DRAFT ASSESSMENT ORDER UNDER SECTION 144C OF INCOME TAX ACT, 1961 – MANDATORY?

[Mr. M. GOVINDARAJAN]

Section 144C

Section 144 C of the Act refers to the Dispute Resolution Panel.

• Section 144C(1) provides that in case of an eligible assessee, the Assessing Officer shall forward a draft of the proposed order of assessment to the assessee if he proposes to make any variation in the income or loss returned which is prejudicial to the interest of the assessee;
• Section 144C(2) provides that the assessee shall, within thirty days of the receipt of the draft assessment order, file-

• his acceptance of the variations to the Assessing Officer; or
• his objection, if any, to such variation with-

• the Dispute Resolution Panel; and
• the Assessing Officer;

• Section 144C(5) provides that the Dispute Resolution Panel  shall issue such directions to the Assessing Officer as it thinks fit for his guidance to enable him to complete the assessment in case the assessee raised an objection;
• Section 144C(7) provides that the Dispute Resolution Panel, before issuing directions,  may make further inquiries as it thinks fit or cause any further inquiry to be made by any income tax authority and report the result of the same to it.
• Section 144C(8) recognizes wide powers of the Dispute Resolution Panel to confirm, reduce or enhance the variations provided in the draft order subject to the limitation that it shall not set aside any proposed variation or issue any direction for further inquiry;
• Section 144 C(10) provides that every direction issued by the Dispute Resolution Panel would be binding on the Assessing Officer;
• Section 144C(13) provides that upon receipt of the directions issued by the Dispute Resolution Panel, the Assessing Officer shall in conformity with the directions complete the assessment without providing any further opportunity of being heard to the assessee.

In ‘Zuari Cement Limited V.  Assistant Commissioner of Income Tax’ – WP(C) No. 5537/2012, DB of AP High Court, the High Court held that the failure to pass a draft assessment order under section 143(1) of the Act would result in rendering the final assessment order ‘without jurisdiction’ null and void and unenforceable’.  In this case the consequent demand notice was also set aside.

In ‘Vijay Television Private Limited V. DRP’ – 2014 (6) TMI 540 - MADRAS HIGH COURT the Revenue sought to rectify a mistake by issuing a corrigendum after the final assessment order was passed. Consequently not only the final assessment order but also the corrigendum issued thereafter was also challenged.  The High Court quashed the final order of the Assessing Officer and the demand notice.  In respect of corrigendum, the High Court held that it was beyond the time permissible for issuance of such corrigendum and, therefore, it could not be sustained in law.

In ‘Turner International India Private Limited V. Deputy Commissioner of Income Tax’ – 2017 (5) TMI 991 - DELHI HIGH COURT the petitioner is a wholly owned subsidiary of Turnover Broadcasting System Asia Pacific Inc.  It is engaged in the business of sub-distribution of distribution rights and sale of advertisement inventory on satellite delivered channels.  The petitioner filed returns for the assessment year 2007 – 08 at ₹ 10,69,43,491 and the same was revised to claim a higher TDS. For the assessment year 2008 09 the petitioner filed a return of income at ₹ 35,04,23,465/-

Since there were international transactions involved a reference was made by the Assessing officer to the Transfer Pricing Officer.  The Transfer Pricing Officer issued two separate orders for the two difference financial years.  The Assessing Officer on the basis of the orders of Transfer Pricing Officer, draft assessment orders were passed by the Assessing Officer which was objected to by the Dispute Resolution Panel.  The Dispute Resolution Panel concurred with the Transfer Pricing Officer, final assessment orders were passed by the Assessing Officer.

On appeal by the assessee, the Appellate Tribunal observed that neither the petitioner nor the Transfer Pricing Officer had taken into consideration appropriate comparables and therefore the determination of arm’s length price was not justifiable.  The Appellate Tribunal remanded the matters for undertaking a transfer pricing study afresh and frame an assessment in accordance with law.  Two separate orders were passed by the Transfer Pricing Officer proposing an upward assessment to the total income of the petitioner for each of the assessment year.  The Assessing Officer confirmed the additions as proposed by the Transfer Pricing Officer.

The said orders were challenged before the High Court.  The main ground of the challenge is that there was non compliance with the mandatory provision contained in section 144 C(1) of the Act requiring the Assessing Officer to first frame draft assessment orders. The Revenue contended that the failure to adhere to the mandatory requirement of issuing a draft assessment order be a curable defect.  The matter must be restored to the Assessing officer to pass a draft assessment order and for the petitioner to pursue the matter before the Dispute Resolution Panel.  The Court did not accept the contentions of the Revenue.  The failure by the Assessing officer to adhere to the mandatory requirement of section 144C(1) of the act and first pass a draft assessment order would result in invalidation of the final assessment order and the consequent demand notices and penalty proceedings.  The High Court set aside the assessment orders.

In ‘Commissioner of Income tax V. C-SAM (India) Private Limited’ – 2017 (8) TMI 291 - GUJARAT HIGH COURT the Assessing Officer has taken the return filed by the assessee for the assessment year 2009 – 10.  The assessee was subjected to transfer pricing regime on account of its international transactions with associated persons.  The assessee filed NIL return for the said assessment year.  The Assessing Officer passed an assessment order computing the assessee’s income at ₹ 2.6 crores by making various additions and deletions as per the order of Transfer Pricing Officer. The assessee challenged the assessment order on the ground that the procedure laid down under section 144C of the Act was not followed by the Assessing Officer.

The Revenue did not dispute the factual aspect that upward revision was made in the income of the assessee on the basis of the order of the Transfer Pricing Officer and the same was done without following the procedure laid down under section 144C of the Act.  This was a mere procedural requirement and therefore a curable defect.  The Revenue, therefore, prayed that the Tribunal should have placed the Assessing Officer for passing a fresh order after following such procedure. The Tribunal dismissed the appeal of the Revenue and therefore Revenue approached the High Court.

The High Court observed that the statutory provisions under section 144C make it abundantly clear that the procedure laid down under section 144C is of great importance and is mandatory.  Before the Assessing Officer can make variations in the returned income of an eligible assessee, section 144C(1) lays down the procedure to be followed notwithstanding anything to the contrary contained in the Act.  This non obstante clause thus gives an overriding effect to the procedure.  When an Assessing Officer proposes to make variations to the returned income declared by an eligible assessee, the High Court held that-

• The Assessing Officer has to first pass a draft order;
• He shall provide a copy to the assessee;
• The assessee can raise his valuable right to raise objections before the Dispute Resolution Plan on any of the proposed variations;
• In addition to giving such opportunity to an assessee decision of the Dispute Resolution Plan is made binding on the Assessing Officer;

The High Court, therefore, held that is not possible to uphold the Revenue’s contention that such requirement is merely procedural.  The requirement is mandatory and gives substantive rights to the assessee to object to any additions before they are made. Further the Assessing officer is expected to pass the order of assessment in terms of such directions without giving any further hearing to the assessee. Thus at the level of Assessing Officer, the directions of the Dispute Resolution Panel would bind even the assessee.  Such opportunity cannot be taken away by treating it as purely procedural in nature.  The High Court dismissed the appeal.

In ‘JCB India Limited V. Deputy Commissioner of Income Tax and another’ – 2017 (9) TMI 673 - DELHI HIGH COURT the case of the assessee is for three assessment years from 2006 – 07 to 2008 – 09.  For the said three years the assessee filed returns at a income as detailed below-

• 2006 – 07 – ₹ 214,44,73,701;
• 2007 – 08 – ₹ 314,45,94,745;
• 2008 – 09 – ₹ 601,92,08,999;

Since the international taxations are involved between the petitioner and its associated enterprise, the Assessing Officer passed the final assessment for the above years at-

• 2006 – 07 – ₹ 255,45,21,520;
• 2007 – 08 – ₹ 426,63,86,286;
• 2008 – 09 – ₹ 731,93,88,090;

Against the order of the Assessing Officer for all the three years, the assessee filed separate appeals before the Appellate Tribunal.  The Appellate Tribunal, in all the three cases remanded the matter to the file of Dispute Resolution Panel for a fresh determination after dealing with the objections raised by the assessee.

The Dispute Resolution Panel placed orders for all three cases separately. The Transfer Pricing Officer recommended adjustments in all three cases.  The Assessing Officer passed the final assessment order at the rate for all three cases in line with the recommendations made by the Transfer Pricing Officer as detailed below-

• 2006 – 07 – ₹ 253,39,84,370;
• 2007 – 08 – ₹ 426,63,86,286;
• 2008 – 09 – ₹ 731,93,88,090;

Against these three orders the assessee filed appeals before the Tribunal.  The Appellate Tribunal allowed the appeals of the assessee and remanded the matter to the Assessing officer for a fresh adjudication in accordance with the law.

The Assessing Officer vide his letter dated 14.02.2014 sought the comments of the Transfer Pricing officer on the issue of transfer pricing adjustment.  There was no response from the Transfer Pricing Officer.  Vide letter dated 04.03.2016, the Assessing Officer called upon the Transfer Pricing Officer to quantify the transfer pricing adjustments in pursuance of the remand made by the Appellate Tribunal for fresh adjudication.  It was reiterated that the order of the assessment was to be completed by 31.03.2016.

The Transfer Pricing Officer issued notice on 10.03.2016 to the assessee to present its case.  The assessee made its submission on 17.03.2016 contending that the proceedings were barred by limitation in light of section 92CA (3A) read with section 153(2A).  The Transfer Pricing Officer passed separate orders for each of the assessment years under scrutiny on 30.03.2016 determining the transfer pricing adjustment at-

• 2006 – 07 – ₹ 40,67,16,966;
• 2007 – 08 – ₹ 86,76,93,761;
• 2008 – 09 – ₹ 134,21,17,779

The next day the Assessing Officer passed the final assessment order.  The Assessing Officer enhanced the returned income on the basis of transfer pricing adjustment as recommended by the Transfer Pricing Officer.  A notice of demand was send and show cause notice as to why penalty should not be imposed to the assessee.

The assessee filed writ petitions before the High Court, Delhi against the demand of notice and show cause notice.  The question that arised for the consideration of the High Court is whether, after the remand proceedings, the Assessing Officer could have, without issuing a draft assessment order under section 144C of the Act, straightaway issue the final assessment order.

The Revenue contended the following before the High Court-

• There was an efficacious alternative remedy available to the petitioner to file appeals against the impugned final assessment orders passed by the Assessing Officer;
• It is not mandatory on the part of the Assessing Officer to pass a draft assessment order since this was a second round before the Transfer Pricing Officer pursuant to remand by the Income Tax Appellate Tribunal;
• It was as if the Tribunal had set aside the entire assessment order of the Assessing Officer;
• The setting aside was only in respect of the transfer pricing adjustment and too with a specific direction to the Assessing Officer for determining the arm’s length price ‘after considering fresh comparables’;
• Since the assessment itself was not cancelled by the Tribunal or completely set aside, it is the provisions of section 153(3)(ii) of the Act would apply;
• The requirement of passing a draft assessment order under section 144C was only in the first instance and not after the remand by the Income Tax Appellate Tribunal;

The High Court did not accept the submissions made on behalf of the Revenue.  The High Court held that section 144C (1) of the Act is unambiguous.  It requires the Assessing Officer to pass a draft assessment order after receipt of the report from the Transfer Pricing Officer.  There is nothing in the wording of section 144C(1) which would indicate that this requirement of passing a draft assessment order does not arise where the exercise had been undertaken by the Transfer Pricing Officer on remand to it, of the said issue, by the Income Tax Appellate Tribunal.  The High Court also held that the final assessment order of the Assessing Officer stood vitiated not only on account of mere irregularity but also it was incurable illegality. The orders passed are without jurisdiction on account of the failure by the Assessing Officer to first pass a draft assessment order and thereinafter, subject to the objections filed before the Dispute Resolution Panel and the orders of the Dispute Resolution Panel, to pass the final assessment order.  The Court also set aside the orders of Transfer Pricing Officer.  The High Court allowed the writ petitions.