Facts of the Cas

The Revenue filed an appeal challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 28 September 2021, whereby the ITAT upheld the order of the Commissioner of Income Tax (Appeals) setting aside the final assessment order passed by the Assessing Officer (AO).

The assessment pertained to Assessment Year 2003-04. The ITAT had earlier remanded the matter to the Transfer Pricing Officer (TPO) by order dated 11 June 2014. During the remand proceedings, the AO passed a final assessment order without issuing a draft assessment order as mandated under Section 144C of the Income-tax Act, 1961.

As per the fourth proviso to Section 153(2A), applicable prior to amendment by the Finance Act, 2016, the limitation for passing a valid final assessment order expired on 31 March 2017.

 

Issues Involved

Whether a final assessment order passed without issuing a draft assessment order under Section 144C of the Income-tax Act, 1961 is legally sustainable.

Whether issuance of a draft assessment order under Section 144C is mandatory even during remand proceedings pursuant to directions of the ITAT.

Whether such non-compliance amounts to a jurisdictional defect invalidating the assessment order.

 

Petitioner’s (Revenue’s) Arguments

The Revenue contended that the requirement of issuing a draft assessment order under Section 144C was not applicable in remand proceedings. It was argued that since the remand was limited and arose out of earlier appellate directions, the Assessing Officer was justified in passing the final assessment order directly.

The Revenue further submitted that procedural lapses, if any, should not invalidate the assessment when substantive compliance had otherwise been achieved.

 

Respondent’s (Assessee’s) Arguments

The Assessee argued that it continued to qualify as an “eligible assessee” under Section 144C(15) of the Act even during remand proceedings. Consequently, issuance of a draft assessment order was mandatory before passing a final assessment order.

It was contended that failure to follow the statutory procedure under Section 144C resulted in denial of the Assessee’s substantive right to approach the Dispute Resolution Panel (DRP). Such failure constituted a jurisdictional defect rendering the final assessment order void ab initio.

The Assessee also relied upon settled judicial precedents holding that non-issuance of a draft assessment order is not a curable irregularity.

 

Court Order / Findings

The Delhi High Court dismissed the Revenue’s appeal and upheld the order of the ITAT. The Court held that compliance with Section 144C of the Income-tax Act is mandatory and not procedural in nature.

The Court observed that even in remand proceedings, if the assessee continues to be an eligible assessee, the Assessing Officer is statutorily obligated to issue a draft assessment order before finalising the assessment.

Passing a final assessment order without issuing a draft assessment order amounts to a jurisdictional error and vitiates the entire assessment proceedings. The Court further noted that limitation for passing a valid assessment order had already expired, rendering the assessment unsustainable on that ground as well.

 

Important Clarification

The judgment conclusively clarifies that:

Section 144C applies with full force even in remand proceedings pursuant to ITAT directions.

Non-issuance of a draft assessment order is a substantive illegality and not a procedural lapse.

Such defect cannot be cured by subsequent proceedings or appellate orders.

Limitation provisions under Section 153 continue to operate independently and strictly.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770194623_PR.COMMISSIONEROFINCOMETAX7VsSUMITOMOCORPORATIONINDIAPLTD..pdf

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