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2021 (7) TMI 1208 - HC - Income TaxValidity of assessment order - Transfer pricing - Reference to dispute resolution panel u/s 144C - Assessment Order has been passed without the draft Assessment Order - non providing an opportunity to raise objections before the DRP - whether the provisions contained in Section 144C(1) of the IT Act are mandatory or directory ? - whether there has been a mere procedural error on the part of the AO in passing the final Assessment Order without passing a draft Assessment Order as required under Section 144C(1) of the IT Act or has there been a jurisdictional error which strikes to the root of the entire proceedings. HELD THAT - Assessment Order has been passed without the draft Assessment Order as contemplated under Section 144C (1) of the IT Act - AO ought to have in the first instance forwarded a draft of the proposed order of assessment to Petitioner as there was a proposed variation prejudicial to the interest of the assessee. This important step has been completely omitted by the Respondent taking away a very necessary right of Petitioner to file objections to the proposed variation with the DRP and the Assessing Officer which in our view strikes to the root of the procedure contemplated by Section 144C. Failure on the part of the AO to follow the procedure u/s 144C(1) is not a merely procedural or inadvertent error but a breach of a mandatory provision. We are also not impressed with the arguments of the Revenue that the AO was under pressure of two charges as there were timelines to adhere to since the said timelines from time to time have been extended the most recent one being to 30th September 2021. The Revenue ought to have appreciated that the requirement under Section 144C(1) to first pass a draft Assessment Order and to provide a copy thereof to the assessee is a mandatory requirement which gave substantive right to the assessee to object to any variation that is prejudicial to it. In this case the order under Section 92CA (3) of the IT Act proposed to make an adjustment to the arm s length price considered as Nil by Petitioner and to that extent the said adjustment was evidently prejudicial to the interest of Petitioner. Depriving Petitioner of this valuable right to raise objection before DRP would be denial of substantive rights to the assessee for which in our view the Assessing Officer has no power under the statute as the provision clearly mandates the Assessing Officer to pass and furnish a draft Assessment Order in the first instance in such a case. Failure to follow the procedure under Section 144C(1) would be a jurisdictional error and not merely procedural error or a mere irregularity. The Assessment Order has not been passed in accordance with the provisions of Section 144C of the IT Act. This is not an issue which involves a mistake in the said order but it involves the power of the Assessing Officer to pass the order. By not following the procedure laid down in Section 144C(1) to pass and furnish a draft Assessment Order to Petitioner and directly passing a final Assessment Order and without giving Petitioner an opportunity to raise objections before the DRP there is a complete contravention of Section 144C the Assessing Officer having wrongly assumed jurisdiction to straight away pass the final order. This is not a mere irregularity but an incurable illegality. Even the provisions of Section 292B of the IT Act would not protect such an order as Section 292B of the IT Act cannot be read to confer jurisdiction on the Assessing Officer where none exists.We therefore quash and set aside the impugned Assessment Order Demand Notice and Penalty Notice - WP allowed.
Issues Involved:
1. Whether the provisions of Section 144C(1) of the IT Act are mandatory or directory. 2. Whether the failure to follow the procedure under Section 144C(1) constitutes a jurisdictional error or merely a procedural error. 3. Whether the final Assessment Order passed without a draft Assessment Order is valid. 4. Whether the procedural lapse can be cured under Section 292B of the IT Act. Issue-Wise Detailed Analysis: 1. Whether the provisions of Section 144C(1) of the IT Act are mandatory or directory: The court examined the provisions of Section 144C(1) of the IT Act, which mandates the Assessing Officer to first pass a draft Assessment Order and communicate it to the assessee before finalizing the assessment. The court referred to the Andhra Pradesh High Court's decision in M/s. Zuari Cement Limited, which held that the provisions of Section 144C are mandatory and not directory. The court noted that the Special Leave Petition filed by the Revenue against this decision was dismissed by the Supreme Court, reinforcing the mandatory nature of Section 144C(1). 2. Whether the failure to follow the procedure under Section 144C(1) constitutes a jurisdictional error or merely a procedural error: The court referred to the Gujarat High Court's decision in Commissioner of Income Tax, Vadodara-2 Vs. C-Sam (India) (P.) Limited, which held that the procedure under Section 144C is not merely procedural but gives substantive rights to the assessee. The failure to follow this procedure constitutes a jurisdictional error, not just a procedural lapse. The court also cited the Bombay High Court's decision in International Air Transport Association Vs. Deputy Commissioner of Income Tax, which held that passing a final Assessment Order without a draft Assessment Order is a jurisdictional error. 3. Whether the final Assessment Order passed without a draft Assessment Order is valid: The court found that the final Assessment Order dated 6th April 2021 was passed without first issuing a draft Assessment Order, as required under Section 144C(1). This omission deprived the petitioner of the right to file objections before the Dispute Resolution Panel (DRP), which is a substantive right. The court held that this failure struck at the root of the procedure and rendered the final Assessment Order void ab initio. 4. Whether the procedural lapse can be cured under Section 292B of the IT Act: The court rejected the Revenue's argument that the procedural lapse could be cured under Section 292B of the IT Act. It held that Section 292B cannot save an order passed in breach of the mandatory provisions of Section 144C(1), as it is an incurable illegality. The court cited the Delhi High Court's decision in JCB India Limited, which emphasized that such an omission is not a mere irregularity but an incurable illegality that Section 292B cannot rectify. Conclusion: The court concluded that the failure to follow the mandatory procedure under Section 144C(1) constituted a jurisdictional error, rendering the final Assessment Order, Demand Notice, and Penalty Notice void ab initio. Consequently, the court quashed and set aside the impugned orders dated 6th April 2021 for the Assessment Year 2017-2018. The writ petition was allowed, with no order as to costs.
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