The Constitutional Infirmity of Section 148A(d)'s E-Verification Carve-Out

[Anushika Peer is a third year law student at Rajiv Gandhi National University of Law, Punjab]

Introduction

Prior to the insertion of Section 148A of the Income Tax Act, 1961, the court had laid down certain procedural requirements in the case of GKN Driveshafts v. ITO, mandating furnishing of reasons for reopening an assessment, inviting objections, and disposing of them by a speaking order before proceeding further. During the period of 1st April- 30th April, 2021, the department issued around 90,000 reassessment orders itself, which were the subject matter of 9,000 writ petitions pending before various High Courts. This led to the Finance Act, 2021, converting this judicially mandated courtesy into a codified, four-stage sequential prerequisite under Section 148A, which includes an enquiry, a show-cause notice, consideration of the assessee’s reply, and a reasoned order u/s 148A(d). The structure is not incidental but rather a statutory embodiment of audi alteram partem. It was introduced with an intent to curtail arbitrary tax reopening cases and reduce litigation.

Built into this same provision is a carve-out that removes the entire structure in one specific circumstance where the Assessing Officer’s (AO) information arrives through the E-Verification Scheme, 2021, framed under Section 135A. The prerequisites for issuance of a reassessment notice do not apply in the case of information retrieved through the E-verification scheme. What invites scrutiny is that the ideal principle remains unfulfilled; the more opaque the system’s source is, the higher the transparency is required. Same can be inferred by the need for the insertion of Section 148A to substitute the “reasons to believe” with “information suggesting escapement of income” with respect to faceless collection of information under Section 135A. None of the Central Board of Direct Taxes (CBDT)’s notified schemes’ algorithmic criteria, thresholds, operational mechanisms, or data inputs are available in the public domain. Under clause 4(9) of the E-verification, the information goes through a systematic filtration starting from the Preliminary Verification Report (PVR) to the Final Verification Report (FVR) and computation of the Value at Risk (VaR) metric. However, the procedure is completely algorithmically automated. The Bombay High Court in Benaifer Vispi Patel recognised that information routed through section 135A “cannot be seen to be free from defects or errors”.

GKN Driveshafts did not merely require reasons to believe to be supplied; it required that the assessee must be given a genuine opportunity to demonstrate that the material relied upon does not in fact suggest escapement of income. The AO reopening a completed assessment is not adjudicating between two informed parties on equal footing. Pre-notice participation is the only point in the timeline at which the asymmetrical and disembodied information can be corrected before the assessee is drawn into the reassessment machinery.  The Supreme Court in the case of Union of India v Ashish Agarwal reinforced this jurisdictional safeguard by treating the notices issued pre-2021 as show-cause notices (SCN) under section 148A(b) during its transitional phase. The SCN forms one of the mandatory steps added through amendment and must include the material upon which the AO has relied, and the assessee is thereby provided with an opportunity to furnish the reply to the same within a given period of time.

The transition in law from “reasons to believe” to “information suggesting escapement of income” was to reduce the subjectivity in law on the part of the AO. The most important step post random allocation of information to the AO is to form a tangible nexus between the information at hand and the reasons to believe by AO. The same needs to be done with independent application of the mind. Otherwise, it would result in borrowed satisfaction.

The author argues that the carve-out cannot survive scrutiny once the gap it creates in the reassessment structure is tested against the classification and due process standards that the Constitution itself imposes, and outlines the safeguards ought to be attached if it is to survive at all.

The Structural Gap

The information may go through a detailed systematic procedure under the notified scheme, but the legislature overlooked the direct contravention of the fundamental rights, with the exception carved out. A process that not only occurs without the assessee’s knowledge but also deprives the assessee of the right to be heard to justify or provide a rationale behind the material used against him. The research gap is not whether the AO have to be careful with the Section 135A retrieved information. The Courts have already answered the same. The unanswered contention remains whether Parliament could lawfully remove the pre-notice hearing, inclusive of the right to be heard, for this category of information at all, given the category that was created, and continues to be operated, in a manner that supplies no external check on its reliability.

The CBDT’s foundational Verification Report Upload (VRU) directs AOs to identify and upload specified categories of information onto the VRU functionality on the Insight Portal for effective “implementation of risk management strategy”. The Category of information includes information from other government or law enforcement agencies, internal audits, search or survey findings, information from any income tax authority and information arising from court or NCLT orders. Subsequent Directorate of Systems instructions confirm that “high risk CRIU/VRU” cases are identified through board-approved Risk Management Strategy (RMS) cycles and further disseminated to jurisdictional AOs through the Insight Portal’s verification module for action under section 148A first and thereafter section 148. Running in parallel under the same rubric is the E-verification scheme, which uses the identical vocabulary of an RMS, PVR and a FVR but routes its output directly to section 148, bypassing section 148A. The problem that arises is that there is no defined criterion as to which “category of information” is routed through the E-verification scheme or the VRU mechanism. Both draw the same insight portal architecture and the same board-approved risk assessment vocabulary. In many cases, identical information might find its route into either of the channels, raising major concerns of arbitrariness and lack of transparency. Therefore, to bypass a jurisdictional safeguard, all it requires is to process an unspecified category of information through the E-verification scheme.

Constitutional Validity Test

The key distinction to understand is between constitutional permissibility and impermissible opacity. Permissible confidentiality protects sensitive data to safeguard individuals, organisations, or national security. By contrast, impermissible opacity occurs when withholding information causes public harm and injustice. Confidentiality complies with the law, whereas opacity evades it. Article 14 provides the right to equality before the law and equal protection of the law. Anwar Ali Sarkar gave the twin test: intelligible differentia and rational nexus to the object sought to be achieved by the statute that has been reiterated in the Dalmia case. Furthermore, the violation can be proved by the doctrine of arbitrariness given in Shayara Bano. The classification herein fails both the tests. The objective of section 148A is to ensure a fair pre-hearing and a basis to reopen an assessment. The classification of the information itself remains vague due to non-application of strict standards, failing the differentiation on which the rational nexus relies. There exists no rational nexus between the information being received from an undisclosed algorithm and how the assessee should be barred from the right to pre-hearing and justify the material found. Where a certain classification causes consequences which cut against the very meaning of the statute, it thereby fails the second limb of the Dalmia test, i.e., the rational nexus.

Post the Shayara Bano case, the doctrine of manifest arbitrariness is recognised as an independent ground in itself to strike down a constitutionally violative provision under Article 14. A provision is classified as arbitrary if its exercise by the legislature is such that it is “capricious, irrational and/or without adequate determining principles. Also, something which is excessive or disproportionate.” As Bhagwati J precisely said, equality is antithetic to arbitrariness, and they cannot exist together. Proviso (d) of section 148A withdraws procedural protection from the assessee at the very juncture where the department’s system is opaque probable of producing undifferentiated information with different legal consequences. The provision violates the principle of natural justice. The differentiation created is not backed by a well-established framework. There is a substantial difference between the pre-hearing and post-decisional hearing. It would result in unfavourable consequences for the assessee since once a notice under section 148 is issued, a person is pushed into the section 144B machinery and the onus to prove shifts entirely on them. This results in the formation of epistemic asymmetry, thereby depicting a structural imbalance of knowledge wherein the AO has the monopoly over the materials and acts as the conclusive decision-maker.

Furthermore, as established in the case of Maneka Gandhi, a procedure must be fair, just and reasonable. It should be based on due process of law rather than procedure established by law. An analogy can be drawn in parallel to the other exceptions carved out for section 148A. Search and requisition are themselves judicially supervised, warrant-based processes along with statutory safeguards which are independent of section 148A itself. Consequently, the exclusion herein substitutes one of the independent safeguards and not in its entirety. However, section 135A provides no comparable standard safeguards. Undoubtedly, under the E-verification process, a digital alert in the form of SMS/ portal alerts is sent to the assessee to reply prior to formation of the PVR, but the same cannot be taken as a deemed right to be heard. An electronic alert cannot be seen as equivalent to a formal show-cause notice. However, the 135A(a) provision is not under challenge since faceless verification promotes a medium of transparency. The contention is to attack the legal consequence attached to the scheme's output, not the scheme's architecture itself.

The assumption that a person regularly logs into their compliance portal is flawed. There's a high possibility of technological exclusion in the form of glitches, network routing posing a problem in delivery of an email, a changed number or the alert landing in a spam bin. Essentially, PVR is manually checked, and formation of a live link between the information retrieved from the system and the independent application of mind by the AO is mandatory. However, such safeguards aren’t adequate considering the amount of subjectivity it reflects. There are many cases where there has been application of a mechanical mind on the part of the AO. They often treat the FVR as final proof of tax evasion. There exists no judicial or quasi-judicial oversight attached to the generation of a PVR or FVR.

It is pertinent to note what has, and has not, yet been argued before the courts. In the case of Benaifir Vispi Patel, the constitutional validity of clause (d) was challenged before the Bombay High Court, but the court refrained from delving into this very specific contention, keeping the question open. The most recent development has been seen in the case of GM Polyplast Ltd v ACIT, where a writ petition has been filed to challenge the constitutional validity of clause (c) of section 148A and clause (iv) of explanation 2 to section 148 under Article 14 on the grounds of unreasonableness and arbitrariness. The petition demonstrates that courts are now prepared to entertain an Article 14 challenge to a section 148A proviso clause. Same parallel can be drawn with the SyRI European case, where the Dutch government declared the algorithmic tool ‘SyRI’ made to analyse citizen data for tax fraud unconstitutional on the grounds of violation of the right to privacy.

Conclusion

The contention developed here does not require the courts to hold that natural justice can never be excluded by a statute. The principles of natural justice are subject to modification or exclusion by statutory provisions. Clauses (a) and (b) of the proviso to section 148A settle that proposition and demonstrate that some exclusions are defensible. In arguendo, if the courts or the legislature declines to scrap the exception outright, then it calls for certain reasonable safeguards. Firstly, furnishing reasons that are self-explanatory in nature, which are often not appropriately presented in many instances. Additionally, not only the reasons but also the material information on which the FVR and PVR relied is to be disclosed to the assessee. Thirdly, the CBDT should publish strict criteria suggesting bifurcation of the information which ought to be channelised between the VRU and E-verification channels. Essentially, these measures can be seen as subject to strict fallback and not as a substitute for the primary submissions.