2024 (12) TMI 495 - AT - Income Tax

Reference to dispute resolution panel u/s 144C - Non-passing Draft Assessment order before passing the assessment order - Non complying with the mandatory provision section 144C - HELD THAT - AO is required to issue a draft assessment order in respect of an eligible assessee. There are two categories of eligible assessee (a) In a case where there has been a variation on account, and (b) Any Non-Resident not being a company or any foreign company. In the former case, the Assessing Officer is required to adhere to the special procedure prescribed u/s 144C, only in case, where there is variation to the returned income on account of arm s length price for international transaction or specific domestic transaction has been proposed by the TPO. We find the above that a Non-Resident is made eligible assessee by Finance Act, 2020 w.e.f. 1.4.2020. Even the CBDT Explanatory Memorandum of Finance Bill, 2020 clarifies the amendment took place w.e.f. 1.4.2020. This amendment will take effect from 1st April, 2020. Thus, if the AO proposes to make any variation after this date, in case of eligible assessee, which is prejudicial to the interest of the assessee, the above provision shall be applicable. Therefore, all the assessment orders passed subsequently are squarely covered by the above provisions of the Act. There cannot be any dispute on this issue. Hon ble Delhi High Court, in a bunch of writ petitions, led by Principal Commissioner of Income Tax vs Sumitomo Corporation India (P.) Ltd. 2024 (9) TMI 157 - DELHI HIGH COURT has quashed the final assessment orders passed without a draft order of assessment being passed as per the provisions of section 144C(1) of the Income-tax Act. We hold that the assessment order passed u/s 153A/143(3) without complying with the mandatory provision section 144C of the Act could not be cured in any manner and therefore, is quashed, thus allowing the appeal.

Issues Involved:

1. Non-passing of Draft Assessment Order under Section 144C.
2. Absence of incriminating material for assessment under Section 153A.
3. Re-computation of Long-Term Capital Gain.
4. Disallowance of deduction under Section 35AC.
5. Ad-hoc addition of cash in hand.
6. Classification of rental income under "Income from Other Sources" instead of "Income from House Property."

Issue-wise Detailed Analysis:

1. Non-passing of Draft Assessment Order under Section 144C:

The primary issue revolves around the failure of the Assessing Officer (AO) to issue a draft assessment order as mandated by Section 144C of the Income-tax Act, 1961. The appellant, being a non-resident, qualifies as an "eligible assessee," thus necessitating the issuance of a draft order. The tribunal emphasized that Section 144C is a non-obstante provision, which requires its compliance irrespective of other provisions in the Act. The failure to issue a draft order constitutes a jurisdictional error, rendering the final assessment order void and non-curable. The tribunal relied on various judicial precedents, including the Bombay High Court's decision in SHL (India) P. Ltd vs. DCIT, which underscored the mandatory nature of Section 144C and the incurable nature of the defect arising from non-compliance.

2. Absence of Incriminating Material for Assessment under Section 153A:

The appellant contended that the assessment order should be quashed due to the absence of incriminating material, which is a prerequisite for issuing a notice under Section 153A. However, since the tribunal quashed the assessment order on the grounds of non-compliance with Section 144C, this issue became academic and was not further adjudicated.

3. Re-computation of Long-Term Capital Gain:

The appellant challenged the CIT(A)'s direction to assess the Long-Term Capital Gain at a higher amount than what was offered. The tribunal did not delve into this issue due to the quashing of the assessment order on procedural grounds.

4. Disallowance of Deduction under Section 35AC:

The appellant argued against the disallowance of a deduction claimed under Section 35AC. Similar to other grounds, this issue was not addressed in detail since the assessment order itself was quashed.

5. Ad-hoc Addition of Cash in Hand:

The CIT(A) upheld an ad-hoc addition of cash in hand, which the appellant contested. This issue was rendered academic following the quashing of the assessment order.

6. Classification of Rental Income:

The appellant disputed the classification of rental income under "Income from Other Sources" instead of "Income from House Property." The tribunal did not proceed with this issue due to the annulment of the assessment order.

Conclusion:

The tribunal quashed the assessment order due to the AO's failure to issue a draft assessment order as required under Section 144C, a mandatory procedural step for eligible assessees. This procedural lapse was deemed a jurisdictional error, rendering the assessment order void. Consequently, other grounds raised by the appellant were not adjudicated, as they became academic in light of the primary issue's resolution. All appeals were allowed, and the assessment orders for the relevant years were annulled.

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