AO Lacks Jurisdiction To Pass Draft Assessment Order In Absence Of " Any Variation In Income Or Loss ": Delhi High Court

The Delhi High Court has held that the AO, under Section 144C of the Income Tax Act, would have no jurisdiction to pass a draft assessment order in the absence of "any variation in the income or loss returned," which is prejudicial to the interest of the assessee.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that Section 144C of the Income Tax Act as it stood prior to the amendments would have empowered the AO to frame a draft assessment order only if a variation in the income returned was suggested.

The respondent/assessee submitted a Return of Income on November 26, 2014, declaring its income for the year to be Rs. 26,62,42,773. The return was selected for scrutiny and assessment, and notices under Section 143(2) came to be issued. In the course of the assessment proceedings, the AO took notice of an international transaction between the assessee and its associate enterprises, which led to the matter being referred to the Transfer Pricing Officer. The arm's length price was thereafter determined by the TPO. However, no adverse inference was drawn.

The AO proceeded to frame a draft assessment order. The AO formed an opinion that the income as shown was liable to be taxed at the rate of 20% as per the provisions of Section 115A. The AO appears to have rejected the stand of the assessee, who had claimed benefits under Article 11 of the India-Cyprus DTAA. The assessee chose not to file any objections before the DRP against the order. A Final Assessment Order came to be framed on February 9, 2018, in which, while the total income as declared by the assessee remained untouched, it was subjected to tax at the rate of 20%.

The assessee assailed the Final Assessment Order by way of an appeal before the CIT (A), which came to be allowed with the appellate authority taking the view that the assessee would be entitled to claim the benefits of Article 11 of the DTAA.

The appellants or department preferred an appeal before the ITAT. In that appeal, the assessee also filed cross objections, principally contending that since the changes as suggested by the AO originally would not impact the income or loss returned, the provisions of Section 144C of the Finance Act, 2020, would not be attracted, and the AO would have no authority or jurisdiction to frame a draft assessment order in terms of that provision. It is this objection that has ultimately come to be accepted by the ITAT in terms of the order.

The ITAT has noticed that the assessee was an eligible assessee in terms of Section 144C(15)(b)(ii). It, however, took note of Section 144C as it stood at the relevant time and prior to the amendments that came to be introduced by virtue of the Finance Act, 2020, w.e.f. April 1, 2020. The provision as it stands presently uses the expression “any variation which is prejudicial to the interest of such assessee." However, prior to the provision being recast by the Finance Act, 2020, the aforenoted provision employed the phrase “any variation in the income or loss returned." It is thus manifest that it was only a “variation” that would impact the “income or loss returned” that Section 144C(1) would have attracted. The ITAT noticed that there was no variation in the income returned. The only point of dispute was with respect to whether the assessee was entitled to claim the benefits under Article 11 of the DTAA.

The court found no error in the view as expressed by the ITAT.

The court noted that the appeals thus raise no substantial question of law and shall consequently stand dismissed.

Counsel For Appellant: Ruchir Bhatia

Counsel For Respondent: Piyush Kaushik

Case Title: The Commissioner Of Income Tax - International Taxation Versus S.A.Chitra Ventures Ltd.

Citation: 2024 LiveLaw (Del) 211

Case No.: ITA 606/2023

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