In a significant judgment, the Gujarat High Court has ruled that an Assessing Officer (AO) cannot pass a best judgment assessment under Section 144 of the Income Tax Act without assigning proper reasons for rejecting an assessee’s detailed response. Failure to do so amounts to a violation of the principles of natural justice, rendering the assessment order legally untenable.
Background of the Case
The assessee, a proprietor engaged in the manufacturing and trading of copper and aluminium scrap, had filed his income tax return declaring business income under the head “Income from Business and Profession.” The return was selected for scrutiny, and a notice under Section 143(2) was issued by the Assessing Officer.
During the course of assessment proceedings, the AO issued a show cause notice proposing several additions to the assessee’s declared income. In response, the assessee submitted a voluminous and detailed reply, raising multiple objections against the proposed additions.
However, despite receiving the comprehensive reply, the AO proceeded to complete the assessment under Section 144 — without assigning any specific reasons for rejecting the assessee’s submissions.
High Court’s Observations and Ruling
Aggrieved, the assessee filed a writ petition before the Gujarat High Court. The Court made strong observations on the procedural lapses by the Assessing Officer:
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The Court emphasized that the principle of natural justice requires two key elements:
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The concerned party must be given adequate notice and a fair opportunity to respond.
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The authority must provide reasoned orders, clearly demonstrating the application of mind when arriving at a conclusion.
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The Gujarat High Court noted that the AO failed to explain why he was not accepting the assessee’s objections and submissions. Merely passing an order without recording reasons constitutes a violation of natural justice.
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Such procedural impropriety, the Court held, vitiates the entire assessment, making it unsustainable under the law.
Accordingly, the High Court set aside the assessment order passed under Section 144.
Case Details
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Case Name: Shantilal Bhikhabhai Nairya vs. Union of India
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Citation: [2025] 173 taxmann.com 842 (Gujarat)
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Court: Gujarat High Court
Key Takeaway
This ruling reinforces the importance of reasoned orders in income tax assessments. Assessing Officers must demonstrate proper application of mind and cannot arbitrarily reject an assessee’s response, especially when a detailed and voluminous reply is filed. Failure to follow the principles of natural justice will render the assessment order invalid.
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