2018 (3) TMI 1188 - AT - Income Tax

Validity of assessment u/s 143(3) r.w.s. 144C - No draft assessment order but final assessment order passed - draft assessment order passed by AO wherein the demand notice was issued along with notice for initiation of penalty proceedings is in fact assessment order passed by the Assessing Officer determining the demand payable - initiation of penalty proceedings u/s 271(1)(c) - Held that - The issue arising before us is identical to the issue before Tribunal in DCIT Vs. M/s. Rehau Polymers Pvt. Ltd. (2017 (8) TMI 1294 - ITAT PUNE ). Hence, the draft assessment order passed by the Assessing Officer was complete assessment order which is not envisaged under section 143(3) r.w.s. 144C of the Act. Accordingly, we hold that the draft assessment order passed in the case is invalid in law. - Decided in favour of assessee.

Issues Involved:
1. Validity of the assessment order issued without following the procedure laid down in section 144C of the Income-tax Act, 1961.
2. Issuance of demand notice under section 156 and notice under section 274 read with section 271(1)(c) along with the draft assessment order.
3. Merits of the addition proposed by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Validity of the Assessment Order:
The primary issue raised by the assessee was the validity of the assessment order issued by the Assessing Officer (AO) without adhering to the mandatory procedure outlined in section 144C of the Income-tax Act, 1961. The assessee contended that the assessment order should be declared null and void as it did not follow the statutory provisions. The Tribunal noted that the AO had issued a draft assessment order along with a demand notice and initiated penalty proceedings, which is not in line with the procedure mandated by section 144C. The Tribunal referenced similar cases, including DCIT Vs. M/s. Rehau Polymers Pvt. Ltd., where it was held that non-compliance with section 144C renders the proceedings null and void. The Tribunal concluded that the draft assessment order in this case was indeed a final assessment order, which is not permissible under the Act, thereby invalidating the assessment order.

2. Issuance of Demand Notice and Penalty Proceedings:
The assessee argued that the AO erred by issuing a demand notice under section 156 and a notice under section 274 read with section 271(1)(c) along with the draft assessment order. The Tribunal observed that the issuance of a demand notice and initiation of penalty proceedings along with the draft assessment order indicated that the AO had finalized the assessment, contrary to the provisions of section 144C. The Tribunal cited precedents, including the case of Vijay Television, where it was held that such actions by the AO are contrary to the mandatory procedures and render the assessment order invalid. The Tribunal reiterated that the AO must first issue a draft assessment order proposing any variations and allow the assessee to file objections before finalizing the assessment.

3. Merits of the Addition Proposed by the TPO:
The Tribunal did not address the merits of the addition proposed by the TPO, as the preliminary issue regarding the validity of the assessment order was decided in favor of the assessee. The Tribunal emphasized that since the jurisdictional issue was resolved in favor of the assessee, the other grounds of appeal related to the merits of the addition became academic and were dismissed.

Conclusion:
The Tribunal held that the assessment order issued by the AO was invalid due to non-compliance with the mandatory procedure outlined in section 144C of the Income-tax Act, 1961. The issuance of a demand notice and initiation of penalty proceedings along with the draft assessment order further invalidated the proceedings. Consequently, the appeal of the assessee was allowed, and the assessment order was set aside. The Tribunal did not address the merits of the addition proposed by the TPO, as the jurisdictional issue was resolved in favor of the assessee.

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