2023 (10) TMI 922 - HC - Income Tax

Revision u/s 263 - Reference to dispute resolution panel not adhered - procedural compliance of Section 144C(1) flawed mandatory requirement of Section 144C(1) of the Act and pass a draft assessment order not followed - whether the failure to pass a draft assessment order before the final assessment, as required for a foreign company such as the Petitioner, invalidates the impugned order and the ensuing proceedings? - HELD THAT - The provisions of Section 144C(1) of the Act provides that in case of an eligible assessee , an AO proposing to pass an assessment order, shall at the first instance, forward a draft assessment order to the assessee, in case they wish to make variations prejudicial to the interest of the assessee. On receipt of the draft assessment order, the eligible assessee has a remedy of filing objections before the DRP. It is undisputed and manifestly clear that no draft assessment order, as envisioned by Section 144C(1) of the Act, was ever framed in the present case. While the CIT exercised the revisionary powers enshrined u/s 263 this action was primarily rooted in the belief that the original assessment was erroneous and potentially detrimental to the revenue s interests. However, on remand, the AO passed the impugned order, revising the Petitioner s income, and increased its tax liability. Thus, the impugned order is clearly prejudicial to the interest of the assessee and a draft order should have been made available to the assessee. The mention of schematic and teleological method of interpretation underscores the significance of understanding the larger purpose behind a provision, rather than adopting a strictly literal interpretation. It must therefore be ascertained whether bypassing the procedures of Section 144C(1) would align with such an interpretative approach. In our opinion, the answer has to be in the negative. The process outlined in Section 144C(1) of the Act is not discretionary, but mandatory. It must be adhered to even when the assessment order is issued in line with directions from a higher authority. While Respondents argued that the provisions of Section 144C shall not apply to orders issued under Section 263, in our opinion, the exercise of revisionary powers does not dilute the requirement of compliance with Section 144C of the Act. The exception carved out in Section 144C(14A) extends to assessment/ re-assessment orders passed by the AO with the prior approval of the Principal Commissioner or Commissioner, as per Section 144BA(12) of the Act. The nature of proceedings initiated under Section 144BA differs from the ones commenced under Section 263 - Section 144C(14A) does not dispense with the AO s obligation to intimate a draft order to an eligible assessee, which term includes foreign companies like Petitioner. Respondent No. 1 s omission to pass a draft assessment order is not merely a procedural oversight, but a substantive lapse, which renders the subsequent impugned order devoid of jurisdiction. The question whether the final assessment order stands vitiated for failure to adhere to the mandatory requirement of first passing the draft assessment order in terms of Section 144C(1) of the Act is no longer res integra; there is a long series of decisions where the Court has explained the legal provision/ position. See TURNER INTERNATIONAL INDIA PVT. LTD 2017 (5) TMI 991 - DELHI HIGH COURT , AND NOKIA INDIA PRIVATE LIMITED 2017 (9) TMI 1838 - DELHI HIGH COURT We hold that failure by Respondent No. 1 to adhere to the mandatory requirement of Section 144C(1) of the Act and pass a draft assessment order, would result in invalidation of the final assessment order and the consequent demand notice and penalty proceedings.

Summary

Issues Involved:
1. Jurisdictional challenge regarding non-compliance with Section 144C of the Income Tax Act, 1961.
2. Validity of the assessment order dated 23rd June 2022, and subsequent demand and penalty notices.

Summary of Judgment:

Issue 1: Jurisdictional Challenge Regarding Non-Compliance with Section 144C of the Income Tax Act, 1961

The Petitioner, a foreign entity incorporated in Singapore, contended that the Deputy Commissioner of Income Tax failed to issue a draft assessment order as mandated by Section 144C(1) of the Income Tax Act, 1961. The Petitioner argued that this procedural lapse deprived them of the opportunity to raise objections before the Dispute Resolution Panel (DRP). The High Court found that the Assessing Officer (AO) bypassed the statutory mandate, which is not discretionary but mandatory for foreign companies. The failure to issue a draft assessment order rendered the final assessment order dated 23rd June 2022, and the subsequent demand and penalty notices, void of jurisdiction.

Issue 2: Validity of the Assessment Order Dated 23rd June 2022, and Subsequent Demand and Penalty Notices

The Court analyzed whether the impugned order, passed in compliance with the directions under Section 263 of the Act, required adherence to Section 144C. The Court held that the assessment order was indeed prejudicial to the Petitioner and thus necessitated a draft order. The omission to provide a draft assessment order denied the Petitioner a fair opportunity to contest the assessment before the DRP. The Court emphasized that procedural lapses impacting jurisdiction must be addressed promptly to avoid prolonged litigation. Consequently, the impugned order, demand notice, and penalty proceedings were quashed.

Conclusion:

The High Court allowed the petition, quashing the impugned order dated 23rd June 2022, the demand notice dated 23rd June 2022, and the penalty notice dated 24th June 2022. The matter was remanded back to the AO to proceed in accordance with the directions issued by the Commissioner of Income Tax under Section 263 of the Act. The Court underscored the importance of adhering to mandatory procedural requirements to ensure effective and efficient justice delivery.