2025 (3) TMI 150 - HC - Income Tax

Validity of order u/s 144C(1) - errors in the implementation of the Faceless Assessment Scheme - notices sent prior to framing assessment - Order did not meet the requirements of a DAO as it lacked the necessary stipulations for the assessee to respond - HELD THAT - The officer has made reference to the statutory requirement under Section 144C(2) of the Act which requires an assessee on receipt of a DAO to either indicate acceptance or file objections to the DAO proposals with the DRP within 30 days. The officer then blames the assessee for neither filing its acceptance nor objections with the DRP within the time provided. The fact of the matter was that such statutory option was never extended to the assessee. Hence the assessee could not have complied with the statutory requirement as order of assessment dated 27.12.2010 does not extend such option as it ought to have. The corrigendum stating that order dated 27.12.2010 may be taken to be a DAO has itself been issued only on 21.02.2011 two months after order dated 27.12.2010. Hence the period of 30 days provided in terms of Section 144C(2) has expired by then and the attempt of the Department to circumvent the issue and pin the blame for its error on the assessee is nothing short of a travesty of its statutory responsibilities under that provision. Importantly a demand accompanying an assessment order is a statutory demand in terms of Section 156 of the Act which states that when any tax interest penalty fine or any other sum is payable in consequence of any order passed under this Act the assessing officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable . The recovery of the demand under that notice is as per the modes of recovery under Section 226 of the Act. There is hence a sanctity attached to a demand under a notice under Section 156 of the Act that cannot be wished away merely by issuing a letter styled as a corrigendum . If at all such demand is to be extinguished the order under which such demand was raised ought to be reversed in a manner known to law. Notices sent prior to framing assessment dated 27.12.2010 do not adhere to the statutory stipulations of Section 144C of the Act and such aberrations in law are not saved by virtue of Section 292BB. Court has held that all irregular erroneous or illegal orders cannot be held to be non est as there is a distinction between orders that are null and void on the one hand and those that are irregular wrong or illegal on the other. We are of the view that the above judgement rather than advancing the case of the Revenue would support the case of the assessee. We disagree with the Tribunal in its conclusion that the errors committed by the Department in this matter are insignificant and have assigned reasons in the paragraphs supra in support of our conclusion that the errors committed are fundamental to the assumption of jurisdiction and go to the root of the matter. In light of the fact that we have upheld the validity of order as a regular assessment we answer substantial questions 1 to 3 in favour of the assessee and adverse to the revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The Court considered several substantial questions of law, including:

1. Whether the Tribunal was correct in law to treat the order passed by the Assessing Officer on 27.12.2010 as a draft assessment order under Section 144C(1) of the Income Tax Act.

2. Whether the Tribunal should have held that no further proceedings before the Dispute Resolution Panel (DRP) were possible following the order dated 27.12.2010.

3. Whether the order passed on 25.08.2011 was valid given prior orders on 27.12.2010 and 28.02.2011.

4. Whether the Tribunal correctly upheld the adjustments made to international transactions by the Transfer Pricing Officer.

5. Whether the Tribunal was right in holding that no adjustment was needed concerning the differential method of depreciation by comparable companies.

6. Whether the Tribunal should have appreciated the impact of different depreciation methods on profitability and made suitable adjustments under Rule 10B(2) and 10B(3).

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the Draft Assessment Order (DAO)

- Legal Framework: Section 144C of the Income Tax Act mandates a Draft Assessment Order to be issued, allowing the assessee to accept or object to the variations proposed.

- Court's Interpretation: The Court found that the order dated 27.12.2010 did not meet the requirements of a DAO as it lacked the necessary stipulations for the assessee to respond.

- Key Evidence: The order was accompanied by a statutory demand notice, indicating it was a final assessment rather than a DAO.

- Application of Law: The Court held that mere reference to Section 144C(1) without following the prescribed procedure does not qualify the order as a DAO.

- Conclusion: The order dated 27.12.2010 was a regular assessment, not a DAO.

Issue 2: Further Proceedings Before the DRP

- Legal Framework: Section 144C outlines the process for objections to be filed with the DRP upon receipt of a DAO.

- Court's Interpretation: The corrigendum issued on 21.02.2011 attempting to convert the assessment to a DAO was not valid as it was issued after the statutory period.

- Conclusion: The proceedings before the DRP were invalid as the initial order was not a DAO.

Issue 3: Validity of Subsequent Orders

- Legal Framework: Section 143(3) and Section 144C of the Income Tax Act.

- Court's Interpretation: The subsequent orders were based on an incorrect assumption of jurisdiction, rendering them invalid.

- Conclusion: The subsequent orders were not legally sustainable.

Issue 4 to 6: Adjustments to International Transactions and Depreciation Methods

- The Court did not address these issues as it resolved the case based on the procedural irregularities identified in the first three issues.

SIGNIFICANT HOLDINGS

- The Court held that the errors committed by the Department were fundamental to the assumption of jurisdiction and invalidated the subsequent proceedings.

- The Court emphasized that statutory demands cannot be nullified by a mere corrigendum without following a procedure known to law.

- The Court distinguished between orders that are null and void and those that are merely irregular, concluding that the errors in this case were jurisdictional and not curable.

- The Court concluded that the initial order was a regular assessment, not a DAO, and thus questions 1 to 3 were answered in favor of the assessee, rendering questions 4 to 6 unnecessary to address.