2025 (6) TMI 1332 - HC - Income Tax

Validity of Assessment orders issued beyond the time limit under sub-section (13) of Section 144C - HELD THAT - Section 144C was incorporated to the Act by an amendment. Amendments are thoughtful purpose-driven changes made to an existing legislation by the legislature. When an amendment is made it must be assumed that the legislature felt it was appropriate to alter the law as it existed prior to the amendment. The legislature well aware of the scheme and provisions of the statute as it existed proceeds to amend the statute when the need of a change is felt. Amendments are hence impelled by the conviction of the legislature regarding changes required to be made for various considerations and reasons. An amended provision becomes an integral part of the statute and it cannot be considered and interpreted in isolation detached from the other provisions of the statute. However apart from keeping in mind the object of the statute it is essential to keep the legislative purpose of effecting the amendment also in mind while attempting to interpret an amended provision. Otherwise the interpretation may defeat the purpose of the amendment. No reason to take a different view from that adopted by a learned Single Judge of this Court in Allianz Cornhill Information Services Private Limited Rep. by its Chief Financial Officer v. Union of India rep. by Secretary Ministry of Finance (Department of Revenue) and Others 2023 (12) TMI 1419 - KERALA HIGH COURT and Vodafone Idea Limited v. Central Processing Centre and Others 2023 (11) TMI 449 - BOMBAY HIGH COURT Assessing Officer is bound to adhere to the time limit stipulated in S.144 C (13) of the Income Tax Act and assessment order issued in breach of it shall be invalid. WP Allowed.

Summary

The core legal question considered in these writ petitions is whether the assessment orders issued by the Income Tax Department beyond the time limit prescribed under sub-section (13) of Section 144C of the Income Tax Act are valid or liable to be set aside. The petitions challenge the assessment orders on the ground that they were passed after the statutory time limit, thereby raising the issue of the consequence of non-adherence to the prescribed time frame under Section 144C(13).

Section 144C of the Income Tax Act, introduced by the Finance Act, 2009, establishes a special procedure for assessments involving transfer pricing disputes, aiming to provide a speedy and alternative dispute resolution mechanism within the Income Tax Department. The section prescribes several specific time limits: the eligible assessee must file acceptance or objections within 30 days of the draft order; the Assessing Officer must complete the assessment within one month after receipt of acceptance or expiry of the objection period; the Dispute Resolution Panel (DRP) must issue directions within nine months from the end of the month in which the draft order was forwarded; and, crucially, under sub-section (13), the Assessing Officer must complete the assessment in conformity with the DRP's directions within one month from the end of the month in which such directions are received, without providing any further opportunity of hearing to the assessee.

In the cases before the Court, the assessment orders were issued beyond the one-month time limit stipulated in Section 144C(13). The relevant dates reveal that the assessment orders were passed several months after the DRP issued its directions, thereby breaching the statutory time frame. The sole issue for determination was the legal consequence of this delay.

The petitioner's counsel emphasized the legislative intent behind Section 144C, highlighting that it was enacted to create a fast-track mechanism for resolving transfer pricing disputes, thereby improving the investment climate by reducing prolonged litigation. Reference was made to the Finance Minister's budget speech and the notes on clauses accompanying the Finance Bill, 2009, which explicitly state the objective of speedy disposal through an alternative dispute resolution mechanism. The counsel argued that the time limits in Section 144C are mandatory and integral to the scheme, not merely procedural, and that any breach vitiates the assessment proceedings. He relied heavily on the Division Bench judgment of the Bombay High Court, which held that failure to adhere strictly to the time limits under Section 144C defeats the statutory purpose and renders the assessment order time-barred and invalid. The Bombay High Court held that the directions of the DRP are binding on the Assessing Officer and that the Assessing Officer cannot delay or defeat the DRP's directions by issuing assessment orders beyond the prescribed time limit. The Court also cited decisions of the Delhi High Court and other authorities supporting the view that non-compliance with Section 144C's mandatory time limits invalidates the assessment order.

The petitioner also relied on a recent judgment of a learned Single Judge of this Court, which held that Section 144C is a substantive provision prescribing specific time limits that must be strictly complied with. The judgment emphasized that the exclusion of Section 153 (which ordinarily prescribes time limits for assessments) from the operation of Section 144C demonstrates the legislature's clear intention to impose a stricter and faster time frame for assessments under Section 144C. The Court observed that failure to comply with these time limits defeats the purpose of the fast-track mechanism and that the Assessing Officer must pass the assessment order within the prescribed period following the DRP's directions without any delay or further hearing.

On the other hand, the Income Tax Department's counsel contended that Section 144C is essentially a machinery provision designed to facilitate the assessment process and does not affect the substantive charging provisions of the Act. He argued that the Assessing Officer's role after receiving the DRP's directions is purely administrative and that delay in passing the assessment order beyond the time limit under Section 144C(13) does not invalidate the assessment. The counsel relied on precedents interpreting similar machinery provisions (such as Section 144B) and contended that non-compliance with procedural time limits should be treated as irregularities rather than fatal defects. He further submitted that the judgment of the Bombay High Court is distinguishable on facts because the delay there was over two years, whereas in the present cases the delay was shorter. He also referred to a recent judgment of a Single Judge of this Court holding that Section 144C is not substantive but a machinery provision, and that the petitions should be dismissed.

The Court examined these competing arguments in detail. It rejected the analogy drawn by the Department's counsel between Section 144C and Section 144B, noting that the function and legislative intent behind Section 144C are distinct. While the Assessing Officer's discretion may be limited after receiving DRP directions, this does not mean that delay beyond the prescribed time limit is a mere irregularity. The Court emphasized that Section 144C was introduced by a thoughtful amendment to the Income Tax Act with the clear objective of providing a speedy resolution of transfer pricing disputes, and that the time limits are an essential feature of this scheme. The Court relied on the principle that amended provisions must be interpreted in light of the legislative purpose and the mischief sought to be remedied, and that the machinery provisions must be construed so as to effectuate the object of the statute rather than defeat it.

The Court referred to authoritative Supreme Court precedent holding that machinery provisions must be construed to effectuate the statute's purpose and not to defeat it. Applying this principle, the Court held that the Assessing Officer is bound by the time limit under Section 144C(13) and that any assessment order passed beyond this period is invalid. The Court found no merit in the Department's contention that the delay was not fatal, and held that strict adherence to the time limits is mandatory to preserve the integrity of the fast-track dispute resolution mechanism. The Court also rejected the argument that the delay in the present cases was short and therefore excusable, holding that the length of delay is immaterial to the legal consequence of non-compliance with a mandatory statutory time limit.

Accordingly, the Court set aside the impugned assessment orders passed beyond the time limit prescribed under Section 144C(13). The Court's conclusions align with the reasoning in the Bombay High Court and the earlier Single Judge judgment of this Court, both of which underscore the mandatory nature of the time limits and the binding effect of the DRP's directions.

Significant holdings include the following:

"Section 144C of the Act is a self-contained provision which carves out a separate class of assessees, i.e., 'eligible assessee'. ... if the provisions of Section 144C as mandated by the Statute are not strictly adhered the entire object of providing for an alternate redressal mechanism in the form of DRP stand defeated."

"When a Statute prescribes the power to do a certain thing in a certain way, then the thing must be done in that way and other methods of performance are forbidden."

"The Assessing Officer shall, upon receipt of the directions issued under sub-section (5), in conformity with the directions, complete the assessment within one month from the end of the month in which such direction is received."

"The legislature had clear intention while the said provision was inserted in 2009 to facilitate an expeditious resolution of disputes on a fast track basis. If the assessing officer fails to pass any order in accordance with the statutory provisions, as mandated under Section 144C, it will defeat the entire exercise and render the same futile."

"The machinery provisions must no doubt be so construed as would effectuate the object and purpose of the statute and not defeat the same."

"Assessing Officer is bound to adhere to the time limit stipulated in S.144 C (13) of the Income Tax Act and assessment order issued in breach of it shall be invalid."

The Court thus established that the time limits under Section 144C are mandatory and substantive in effect, not mere procedural formalities. The directions issued by the DRP are binding on the Assessing Officer, who must complete the assessment within the prescribed time frame without further opportunity of hearing. Failure to comply with these time limits invalidates the assessment order, and the assessment cannot be sustained if passed beyond the statutory period. The Court's ruling reinforces the legislative intent to provide a fast-track, alternative dispute resolution mechanism for transfer pricing disputes and ensures that the statutory scheme is not undermined by administrative delays.