2025 (7) TMI 1563 - AT - Income Tax

Addressing of Erroneous adjustment u/s 143(1) - scope of Section 144C - mandation to first issue a draft Assessment Order - HELD THAT - As per the Section 144C which is applicable in the case of the assessee the Assessing Officer has to first issue a draft Assessment Order specifying the proposed additions then the Assessee has right to file Objections before the DRP. In the case of the Assessee the Assessing Officer issued Draft Assessment Order proposing only adjustments suggested by the TPO and in the Draft Assessment Order the Assessing Officer has not considered the adjustment made under section 143(1) of the Act. The Assessee filed objections before the DRP against the said Draft Assessment Order. DRP directed to delete the additions suggested by Transfer Pricing Officer. Therefore as per Section 144C(13) of the Act the AO has to pass the assessment order in conformity with the directions of the DRP. In this case DRP directed to delete the adjustment proposed by TPO. Therefore in the assessment order the Assessing Officer had to only consider the Draft Assessment Order and the directions of the DRP. After giving effect to the directions of the DRP Order the total income would have been equal to Returned Income. However the Assessing Officer suo-moto considered the total income mentioned in the order u/s.143(1) of the Act. The Section 144C of the Act precludes the Assessing Officer to make any changes outside the directions of the DRP based on DRAFT Assessment Order. Therefore the Assessing Officer suo-moto considering the total income as per the order under section 143(1) is outside the scope of Section 144C of the Act. Therefore the addition made by Assessing Officer in the assessment order dated 25.10.2024 assessing the total income at Rs. 24, 32, 06, 832/- based on order u/s.143(1) is bad in law. Therefore we direct the Assessing Officer to assess the total income of the Assessee at Rs. 20, 55, 52, 510/- which was the total income shown in the Return of Income. Accordingly Revised Ground No.2 of the Assessee is allowed. Non grant of credit to the prepaid taxes related to the amalgamating entity - AO is directed to verify the facts and allow the claim as per law. Assessing Officer shall provide opportunity to the Assessee. Accordingly Revised Ground No.3 is allowed for statistical purpose.

Summary

ISSUES:

Whether adjustments made under section 143(1) can be addressed during assessment proceedings under section 143(3) in the presence of dispute resolution under section 144C.Whether the Assessing Officer can make additions/enhancements to income in the final assessment order without prior notice or directions from the Dispute Resolution Panel (DRP) under section 144C.Whether denial of prepaid tax credit pertaining to an amalgamating entity is erroneous.Whether continuing adjustments/additions made by the Assessing Officer (CPC) result in double addition and are erroneous.

RULINGS / HOLDINGS:

On the first issue, the Court held that the Assessing Officer cannot address adjustments made under section 143(1) during assessment proceedings under section 143(3) when the matter is governed by section 144C, as the Assessing Officer is bound to complete assessment "in conformity with the directions" of the DRP without providing further opportunity to the assessee.Regarding the second issue, the Court ruled that the Assessing Officer's addition of INR 3,76,54,322 in the final order without directions from the DRP and without prior notice is "bad in law" and must be deleted, as section 144C precludes changes outside DRP directions.On the third issue, the Court directed the Assessing Officer to verify and allow the claim for prepaid tax credit related to the amalgamating entity in accordance with law, granting relief for statistical purposes.On the fourth issue, the Court found that the alleged double addition becomes academic after allowing the second ground and dismissed it as unadjudicated.

RATIONALE:

The Court applied the statutory framework of section 144C of the Income-tax Act, which mandates issuance of a draft assessment order, allows the assessee to file objections before the DRP, and requires the Assessing Officer to complete assessment strictly "in conformity with the directions" of the DRP without further opportunity to the assessee.The Court emphasized that the Assessing Officer is "precluded" from making any changes beyond the DRP directions based on the draft order, thereby invalidating any suo-moto additions or adjustments outside that scope.The Court relied on the language of section 144C(13) to hold that the assessment must be completed within one month of receipt of DRP directions and without deviation.Regarding denial of prepaid tax credit, the Court mandated verification and compliance with the provisions of the Act, ensuring procedural fairness by directing the Assessing Officer to provide opportunity to the assessee.No dissenting or concurring opinions were noted; the judgment follows established statutory interpretation without doctrinal shift.