2020 (1) TMI 778 - AT - Income Tax

TP Adjustment - Assessment u/s 144C(1) - eligible assessee u/s 144C(15)(b)(i) - failure to pass draft of the proposed assessment order - adjustment towards the domestic transactions undertaken for the assessee with its related parties - TPO has passed the order u/s 92CA(3) - HELD THAT - In terms of section 144C(1) AO was required to issue the draft of the proposed assessment order to the assessee as variation so proposed is prejudicial to the interest of the assessee, being a specific mandate of the legislation as provided u/s 144C(1) of the Act. Wherever, there is any variation to the returned income proposed in the hands of the eligible assessee, the Assessing Officer shall in the first instance issue a draft of the proposed order and only where the assessee intimate the Assessing Officer the acceptance of the variations so proposed or no objection is received within the specified period, the Assessing Offer shall pass the final assessment order. In the instant case, the Assessing officer has not issued the draft of the proposed assessment order and the provisions of section 144C have been clearly violated and not followed by the Assessing Officer. The contention of the Revenue that due opportunity has been provided to the assessee during the course of assessment proceedings wherein the matter relating to the adjustment proposed by the TPO was discussed with Assessee does not absolve the Assessing Officer from the mandatory and not just a procedural requirement of issuing the draft of the proposed order as required u/s 144C(1) of the Act. Therefore, following the decision in case of Jaipur Rugs Company (P) Ltd . 2018 (6) TMI 146 - ITAT JAIPUR the assessment order so passed by the Assessing Officer u/s 144C(1) read with 143(3) without issuing the draft of the proposed order cannot be sustained in the eyes of law and is hereby set aside. In the result, the ground no. 1 of the assessee s appeal is allowed.

Summary

Issues Involved:
1. Legality of the assessment order passed without issuing a draft assessment order under Section 144C.
2. Substantiation of the addition made as excess interest paid.

Issue-Wise Detailed Analysis:

1. Legality of the Assessment Order Passed Without Issuing a Draft Assessment Order Under Section 144C:

The primary issue was whether the non-issuance of a draft assessment order as mandated by Section 144C(1) of the Income Tax Act renders the final assessment order invalid. The assessee argued that the assessment order passed by the Assessing Officer (AO) without providing a draft assessment order was against the provisions of the Income Tax Act and thus void ab initio. The Commissioner of Income Tax (Appeals) [CIT(A)] had previously held that this procedural lapse did not cause any prejudice to the assessee since the assessee was given an opportunity to discuss the Transfer Pricing Officer's (TPO) order during the assessment proceedings.

The Tribunal referred to the provisions of Section 144C, which clearly state that the AO must forward a draft of the proposed order to the eligible assessee if any variation in the income or loss returned is prejudicial to the assessee's interest. The Tribunal emphasized that the issuance of a draft order is a "sine qua non" before passing a regular assessment order under Section 143(3). The Tribunal cited the decision in Jaipur Rugs Company (P) Ltd vs. DCIT, which held that the non-issuance of a draft assessment order makes the final order invalid. The Tribunal found that the AO had failed to issue a draft order, and the final order was thus without jurisdiction and void.

The Tribunal also noted that the issuance of a show-cause notice cannot be equated with the issuance of a draft assessment order. Accepting the show-cause notice as a substitute for the draft order would render the provisions of Section 144C redundant and deprive the assessee of the right to approach the Dispute Resolution Panel (DRP). Therefore, the Tribunal quashed the assessment order on the grounds of non-compliance with Section 144C.

2. Substantiation of the Addition Made as Excess Interest Paid:

The second issue was the substantiation of the addition made by the AO as excess interest paid to related parties. The TPO had proposed an adjustment of ?2,84,613/- as excess interest paid to related parties, which was included in the final assessment order. The CIT(A) had sustained this addition on merits.

However, since the Tribunal quashed the entire assessment order due to the procedural lapse in not issuing a draft assessment order, the issue of substantiating the addition became academic. Consequently, the Tribunal dismissed this ground as infructuous.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the assessment order due to the AO's failure to issue a draft assessment order as required under Section 144C. The procedural lapse was deemed not just a minor error but a significant violation that rendered the final assessment order void. The Tribunal did not address the merits of the addition made as excess interest paid, as the primary issue's resolution rendered it unnecessary. The order was pronounced in the open court on 16/01/2020.