2025 (5) TMI 523 - HC - Income Tax

Validity of final assessment passed without waiting for the directions of DRP - HELD THAT - As undisputed that pursuant to the draft assessment order the petitioner has filed objections before the DRT before cut off date i.e. 09.03.2025. Further in the light of the specific assertion on the part of the petitioner and its inability and omission to intimate and communicate the same to respondent No.1 was due to bona fide reasons sufficient case and unavoidable circumstances we deem it just and appropriate to set aside the impugned order by issuing necessary directions.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the final assessment order and associated notices passed and issued by the assessing authority without awaiting the resolution and directions of the Dispute Resolution Panel (DRP) are valid and sustainable.

(b) Whether the failure of the petitioner to intimate the assessing officer about the filing of objections before the DRP, despite filing such objections within the stipulated time, affects the validity of the assessment order passed subsequently.

(c) The interpretation and application of Section 144C of the Income Tax Act, 1961, particularly the procedural requirements concerning filing objections to draft assessment orders before the DRP and the assessing officer.

(d) The effect of the DRP issuing directions after the final assessment order has been passed and whether such directions render the assessment order infructuous or require setting aside the order.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of final assessment order and notices passed without awaiting DRP resolution

Relevant legal framework and precedents: The Court referred extensively to Section 144C of the Income Tax Act, which governs the procedure for assessment involving the DRP. Section 144C(13) mandates that the assessing officer must await directions from the DRP before passing the final assessment order once objections have been filed before the DRP.

The Court relied on the precedent set by a Coordinate Bench in Open Silicon Research (P.) Ltd Vs. Assessment Unit, which clarified that the assessing officer cannot proceed to finalize the assessment while objections are pending before the DRP.

Court's interpretation and reasoning: The Court held that once objections to the draft assessment order are filed before the DRP, the assessing officer is obliged to await the DRP's directions before passing the final assessment order. Proceeding otherwise violates the procedural safeguards under Section 144C(13).

Key evidence and findings: It was undisputed that the petitioner filed objections to the draft assessment order before the DRP within the prescribed timeline. Despite this, the assessing officer passed the final assessment order and issued demand and penalty notices without awaiting the DRP's directions.

Application of law to facts: The Court found that the assessing officer's action of passing the final order prematurely was contrary to the statutory scheme under Section 144C and the binding precedent. The procedural mandate requires the assessing officer to await DRP directions before concluding the assessment.

Treatment of competing arguments: The respondents argued that the assessing officer was entitled to proceed due to the petitioner's failure to intimate the filing of objections to the assessing officer, contending that such non-compliance justified finalization of the order. The Court rejected this argument on the ground that the petitioner's failure was a bona fide lapse and that the statutory scheme prioritizes the filing of objections before the DRP over procedural lapses in intimation.

Conclusions: The final assessment order and notices passed without awaiting the DRP's directions were held to be invalid and liable to be quashed.

Issue (b): Effect of petitioner's failure to intimate objections to assessing officer

Relevant legal framework and precedents: Section 144C(2)(b)(ii) of the Income Tax Act requires the assessee to file objections both before the DRP and to intimate the assessing officer of such objections. The Court in the Open Silicon Research case considered the consequences of non-compliance with this procedural requirement.

Court's interpretation and reasoning: The Court acknowledged that the petitioner did not intimate the assessing officer about the objections filed before the DRP, which constitutes a procedural lapse. However, the Court emphasized that this lapse does not empower the assessing officer to proceed with the final assessment order while objections are pending before the DRP. The statutory scheme must be construed harmoniously to ensure that the assessing officer waits for the DRP's directions once objections are filed, regardless of intimation lapses.

Key evidence and findings: The petitioner filed objections to the draft assessment order within the prescribed time, but failed to communicate this to the assessing officer due to bona fide reasons.

Application of law to facts: The Court found that the petitioner's failure to intimate was not deliberate and did not justify the assessing officer's premature finalization of the assessment. The procedural safeguard under Section 144C(13) prevails over the lapse.

Treatment of competing arguments: The respondents contended that strict compliance with intimation requirements is mandatory and that failure disentitles the petitioner from relief. The Court rejected this, holding that the statutory scheme mandates waiting for DRP directions once objections are filed, regardless of intimation.

Conclusions: The petitioner's failure to intimate the assessing officer was a bona fide lapse and did not validate the premature assessment order.

Issue (c): Interpretation and application of Section 144C of the Income Tax Act

Relevant legal framework and precedents: Section 144C provides the procedure for assessment involving the DRP, including timelines for filing objections, the role of the DRP in issuing directions, and the obligation of the assessing officer to comply with such directions before passing the final order.

The Open Silicon Research judgment elucidated the sequential procedure: (i) issuance of draft assessment order; (ii) filing of objections by the assessee before the DRP and assessing officer; (iii) DRP issuing directions; and (iv) assessing officer passing final assessment order in conformity with DRP directions.

Court's interpretation and reasoning: The Court reiterated that the assessing officer's power to finalize the assessment is conditional upon the DRP's directions once objections are filed. The assessing officer cannot bypass the DRP's role by passing the final order prematurely.

Key evidence and findings: The petitioner filed objections before the DRP within the stipulated time, but the assessing officer proceeded to pass final orders before DRP directions were issued.

Application of law to facts: The Court applied the statutory scheme strictly, holding that the assessing officer must await DRP directions and act accordingly.

Treatment of competing arguments: The respondents argued that the assessing officer's discretion to finalize the order exists if the assessee fails to comply with intimation requirements. The Court held that such discretion is circumscribed by the statutory mandate to await DRP directions once objections are filed.

Conclusions: The statutory framework under Section 144C requires strict adherence to the procedural sequence, and the assessing officer's premature finalization was contrary to law.

Issue (d): Effect of DRP issuing directions after final assessment order

Relevant legal framework and precedents: The Open Silicon Research judgment dealt with the scenario where the DRP issues directions after the final assessment order is passed, holding that such directions render the assessment order infructuous and necessitate setting aside the order for reassessment in conformity with DRP directions.

Court's interpretation and reasoning: The Court noted that the DRP's directions have binding effect on the assessing officer under Section 144C(13). If directions are issued after the final order, the final order must be set aside and the matter remitted for fresh consideration in accordance with the DRP's directions.

Key evidence and findings: In the present case, no directions had been issued by the DRP before the final order, but the petitioner had filed objections and the DRP was yet to give directions.

Application of law to facts: The Court held that since objections were filed and DRP directions were pending, the assessing officer should have awaited such directions. The premature final order was thus invalid.

Treatment of competing arguments: The respondents contended that the DRP lacks jurisdiction after the final order is passed. The Court rejected this, emphasizing that the statutory scheme contemplates setting aside the final order if directions are issued subsequently.

Conclusions: The final assessment order passed without awaiting DRP directions is liable to be set aside, and the assessing officer must proceed afresh after the DRP issues directions.

3. SIGNIFICANT HOLDINGS

The Court held:

"Once objections have been filed before the DRP and till directions are issued, the assessing officer cannot proceed further. This is in light of mandate under Section 144C (13). Accordingly, non-intimation to the assessing officer under Section 144C (2) (b) (ii) though is a lapse on the part of the petitioner, the only way of meaningfully and harmoniously interpreting the obligation of filing objections under Section 144C (2) (b) (ii) is to construe the procedure that once such objections are filed before the DRP and till the decision is taken by the DRP regarding directions to be passed, the assessing officer ought not to proceed further."

"The assessing officer is to follow the directions issued by the DRP. It is clarified that the observations made above are made in the context of directions being issued by the DRP at a subsequent point of time and will not have the effect of construing the duty to file objections before the assessing officer under Section 144C (2) (b) (ii) as being optional and not mandatory."

"The impugned order dated 19.03.2025 and the impugned notices dated 19.03.2025 are hereby quashed. Respondent No.1 is directed to proceed further after conclusion of the proceedings before the DRP and in accordance with law."

Core principles established include:

- The statutory scheme under Section 144C mandates that the assessing officer must await DRP directions once objections are filed before the DRP.

- Filing objections before the DRP is a substantive procedural safeguard that cannot be circumvented by procedural lapses such as failure to intimate the assessing officer.

- Final assessment orders passed without awaiting DRP directions are liable to be set aside.

- The DRP's directions bind the assessing officer, and the assessment must be finalized in conformity with those directions.

Final determinations on each issue were in favor of the petitioner, resulting in the quashing of the impugned final assessment order and notices, and directions for the assessing officer to proceed in accordance with the statutory procedure and DRP directions.