2017 (10) TMI 684 - AT - Income Tax

Failure by the AO to adhere to the mandatory requirement of Section 144C (1) - non passing the draft assessment order - Held that - Passing assessment order straightway without passing the draft assessment order would take away the enforceable right of the assessee company to approach the ld. DRP by way of filing objection to the draft assessment orders. Since the factum of not passing a draft assessment order by the AO as required u/s 144C is a curable defect, the case is again remitted back to the file of AO to decide afresh in the light of the order passed by the Tribunal dated 15.03.2012 in accordance with provisions contained u/s 144C of the Act, and also after providing an opportunity of being heard to the assessee. See JCB India Ltd. vs. DCIT 2017 (9) TMI 673 - DELHI HIGH COURT . In view of what has been discussed above, present appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the assessment order under sections 254/143(3) read with section 144C.
2. Disallowance of Rs.1,14,36,265/- on account of depreciation on computers.
3. Addition of Rs.4,12,04,919/- due to a difference in Arm's Length Price (ALP).

Detailed Analysis:

1. Validity of the Assessment Order:

The primary issue was whether the assessment order passed by the AO under sections 254/143(3) read with section 144C was sustainable. The appellant argued that the reassessment proceedings should have started with a draft assessment order as mandated by section 144C of the Income-tax Act, 1961. The Tribunal had previously set aside the order due to the DRP not providing an opportunity for the assessee to be heard, directing the AO to pass a draft assessment order.

The Tribunal emphasized that the mandate of section 144C is clear, requiring the AO to pass a draft assessment order to allow the assessee to file objections before the Dispute Resolution Panel (DRP). The Tribunal referred to several judgments, including those from the High Courts of Andhra Pradesh and Delhi, which held that failing to pass a draft assessment order renders the final assessment order invalid. The Tribunal concluded that the AO's failure to issue a draft assessment order was a significant procedural lapse, making the final assessment order void ab initio.

2. Disallowance of Depreciation on Computers:

The AO made a disallowance of Rs.1,14,36,265/- on account of depreciation on computers. However, the Tribunal's primary focus was on the procedural aspect of the assessment order rather than the substantive issues of depreciation. Given the procedural invalidity of the assessment order, the Tribunal did not delve into the merits of the depreciation disallowance.

3. Addition Due to Difference in Arm's Length Price:

The AO added Rs.4,12,04,919/- due to a difference in the Arm's Length Price (ALP). The Tribunal had previously remitted the matter back to the AO to decide afresh after providing an opportunity for the assessee to be heard. The AO was required to consider fresh comparables and determine the ALP accordingly. However, due to the procedural lapse in not issuing a draft assessment order, the Tribunal did not address the substantive issue of the ALP addition.

Conclusion:

The Tribunal held that the AO's failure to issue a draft assessment order under section 144C was a significant procedural defect, rendering the final assessment order invalid. The Tribunal remitted the case back to the AO to pass a draft assessment order, allowing the assessee to file objections before the DRP. The Tribunal's decision was primarily based on procedural grounds, emphasizing the importance of adhering to the statutory requirements of section 144C to ensure the assessee's right to a fair hearing. The appeal was allowed for statistical purposes, directing the AO to follow the correct procedure and provide an opportunity for the assessee to be heard.