The flaws of faceless appeal scheme

 

The flaws of faceless appeal scheme.

FAS has been introduced in September 2020, by the government to  eliminate the  face to face contact between the taxpayer and tax department and to run government administration with the help of technology. The new FAS is a digital communication process between NFAC, RFAC & AU.   The relevant provisions dealing with the appeal process are contained in S-249 and S-250 read with  Rules 45, 46 and 46A. Within the framework of these Sections, the FAS seeks to introduce digital authorities to coordinate and deal with the appeal process viz. NFAC, RFAC and the AU. The sum and substance of the FAS is the prescription and description of the communication process between these various digital authorities (including the National e-assessment Centre and the Assessing Officer under the Faceless Assessment Scheme) and the assessee and referring the draft appeal orders - mandatory in case the sum involved exceeds a threshold -initially to a second appeal unit for review and to a third appeal unit in case any variations proposed by the second appeal unit are to be confirmed and thereafter to the assessee, for comments.

The purpose of this white  paper to directly and pointedly deal with the various issues and infirmities inherent in the FAS without getting into a subordinate understanding of the FAS, which the reader is presumed to have before reading this article. Overall, the FAS suffers from several lacunae and it appears that the focus of the CBDT when drafting the FAS is to provide a superficial process without comprehensively first doing their groundwork. This is bound to have serious repercussions considering that there is a pendency of 4.6 lakh appeals at the level of the Commissioner (Appeals) in the Department. Out of this, about 4.05 lakh appeals, i.e., about 88 per cent of the total appeals will be handled under the Faceless Appeal mechanism and almost 85 per cent of the present strength of Commissioners (Appeals) is proposed to be utilised for disposing of the cases under the Faceless Appeal mechanism.

Issues in the Faceless Appeal Scheme (FAS)

 

 

(i)        The term tax officer has been used under the faceless appeal scheme whereas in the faceless assessment scheme there is no reference to tax officer and instead there is an assessment unit supported by other functional units. The concept of the jurisdictional tax officer has been done away with under the faceless assessment scheme, so what is the relevance and identity of the tax officer under the faceless appeal scheme?

 

(ii)       The FAS says that in the case of further appeals arising from orders passed under the FAS, the jurisdictional ITAT is the ITAT having jurisdiction over the tax officer. Whereas correctly, it should be the ITAT having jurisdiction over the assessee, who is bound by the case laws of the judicial authorities having jurisdiction in the state where the assessee is situated;

 

 

 

(iii)      Under the faceless appeal scheme, when the matter is referred to the tax officer for further information or comment, there is no clarity on who is the tax officer who is required to respond, because, under the faceless assessment scheme, there is no mention of a tax officer but only an assessment unit and that too, there is more than one assessment unit involved when a matter is required to be reviewed before passing the draft assessment order;

 

(iv)The High Court of the state where the assessee is located in the jurisdictional High Court to which the assessee is subject. Hence under the faceless appeal the scheme, when the appeal unit decides the appeal of the assessee, the appeal unit should bear in mind the case law decided by the High Court of the state in which the assessee is located and not the case-law of the High Court in which the appeal unit is located. Likewise, there is a provision for referring the draft order of an appealing unit to another appeal unit which may be located in an altogether different state from the original appeal unit (with provision for a third appeal unit to finalise the draft order in case the second appeal unit suggests variations in the draft order passed by the first appeals unit). Here also the second (and third) appeal unit should bear in mind the case-law of the High Court of the state in which the assessee is located. This will make the whole process very complicated because the assessee is located in one state and the two (or three) appeal units may be located in two different states, whose respective High Courts may have passed differing relevant judgements on the issue under appeal;

 

(v)         And when the matter goes in further appeal to the ITAT, the FAS surprisingly provides that the jurisdictional High Court is that of the state where the tax officer is located. So up to the stage of the proceedings under the faceless appeal scheme before the dynamically allotted appeal units, the case law will be that of one High Court (i.e. where the assessee is located) but when the matter goes in further appeal to the tribunal, the case law will be that of another High Court (ie where the tax officer - whoever that is - is located. This is the illogical conclusion that comes out from a reading of the provisions of the faceless appeal scheme!

 

(vi)The appeal unit also has powers under the faceless appeals scheme to initiate penalty proceedings for non-compliance by the assessee or any other person, with any order direction etc. issued by it. Since the authorities under the faceless assessment scheme also have power to levy penalty proceedings for non-compliance with their respective orders and similar powers have been given to the appeal unit to levy penalty proceedings for non-compliance with their orders, this means that each authority (under the faceless assessment scheme and the faceless appeal scheme) is being given powers to levy a penalty for non-compliance with their respective orders. This is going to be extremely burdensome and at times conflicting for the assessee to comply with;

 

(vii)     The faceless assessment scheme and faceless appeal scheme are not integrated to provide a smooth process from the stage of assessment to departmental appeal proceedings. Instead, these two Schemes are like two distinct frameworks which are talking to each other in separate languages eg.

 

 

Ø  The faceless appeal scheme refers to the Assessing Officer (AO) but this term is not defined anywhere either in the faceless appeal or faceless assessment schemes.

Ø  Also, under the Faceless Appeal Scheme, the NFAC can directly communicate with the AO (and vice versa), whereas the identity of the AO is supposed to be known only to the National e-Assessment Centre under the Faceless Assessment Scheme. Hence, it is not clear on what basis or knowledge, the NFAC can directly access the AO. Also under the Faceless Assessment The scheme, all communication with the assessment unit has to happen through the National e-Assessment Centre and not directly with the assessment unit;

Ø  Under the Faceless Assessment Scheme, there is a provision to share the draft assessment order with the assessee, whereas under the Faceless Appeal Scheme, there is no provision to share the draft appeal order with the assessee-appellant.

 

(viii)       The most important lacuna under the faceless appeal scheme (from which the faceless assessment scheme also suffers) is that prior permission has to be obtained from the chief commissioner or director-general in charge of the regional faceless appeal centre in which the appeal unit lies, to make a personal (video) representation to the appeal unit against the draft order. In other words, under the FAS, the right to make a representation is a discretionary benefit whereas the principles of natural justice require that every person has a right to be heard and represent his case before any order is passed against him. This aspect has already been challenged and is pending in the Delhi court in the case of Lakshya Budhiraja v. UOI & Anr. [2020] 120 taxmann.com 385 (Delhi). Likewise, in Cuttack Tax Bar Association v. UOI W.P.(C) No. 33457 of 2020 dated March 09, 2021, the Orissa High Court has admitted a petition challenging various aspects of the FAS and the matter is pending.

  

(ix)There is provision for the draft order, in cases where the amount involved exceeds a threshold (yet to be specified), passed by the appeal unit to be mandatorily reviewed by another appeal unit that would be selected through the computer system algorithm by the National Faceless Appeal Centre. Where the second appeal unit suggests variations in the draft order passed by the first appeal unit, the variations suggested will be referred to a third appeal unit (also to be selected through the computer system algorithm) to finalise the matter. Under the FAS, the several appeal units are peer authorities, with no difference inexperience. In such a case, what is the relevance or sanctity of this review process? A technically sound order is as much likely to be reviewed and revised as a technically bad order, based on the judicial orientation of the appellate officers in the appeal unit.

 

(x)       Under the FAS, the NFAC has a very limited role and authority and is confined to mainly acting as a traffic controller and coordinator for communications between the assessee, appeal unit and the national e-assessment centre/assessing officer and granting an extension of time for receiving any documents/applications from any of them. It has no power to review draft orders that appear to it contrary/conflicting to established law or earlier orders since orders above a particular threshold are to be automatically referred for review to another appeal unit and orders below the threshold are either to be referred based on the computer system risk assessment algorithm or confirmed. Hence, the scope to ensure uniformity and consistency between draft orders passed on similar issues by the various appeal units under different RFCs has not been dealt with in the FAS. While under the Faceless Assessment Scheme, the National e-assessment Centre is given a larger role, under the Faceless Appeal Scheme, the role of the NFAC is marginalised.

 

Before the advent of the faceless schemes, the provisions in the IT act relating to assessment and appeal had a limitation since they were person-dependent which consequently permitted officers to exercise personal patronage to assessees who were willing to gratify to obtain beneficial orders. The faceless schemes have sought to overcome this shortcoming and eliminate corruption by introducing digitized and impersonal assessment and appeal mechanisms. However, these solutions are not comprehensive and have instead replaced one set of problems with another set of problems. Much more work has to be done on the faceless appeal scheme to make it effective and sustainable.