Final Assessment Order Passed Without Issuing Draft Assessment U/s 144C, Deprives Taxpayer's Statutory Right, And Hence Invalid: Delhi High Court
The Delhi High Court held that a failure to frame an assessment order in draft would clearly be violative of the mandatory prescriptions of Section 144C and the final order of assessment framed in violation thereof liable to be viewed as a nullity.
The High Court therefore clarified that final assessment order passed without passing draft assessment u/s 144C would be untenable.
The Division Bench of Justice Yashwant Varma and Justice Ravinder Dudeja observed that “A failure to frame a draft order of assessment not only curtails the right of the assessee to adopt corrective measures, it also deprives it of a salutary right to challenge the draft in terms of the statutory mechanism laid in place”.
Facts of the case:
All the Assessee's filed their return which was processed u/s 143(1). Later, the TPO in his order u/s 92CA(3), proposed an upward transfer pricing adjustment. The AO thereafter, directly passed the final assessment order u/s 143(3) read with section 144B along with demand notice u/s 156 and penalty notice u/s 274 read with section 270A. This resulted in violation of mandatory provisions of section 144C. On appeal, the ITAT upheld the action of the CIT(A) to set aside the final assessment order passed by the AO without passing a draft assessment order during remand proceedings as mandated u/s 144C. Hence, the Revenue Department approached the High Court assailing the order of the ITAT.
Observations of the High Court:
The Bench stated that Section 144B as it stood, constructed an additional check and an oversight mechanism in respect of variations or additions which were proposed by the AO in a draft order of assessment.
The Bench further stated that the AO was required to forward the record pertaining to a proposed variation or addition along with any objections preferred by the assessee to the Deputy Commissioner and that it was the proposed additions or variations which consequently fell for scrutiny of the Deputy Commissioner in light of the objections preferred by the Assessee.
The Bench expounded that powers of the DRP u/s 144C are not only corrective but extend to a power to enhance or reduce the proposed variation subject to the rider that it is not empowered to set aside a proposed variation.
The Bench observed that the extent of jurisdiction which stands conferred upon the DRP by virtue of subsections (6), (7) and (8) of Section 144C are clearly distinct and different from those conferred upon the Deputy Commissioner under the erstwhile Section 144B.
The power entrusted in DRP cannot be recognised to be one which seamlessly transformed into one which did not envisage a change of forum, added the Bench.
The Bench opined that Section 144C erects a special mechanism of assessment in respect of eligible assessees and that it entails two separate components coming to be merged to form a composite assessment.
Further, Section 144C constitutes a distinct and special assessment mechanism cannot possibly be disputed and is multi-tiered, comprising various in-built corrective and revisory components which work together to forge an ultimate order of assessment recognised under the Act, added the Bench.
The Bench stated that while Explanation to sub-section (8) of Section 144C clarifies that the jurisdiction of the DRP would extend to considering any aspect arising out of the assessment proceedings and the draft order irrespective of whether the assessee chose to raise that issue or not, on the other hand, Deputy Commissioner on the other hand was enabled by Section 144B to merely review the draft order alongside the objections preferred and frame a direction for the guidance of the AO.
At the same time, Section 144A independently empowers the superior authority to intervene and guide ongoing assessments, added the Bench.
The Bench opined that a failure to frame a draft order of assessment not only curtails the right of the assessee to adopt corrective measures, it also deprives it of a salutary right to challenge the draft in terms of the statutory mechanism laid in place.
The Bench held that it was imperative for the AO to frame a draft order as opposed to a final assessment order and that any consequential direction that could be framed would have to be in consonance with the said finding.
At the same time, the Bench clarified that the direction would additionally and necessarily have to be in accordance with the scheme of the Act and the statutory prescriptions comprising therein.
“Once it is conceded that the period for completion of the assessment exercise in terms of subsections (3) and (4) of Section 153 has expired, it would be wholly impermissible for us to expand or enlarge the period prescribed for completion of assessment. Concededly, these are also not cases where the Explanation to Section 153 was asserted to be applicable”, added the Bench.
Thus, the High Court concluded that final assessment order passed without passing draft assessment u/s 144C, as untenable, and allowed Assessee's petition.
Counsel for Appellant/ Revenue: Advocates Aseem Chawla and Ruchir Bhatia
Counsel for Respondent/ Assessee: Senior Advocates Ajay Vohra, Kavita Jha along with Advocates Himanshu Sinha, Salil Kapoor, Vaibhav Kulkarni, Ananya Kapoor, Aditya Vohra, Shashwat Dhamija, Neeraj Jain, Manuj Sabharwal, Prashant Meharchandani, Jainender Singh Kataria, Himanshu Aggarwal, Vishal Kalra, Saumyendra S. Tomar, Ankit Sahni, Snigdha Gautam, Ishita Farsaiya, Sparsh Bhargava, Vanshika Taneja, Apurv Shukla, Tarun Chawla, Sumit Lal Chandani, Utkarsa Kr. Gupta, Amol Sinha, Kshitiz Garg, Sourav Verma, Drona Negi, Ayush Kumar, Nageswar Rao, and Parth
Case Title: Pr. Commissioner of Income Tax vs. Sumitomo Corporation India (P) Ltd
Case Number: ITA 52/2023 & CM APPL. 3673/2023