Non-Adherence To Mandatory Requirement Of Passing Draft Assessment Order Invalidates Final Assessment Order: Delhi High Court
The Delhi High Court has held that non-adherence to the mandatory requirement of passing a draft assessment order invalidates the final assessment order.The Bench of Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula have observed that the omission to pass a draft assessment order is not merely a procedural oversight but a substantive lapse, which renders the subsequent order...
The Delhi High Court has held that non-adherence to the mandatory requirement of passing a draft assessment order invalidates the final assessment order.
The Bench of Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula have observed that the omission to pass a draft assessment order is not merely a procedural oversight but a substantive lapse, which renders the subsequent order devoid of jurisdiction.
The petitioner/assessee company, incorporated under the legal framework of Singapore, is primarily engaged in the business of operating ships. It is a tax resident of Singapore, and thus, it filed its return of income in India, declaring its total income as nil.
The return of income filed by the petitioner was selected for scrutiny under Section 143(2) of the Income Tax Act, and a notice requiring the petitioner to furnish certain details, such as the nature of business activities, a tax residency certificate, a copy of agreements with Indian customers, financial statements, details of permanent establishments in India, etc., was issued.
The petitioner responded to the above queries, asserting that it does not have a permanent establishment in India. A tax residency certificate was also submitted with the response.
The petitioner stated that its income fell within the purview of Article 8 of the India-Singapore Double Taxation Avoidance Agreement (DTAA). Thus, it is taxable only in Singapore. The return was filed, declaring income in India as nil. In addition, the department was informed of a time charter agreement executed between the petitioner and Hindustan Petroleum Corporation Limited for the transportation of LPG.
The department passed an assessment order under Section 143(3) granting the benefit of Article 8 of the DTAA to the petitioner.
In exercise of their power under Section 263, after reviewing the material furnished by the petitioner, the CIT held that the assessment order passed by the respondent was not only flawed but also detrimental to the department's interests. The CIT remanded the matter back to the respondent with instructions to revise the assessment order and tax the income received by the petitioner as per the provisions of the Income Tax Act.
The CIT overruled the earlier assessment order by which the petitioner’s claim to benefits under the DTAA was negated and its income was assessed to tax under the Act.
Section 144C(1) of the Income Tax Act mandates the AO to first issue a draft assessment order to an “eligible assessee”, as defined in Section 144C(15)(b). However, the respondent has bypassed this statutory assessment order under Section 143(3), granting the benefit of Article 8 of the DTAA to the petitioner.
The court noted that as the petitioner is a foreign entity incorporated under the laws of Singapore, it qualifies as an ‘eligible assessee’. The respondent ought to have issued a draft assessment order before passing a prejudicial order, in compliance with Section 144C(1).
The court held that failure by the respondent to adhere to the mandatory requirement of Section 144C(1) and pass a draft assessment order would result in invalidation of the final assessment order and the consequent demand notice and penalty proceedings.
Counsel For Petitioner: Ashish Mehta
Counsel For Respondent: Aseem Chawla
Case Title: Sinogas Management Pte Ltd Versus DCIT
Citation: 2023 LiveLaw (Del) 996
Case No.: W.P.(C) 1879/2023