2018 (3) TMI 1196 - AT - Income Tax

Validity of assessment u/s 143(3) r.w.s. 144C - Final assessment order without issuing draft assessment order under section 144C - draft assessment order passed in the case along with issue of demand notice - reference was made to the Transfer Pricing Officer (TPO) under section 92CA(1) - Held that - The requirement of the Act is that in the draft assessment order proposed, additions are to be made and show cause notice is to be issued to the assessee either accepting the same or file objections before the DRP. However, in the facts of the present case, there was no proposal for making addition but the final assessment order was passed though the Assessing Officer calls it a draft assessment order and also observed that the assessee was at liberty to file objections before the DRP or accept the same, but along with the said order, he also issued demand notice and also initiated penalty proceedings. 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) and assessee s own case. 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. In view of our deciding the jurisdictional issue in favour of assessee

Summary

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 and penalty notice along with the draft assessment order.

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 under Section 144C of the Income-tax Act, 1961. The assessee contended that the AO erred in passing the impugned order, which was not in accordance with the statutory provisions and thus void and of no legal effect.

The Tribunal examined the procedure mandated under Section 144C, which requires the AO to issue a draft assessment order proposing any variations to the returned income or loss, allowing the assessee to file objections before the Dispute Resolution Panel (DRP). In the present case, the AO issued a draft assessment order but also issued a demand notice and initiated penalty proceedings, effectively making it a final assessment order. This action was contrary to the provisions of Section 144C, which necessitates the issuance of a draft order without crystallizing the demand.

2. Issuance of Demand Notice and Penalty Notice:
The Tribunal noted that the AO issued a demand notice under Section 156 and initiated penalty proceedings under Sections 271(1)(c) and 271C(1)(a) along with the draft assessment order. This was found to be inappropriate as the demand should not be crystallized in a draft assessment order. The Tribunal referenced similar cases, including DCIT Vs. M/s. Rehau Polymers Pvt. Ltd., where it was held that issuing a demand notice and initiating penalty proceedings along with a draft assessment order renders the proceedings invalid.

The Tribunal also cited several judicial precedents, including decisions from the Hon’ble High Courts of Madras, Andhra Pradesh, and Bombay, which consistently held that non-compliance with Section 144C by issuing a final assessment order without a proper draft order renders the assessment proceedings null and void. For instance, in the case of Vijay Television, it was held that the AO's action of issuing a corrigendum to treat a final assessment order as a draft order was contrary to the mandatory provisions of the Act and could not cure the defect.

The Tribunal concluded that the AO's failure to follow the correct procedure under Section 144C invalidated the assessment order. Consequently, the additional grounds of appeal raised by the assessee were allowed, and the assessment order was set aside.

Conclusion:
The Tribunal held that the assessment order passed by the AO was invalid due to non-compliance with the mandatory procedure under 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 was found to be improper, rendering the assessment proceedings null and void. The appeal of the assessee was allowed, and the assessment order was set aside.