2025 (7) TMI 1313 - HC - Income Tax

Procedure under Section 144C(1) - mandation to send draft of the proposed order of assessment to petitioner - HELD THAT - As decided in IBS Software Services Private Limited v. Union of India 2025 (6) TMI 1332 - KERALA HIGH COURT and Allianz Cornhill Information Services Private Limited Rep. by its Chief Financial Officer v. Union of India 2023 (12) TMI 1419 - KERALA HIGH COURT held that the provisions of Section 144C are compulsory. Legislative intention for incorporating the provision by way of an amendment was also adverted to by this Court in the above judgments. Procedure u/s 144C(1) is also therefore mandatory. The assessing officer ought to have in the first instance forwarded a draft of the proposed order of assessment to petitioner as there was a proposed variation prejudicial to the interest of the assessee. Failure to follow the said procedure by the assessing officer was therefore a fatal error. I find support for this view in various judgments of different High Courts cited by the learned counsel for the petitioner. The contention of AO was bound by the explanation regarding applicability of Section 144C in Circular No.5/2010 while he undertook the impugned assessment. Though the said contention is factually correct as found above the explanation in the said Circular issued by the Board was contrary to the provisions of Section 144C(1). The explanation was therefore incorrect and illegal. Even the Board has no authority to violate the provisions of the Act. Breach of the mandate of the provision cannot be sought to be condoned by relying on an incorrect interpretation of the provision by the Board. The assessee cannot be put to disadvantage by accepting the contention that the mistake committed by the assessing authority was only a bonafide mistake . Hence the said contention of the learned Standing Counsel is rejected. Moreover it is to be noted that these writ petitions were filed even before issuance of Circular No.9/2013. During the pendency of these cases the Board realised the mistake and replaced paragraph 45.5 of Circular No.5/2010. Another contention of the learned Standing Counsel was that the Revenue cannot be rendered remediless and the matter may be remitted for fresh assessment if the contention regarding noncompliance with the procedure under Section 144C(1) was found correct by this Court. This was opposed by the learned counsel for the petitioner who argued that the period of limitation under Section 153 of the Act being over no fresh assessment can be done now. In view of the judgment of Hope Textiles Ltd and Another v. Union of India and Others 1993 (10) TMI 2 - SUPREME COURT remitting the matter for fresh assessment would be an impermissible course as the period of limitation under the Act is already over. WP Allowed.

Summary

1. ISSUES:

1. Whether the mandatory procedure under Section 144C(1) of the Income Tax Act, 1961, requiring the Assessing Officer to forward a draft of the proposed order of assessment to an eligible assessee when proposing any variation prejudicial to the assessee's interest, must be followed irrespective of the assessment year.

2. Whether failure to comply with the procedure under Section 144C(1) results in the assessment order being void ab initio due to incurable jurisdictional error.

3. Whether the Circular No.5/2010 issued by the Central Board of Direct Taxes (CBDT), which limited the applicability of Section 144C to assessment years 2010-11 and subsequent years, is a correct interpretation of the statutory provision.

4. Whether the subsequent Circular No.9/2013, which clarified the applicability of Section 144C irrespective of assessment year, affects the validity of assessments completed prior to its issuance.

5. Whether non-compliance with Section 144C(1) can be cured or validated under Section 292-B of the Income Tax Act.

6. Whether remitting the matter for fresh assessment is permissible when the limitation period under Section 153 has expired.

2. RULINGS / HOLDINGS:

1. The Court held that Section 144C(1) contains a non obstante clause and mandates that the Assessing Officer must forward a draft of the proposed order of assessment to the eligible assessee if any variation prejudicial to the assessee is proposed on or after 1st October 2009, "irrespective of the assessment year to which it pertains."

2. Failure to comply with the procedure under Section 144C(1) is a "fatal error" constituting a jurisdictional error, rendering the assessment order "void ab initio" and not merely a procedural irregularity.

3. The explanation in paragraph 45.5 of Circular No.5/2010, which limited the applicability of Section 144C to assessment year 2010-11 and subsequent years, was held to be an "improper and illegal" misinterpretation of the statutory provision by the CBDT.

4. Circular No.9/2013 correctly replaced the earlier circular's paragraph 45.5, clarifying that Section 144C applies to any order proposing variation on or after 1st October 2009, "irrespective of the assessment year to which it pertains."

5. Section 292-B cannot cure or validate an assessment order passed in breach of the mandatory provisions of Section 144C(1), as such breach is an "incurable illegality" and a jurisdictional error.

6. Remitting the matter for fresh assessment after the expiry of the limitation period under Section 153 is impermissible, as held in the Supreme Court precedent, and would frustrate the legislative intent.

3. RATIONALE:

The Court applied the plain language of Section 144C(1), emphasizing the non obstante clause that gives the provision overriding effect over any other conflicting provisions in the Income Tax Act. The absence of any reference to assessment years in the statutory text led to the conclusion that the provision applies uniformly to all assessments from 1st October 2009 onwards.

The Court rejected the CBDT's initial interpretation in Circular No.5/2010 as ultra vires and inconsistent with legislative intent, noting that even the Board cannot "misconstrue the provisions of the Act and thus defeat the legislative intention."

The mandatory nature of Section 144C(1) was supported by precedents from multiple High Courts which held that failure to follow the prescribed procedure results in jurisdictional error and invalidation of the assessment order. The Court relied on these precedents to affirm that the procedure is substantive and not merely procedural.

The Court further noted that Section 292-B, which allows for rectification of errors, cannot be invoked to cure a jurisdictional defect arising from non-compliance with Section 144C(1).

Regarding remand for fresh assessment, the Court relied on authoritative Supreme Court precedent holding that reopening assessments beyond the limitation period is impermissible, thus precluding fresh assessments in such cases.