2021 (9) TMI 709 - HC - Income Tax

Revision u/s 263 - final assessment order made pursuant to directions of DRP u/s 144C read with Section 143(3) - whether the draft assessment order communicated to assessee u/s 144C of the Act is an order amenable to revision u/s 263? - HELD THAT - It is well established by a series of decisions that the fulcrum on which the power u/s 263 is exercised, rests on the orders made under the Act, being erroneous and the orders prejudicial to the interest of the Revenue. Let us juxtapose the scheme u/s 144C of the Act with an order being erroneous and prejudicial to the interest of Revenue, and deliberation of scheme in this behalf, we observe that, whether the draft assessment order is erroneous or not is examined by DRP and the element of prejudice insofar as the Revenue is concerned does not arise visa- vis the draft assessment inasmuch as no demand could be raised on the draft assessment order proposed by the AO and objected to by the assessee. As taken note of the requirement of prejudice considered by the Tribunal in the decisions referred to above. The circumstances in the said orders are slightly different. For the purpose of appreciating that the order is erroneous insofar as it is prejudicial to the interest of Revenue is sine qua non for taking recourse to the power under Section 263. The appellant had reasons to believe that a few matters required reconsideration by the Assessing Officer, the remedy is not by interdicting a draft assessment order proposed in Annexure-B, but a different mechanism is available as per the scheme of the Act. Tribunal noticed that from the scheme of the Act the draft assessment order is only a proposed assessment order and there is no demand notice attached to the draft assessment order. In cases covered by Section 144C of the Act, the assessment order comes into picture only after an assessment order is passed pursuant to draft assessment order or in compliance with the directions of the DRP. Draft assessment order by itself cannot levy tax on the assessee. There is no question of loss of revenue in the draft assessment order. It is further held that Section 263 has no application for revising the draft assessment order proposed by the AO. Also the scheme of the Act and the view of the Tribunal are similar, namely that invocation of power under Section 263 of the Act to interdict a draft assessment order proposed by the Assessing Officer is unavailable to Principal Commissioner of Income Tax. We hasten to add, for, at that stage, the condition required for invoking Section 263, namely the order being erroneous insofar as it is prejudicial to the interest of Revenue, does not arise. Hence the reasons are in accordance with the scheme of the Act envisaged on one hand by Section 144C and on another by Section 263. Decided in favour of the assessee.

Summary

Issues:
- Appeal by Revenue against order dated 10.01.2017 in ITA No.222/Coch/2016 for Assessment Year 2010-11 under Section 144C read with Section 143(3) vis-a-vis Section 263 of the Income Tax Act, 1961.

Analysis:
1. The Revenue, through the Principal Commissioner of Income Tax, appealed against the order dated 10.01.2017 in ITA No.222/Coch/2016 for Assessment Year 2010-11. The issues raised relate to the application of Section 144C read with Section 143(3) and Section 263 of the Income Tax Act, 1961. The draft assessment order under Section 144C was made by the Assessing Officer, followed by objections by the assessee and directions issued by the DRP. The Principal Commissioner of Income Tax then invoked Section 263 to set aside the assessment order dated 28.03.2014 and directed a re-examination of certain aspects, leading to the current appeal.

2. The substantial questions of law raised for decision were whether the ITAT was correct in holding that the order dated 28.03.2014 did not prejudice the revenue and whether the Tribunal was right in quashing the order under Section 263 dated 23.03.2016. The Revenue argued that the draft assessment order is amenable to revision under Section 263, emphasizing the competence of the Principal Commissioner to issue directions if prejudice to revenue is noted. On the other hand, the assessee contended that interdicting the draft assessment order under Section 263 is illegal as no prejudice is assumed at that stage, and the final assessment order is made after DRP directions.

3. The Court clarified that the scope of the case was to determine if the draft assessment order under Section 144C is revisable under Section 263, not the final assessment order post-DRP directions. Referring to the scheme under Section 144C, it highlighted the process of draft assessment, objections by the assessee, and DRP resolution. The Court noted that the power under Section 263 is exercised on orders erroneous and prejudicial to revenue, which does not apply to draft assessment orders as they do not result in tax demands.

4. Upon examining the Tribunal's reasoning, the Court concurred that Section 263 cannot be used to revise a draft assessment order proposed by the Assessing Officer. The absence of a demand notice and the fact that the assessment order is issued after DRP directions or in compliance with the draft assessment were key factors. The Court emphasized that the condition for invoking Section 263, i.e., the order being erroneous and prejudicial to revenue, does not arise at the draft assessment stage.

5. Ultimately, the Court ruled in favor of the assessee, dismissing the appeal by the Revenue. The decision was based on the alignment of the Tribunal's view with the scheme of the Act, where Section 263 does not apply to draft assessment orders under Section 144C.

This detailed analysis of the judgment outlines the key legal arguments, considerations, and conclusions reached by the Court regarding the issues raised in the appeal.