NFAC.

Under the scheme, the appellant can file an e-appeal through his registered account. Hence, the tax appeals proceedings will be through an ‘e-appeal’ facility under the registered account of the appellant in a designated web portal for e-appeals. The submissions can be filed through the registered accounts of the parties.

Regional Faceless Appeal Centre (RFAC)

The RFAC will facilitate the conduct of e-appeal proceedings and shall be vested with the jurisdiction to dispose of the appeal as per the provisions of the scheme. The four regional centres are in New Delhi, Mumbai, Chennai and Kolkata.

Appeal unit (AU) 

Under the scheme, the NFAC shall be assigning the appeals to the appeal units. Accordingly, an automated allocation system using artificial intelligence and other suitable technology will facilitate random allocation of cases. However, all the communications between the AU and the parties to an appeal shall be facilitated through the NFAC. The regional Commissioners of Income Tax (Appeal unit) will act as an AU. In each region, Appeal units will conduct the e-appeal proceedings and perform the function of disposing of appeal, which includes:

• Additional grounds of appeal admission.
• Making further inquiry or directing NeAC or AO to make further inquiry.
• Seeking information / clarification on admitted grounds of appeal.
• Providing an opportunity of being heard to the Appellant, Analysis of material furnished by appellant. 
• Review of draft order and other functions as may be required.

An automated examination tool will facilitate examination of draft orders using technology. Hence, the use of artificial intelligence will eliminate discretion in the examination and selection of cases.

Broadly, the scheme provides procedures for the following proceedings: 

Appeal 

1. Appellate Proceedings
2. Assignment of Appeal

Through an automated allocation system, the NFAC will assign the appeal to a specific AU, in any one of the RFAC. Hence, without any human interference the appeal will be allocated to AU.   

Admission/ Rejection of Appeal

If there is a sufficient cause, there may be a delay in filing the appeal by the Appellant beyond the time limit of 30 days. In such cases, the AU if satisfied shall condone the delay in filing the appeal or reject the same. Further, in case the appellant has not filed return of income, the AU if satisfied may admit the appeal by waiving the requirement of payment of advance tax, or reject the same.

The AU would intimate the admission or rejection of the appeal to the NFAC and the NFAC would intimate the same to the Appellant. 

Conduct of Appeal, once admitted 

Once the appeal is admitted, the AU may request NFAC to: 

• Obtain such information or evidence or document from the Appellant or any other person as it may specify.
• Obtain a report from the NeAC or the AO, as the case may be, on grounds of appeal or information or document or evidence filed by the appellant.
• Direct the NeAC /AO, as the case may be, for making further enquiry and submit a report thereof.

Service of notice

The NFAC shall serve a notice on the Appellant or any other person or the NeAC /AO to submit information, document or evidence or report as required by the AU. The information, document, evidence, or report shall be submitted within the specified time. 

Response to Notice

The Appellant or any other person shall file a response against the notice received. The NeAC /AO shall furnish a report in response to the notice within the specified time or extended time as may be allowed based on an application made to the NFAC. 

The NFAC shall forward the response/report of the appellant or any other person or NeAC or Assessing Officer to AU. However, where no response / report, as the case may be, is filed / received, then the NFAC shall inform the AU about the same.

Enhancement of assessment/ penalty/ reduce the amount of refund

If the AU wants to enhance assessment or reduce the amount of refund then it shall prepare a show-cause notice containing the reasons for such proposed action and send such notice to the NFAC. The NFAC accordingly shall serve the show-cause notice on the Appellant.

The Appellant shall, within the specified or extended time, file his response to the NFAC. The NFAC shall send the Appellants’ response to the AU. In case response is not received, the NFAC shall inform about the same to AU.

AU to prepare Draft Order 

The AU shall prepare a draft order and send it to the NFAC along with the details of penalty proceedings, if any to be initiated in the Order. While preparing a draft order, the AU shall take into account all material available on record as well as all matter arising during the appellate proceedings. 

NFAC’s action upon receipt of Draft Order 

If the aggregate amount of tax, penalty, interest or fee, including surcharge and cess, payable in respect of issues disputed in appeal, is more than an amount to be specified, the draft order shall be eligible for review. The NFAC sent the draft order through an automated allocation system to a new AU i.e. other than the AU, which prepared such order, for conducting review of draft order. 

However, in any other case, the draft order shall be examined on risk management strategy specified by the CBDT. The NFAC may decide to either finalize the appeal as per the draft order or send the draft order to a new AU based on the above discussion. 

Way forward after review of draft order by new AU:

• If the new AU agrees with the draft order, it shall intimate it to the NFAC. The NFAC shall finalize the appeal as per the draft order. The NFAC after finalizing the appeal or on receipt of the revised draft order will pass the appeal order and communicate it to the Appellant, Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and the NeAC or the AO. 
• If the new AU suggests variation to the draft order, it shall send the suggestion to the NFAC. The NFAC through an automated allocation system shall assign the appeal to an AU (other than the AU, which prepared or reviewed the draft order). 
• After considering the suggestion for variation, the AU shall prepare the revised draft order as mentioned in the earlier points and send the same to NFAC.
• The NFAC after finalizing the appeal or on receipt of the revised draft order will pass the appeal order and communicate it to the Appellant, Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and the NeAC or the AO. 

Process for admission of Additional Ground before the NFAC

• The Appellant may file additional ground of appeal to NFAC which was not specified in the ground of appeal filed earlier in a specified form before the NFAC.
• The NFAC shall send the additional ground of appeal to NeAC /AO and AU.
• The NeAC / AO shall furnish their comments to the NFAC. 
• The NFAC shall send the comments of the NeAC / AO to the AU. 
• The AU may admit or reject the additional ground after taking into consideration the comments received. 
• The NFAC shall intimate the admission or rejection of the additional ground to the Appellant. 

Process for admission of Additional Evidence before the NFAC

• Filing and validity of the additional evidence is governed by Rule 46A(1) of the Income Tax Rules, 1962. The Appellant may file an additional evidence in the form to be specified by the NFAC. The Appellant shall specify how his case is covered by the exceptional circumstances under Rule 46A(1).
• The NFAC shall send the additional evidence to NeAC / AO for furnishing a report. The NeAC /AO shall furnish the report to the NFAC, which shall in turn be sent to the AU.
• The AU, before taking into account the additional evidence shall provide an opportunity to the NeAC /AO to examine such evidence or to cross-examine witnesses produced by the Appellant or to produce any evidence or document or any witness in rebuttal. Accordingly, the NFAC shall serve a notice to the NeAC /AO.
• The NeAC /AO may request the NFAC to direct the production of any document or evidence by the Appellant, or the examination of any witness. The NeAC /AO shall furnish the report to the NFAC based on the examination and the NFAC shall send the report to the AU.
• Accordingly, the NFAC will serve a notice prepared by AU to the Appellant and send the Appellant’s response to the AU.
• The AU after considering the additional evidence and the report, if any, furnished by NeAC /AO admit or reject additional evidence, for reasons to be recorded in writing, and intimate the NFAC. 
• The NFAC shall intimate the admission or rejection of the additional ground to the Appellant.

No personal appearance in Centre / Units

• Under the scheme, in connection with any proceedings, a person shall not be required to appear either personally or through any Authorized Representative before the income-tax authority.
• The Appellant or his Authorised Representative may request personal hearing to make oral submissions or present his case before the AU under the Scheme.
• Acceptance of Appellant’s request for personal hearing will be at the discretion of the Chief Commissioner or Director General in charge of RFAC. 
• Under the scheme, hearing shall be conducted entirely through video conferencing or video telephony and any other telecommunication application software, which will support the said system.
• Under the scheme, the Commissioner (Appeals) in any AU shall conduct any examination or recording of the statement of the Appellant or any other person using the above mentioned communication system.
• In order to ensure that the appellant or his Authorized Representatives or any other person gets complete benefit of the Scheme, the CBDT will establish suitable facilities of the above mentioned communication system at such locations as may be necessary.

Penalty Proceedings

• In respect of non-compliance of any notice, direction or order issued under the Scheme, the AU may recommend the NFAC for initiation of penalty proceedings.
• The NFAC on receipt of the recommendation shall serve a show-cause notice as to why the penalty should not be imposed.
• The Appellant or any other person, as the case may be, shall file his response to the show-cause notice within the specified or extended (allowed based on an application made to the NFAC) date and time.
• The NFAC shall assign the recommendation for initiation of penalty proceedings, along with the response filed by the Appellant to a specific AU in any one RFAC, through an automated allocation system.
• After considering the relevant material available on the record, the AU may either make a draft order and forward to the NFAC or intimate it about dropping the penalty proceedings. 
•  In case the AU has dropped the penalty, the NFAC shall send an intimation thereof or where the appeal unit sends a draft order, the NFAC shall pass the order for imposition of penalty as per such draft order, and communicate such order to the Appellant and the NeAC / AO for such action as may be required under the Act.

Rectification Proceedings

• An application for rectification can be made to the NFAC by:

• • • Appellant or any other person, as the case may be; or 
    • AU preparing or reviewing or revising the draft order; or
    • NeAC or the AO, as the case may be.

• On receipt of a rectification application, the NFAC shall assign it to a specific AU, in any one of RFAC, through an automated allocation system. The AU shall prepare a notice and send the same to NFAC.
• The NFAC shall serve the notice on the relevant person to show cause as to why rectification of mistake should not be carried out. The relevant person shall file a response to the notice. The NFAC shall send the said response to the AU. In case a response is not received, then the NFAC shall inform about the same to the AU.
• The AU shall, after taking into consideration the application and response filed by the relevant person, prepare a draft order for either rectification of mistake or for rejection of application for rectification, citing reasons thereof. The AU shall send the order to NFAC. 
• The NFAC shall pass an order as per the draft order received from the AU, and communicate it to the Appellant and the NeAC /AO, for such action as may be required under the Act. 

The authentication of records submitted with the NFAC can be done either through digital signature or through electronic verification code. On completion of the proceedings, an electronic copy of the order will be provided by the NFAC by affixing a digital signature. Accordingly, a copy of order will be sent on the e-mail id of the parties to the appeal with a real-time alert. Such an order passed by NFAC can be appealed before the Income Tax Appellate Tribunal (the ITAT).

Exceptions: As per the Press release dated 25 September 2020 issued by the CBDT, the Scheme will not apply to the following cases –

• Search and seizure, major tax frauds/evasion 
• Cases of International Tax Division, and
• Cases under the Black Money Act.

In a fresh development, it is revealed that the Faceless Appeal Scheme has become embroiled in a controversy. Recently, a Writ Petition has been filed before the Delhi High Court in Lakshya Budhiraja v. UOI W.P.(C) 8044/2020 against the provision of discretionary power of hearing in the scheme. In the said Writ Petition, the petitioner is seeking a direction that an opportunity of hearing be granted to all taxpayers and this should not be at the discretion of the Chief Commissioner or the Director General as proposed in the Faceless Appeal Scheme. 

Hence, it is contended by the petitioner that in addition to the violation of Article 14 of the Constitution, the right to provide or not to provide a hearing in the matter is also against the principle of audi alteram partem i.e. no person should be judged without a fair hearing in which each party is given an opportunity to respond to the evidence against them. The Delhi High Court by its order dated 16 October 2020 has scheduled the next hearing to 15 December 2020.

There is no doubt that the scheme has a laudable objective to dispense justice at the earliest as there is a pendency of almost 4.6 lakh appeals at the level of the CIT(A). Hence, it is expected that 88% of the total appeal will be handled by this scheme. However, there are certain suggestions to make it a huge success, which would ultimately go a long way in delivering on the Prime Minister’s promise of a ‘Transparent Taxation’ regime.  

Suggestions

1. The proceedings before the CIT(A) is a quasi-judicial proceedings and hence must conform to the rules of natural justice. One of the important principles of natural justice is that a party must have an opportunity of being heard in support of his case and respond to the evidence against them. Accordingly, it is suggested to make provision for the same in the scheme and not just to allow personal hearing in specified circumstances to be notified.
2. A provision already exists in the Act which provides that the CIT(A) may wherever possible, hear and decide the appeal within a period of one year from the end of the financial year in which such appeal has been filed. It is observed in the general experience that currently no such time limit is followed while disposing of the appeal, leading to major delay in some cases. This is generally happening since the language employed is of directory in nature and is not mandatory. Accordingly, it is suggested that NFAC should adhere to the said time limit to pass the order. Else, it is suggested to make specific provision for the same in the scheme itself.
3. At present, if there is delay in filing the appeal before the CIT(A), the appellant has to enter the grounds for condonation of delay with a word limit not exceeding 500 words. It is humbly suggested that provision should be made in the scheme where a detailed submission should be allowed to be made for condonation of delay so that deserving and genuine cases of delay could be condoned. Alternatively, provision for submitting an affidavit may also be allowed to justify the delay in filing the appeal. 
4. As stated above, the CIT(A) shall not admit additional evidence unless he has recorded his reason for admitting subject to the other conditions as well. Further, by and large the CIT(A) has discretionary power to condone the delay for admitting belated appeal as well as power to allow the additional ground of appeal is also subject to his satisfaction. As the entire process of appeal is technology driven, it is suggested to clearly lay down the provision, which would mandate mentioning the reason for rejecting additional grounds of appeal, additional evidence and even the belated appeal for the greater transparency and upholding rule of law.
5. The appellant cannot claim the right to withdraw the appeal at his will. However, the CIT(A) has power to permit the withdrawal of appeal particularly when there is no case for enhancement. It is earnestly suggested that it should not be followed as rule but an exception depending on the factual matrix of the case. Adequate safeguards may be made in the scheme.
6. This is a watershed moment for India, where the appeal system before the CIT(A) is on the brink of automation. Hence, the efforts should be made with the help of data analytics and artificial intelligence to refine the cases where there are small demands. Accordingly, the small litigant gets the early disposal of the appeal and the fruits of automation reach to masses at the earliest as a welfare state measure.

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