2025 (5) TMI 977 - HC - Income Tax

Validity of final assessment order passed without awaiting the conclusion of proceedings before the Dispute Resolution Panel (DRP) - HELD THAT - A perusal of the material on record would indicate that so long as the petitioner had filed its objection before DRP albeit not intimated due to glitches in the website/portal respondent No.1 ought to have awaited the outcome of DRP proceedings and could not have proceeded to pass the impugned assessment order which deserves to be set aside and necessary directions ought to be issued to the DRP to conclude the proceedings by considering the objections in accordance with law. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the Assessing Officer was justified in passing the final assessment order under the Income Tax Act, 1961 (hereinafter 'IT Act') for the assessment year 2022-23 without awaiting the conclusion of proceedings before the Dispute Resolution Panel (DRP), despite the petitioner having filed objections to the draft assessment order before the DRP;

(b) Whether the failure of the petitioner to intimate the Assessing Officer about the filing of objections before the DRP, due to technical glitches in the portal/website maintained by the respondents, disentitles the petitioner from the protection under Section 144C of the IT Act;

(c) The interpretation and application of the procedural requirements under Section 144C of the IT Act, particularly the interplay between the filing of objections before the DRP and the role of the Assessing Officer in finalizing the assessment;

(d) The effect of the Assessing Officer proceeding to pass the final assessment order and issuing demand and penalty notices without awaiting directions from the DRP;

(e) The legal consequences of non-compliance with the mandatory procedural safeguards under Section 144C of the IT Act, and the appropriate remedy.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (c): Validity of final assessment order passed without awaiting DRP proceedings and interpretation of Section 144C of the IT Act

Relevant legal framework and precedents: The Court extensively examined Section 144C of the IT Act, which governs the procedure for assessment in cases involving transfer pricing adjustments. Under Section 144C(2), an 'eligible assessee' receiving a draft assessment order may either accept the variations or file objections with the DRP within 30 days. The DRP then issues directions under subsections (5) to (10), which the Assessing Officer is bound to follow. Section 144C(13) mandates that the Assessing Officer shall await the DRP's directions before finalizing the assessment.

Two key precedents were relied upon: LG Soft India (P) Ltd. and Open Silicon Research (P) Ltd., both Karnataka High Court decisions dealing with similar procedural lapses in the context of Section 144C.

Court's interpretation and reasoning: The Court emphasized the mandatory nature of the procedural safeguards under Section 144C. It held that once the petitioner filed objections before the DRP within the prescribed period, the Assessing Officer was obligated to await the DRP's directions before passing the final assessment order. The Court found that the Assessing Officer's action in passing the final order without awaiting the DRP's directions was "arbitrary, illegal and without jurisdiction or authority of law."

The Court further clarified that the statutory scheme contemplates a two-step process: first, the filing of objections and second, the DRP's directions to guide the Assessing Officer. The Assessing Officer's discretion is circumscribed by these directions, making premature finalization of the assessment impermissible.

Key evidence and findings: The petitioner had filed objections to the draft assessment order before the DRP within the stipulated time. However, due to technical glitches in the portal, the petitioner could not intimate the Assessing Officer about the filing of objections. Despite this, the Assessing Officer proceeded to pass the final assessment order and issued demand and penalty notices.

Application of law to facts: The Court applied the principles from the cited precedents to hold that the petitioner's failure to intimate the Assessing Officer, caused by technical glitches, did not justify the Assessing Officer bypassing the DRP process. The petitioner's status as an eligible assessee and the timely filing of objections before the DRP triggered the mandatory procedural safeguards under Section 144C, which the Assessing Officer was bound to respect.

Treatment of competing arguments: The respondents argued that non-intimation to the Assessing Officer disentitled the petitioner from the protections under Section 144C, and that the Assessing Officer was justified in finalizing the assessment. The Court rejected this, holding that the procedural lapse was a bonafide technical glitch and that the Assessing Officer ought to have awaited the DRP's directions. The Court also noted that the statutory scheme should be interpreted harmoniously to prevent arbitrary finalization of assessments.

Conclusions: The final assessment order passed without awaiting the DRP's directions was quashed. The matter was remitted to the DRP to conclude proceedings by considering the petitioner's objections, and thereafter the Assessing Officer was directed to proceed in accordance with law.

Issue (b): Effect of non-intimation to Assessing Officer due to technical glitches

Relevant legal framework and precedents: Section 144C(2)(b)(ii) requires the assessee to file objections before the DRP and also to provide a copy to the Assessing Officer. The Court acknowledged this as a mandatory procedural requirement but recognized the practical difficulties arising from technical glitches in the portal.

Court's interpretation and reasoning: The Court held that the petitioner's inability to intimate the Assessing Officer was a "bonafide lapse" caused by technical glitches beyond the petitioner's control. The Court took a lenient view, consistent with the principles of equity and justice, especially in light of government notifications and judicial precedents extending limitation periods and recognizing pandemic-related difficulties.

Application of law to facts: The petitioner had filed objections before the DRP within the prescribed time, which was the substantive step triggering the procedural safeguards. The failure to intimate the Assessing Officer was not fatal to the petitioner's rights, and the Assessing Officer was required to await the DRP's directions regardless.

Treatment of competing arguments: The respondents contended that non-intimation was a procedural default that justified finalization of the assessment. The Court rejected this strict construction, emphasizing the need for a purposive interpretation that prevents injustice arising from technical or procedural glitches.

Conclusions: Non-intimation due to technical glitches did not disentitle the petitioner from the protections under Section 144C. The Assessing Officer was required to await the DRP's directions notwithstanding the lapse.

Issue (d) & (e): Consequences of Assessing Officer passing final assessment order prematurely and appropriate remedy

Relevant legal framework and precedents: The Court relied on the rulings in LG Soft India and Open Silicon Research, which held that final assessment orders passed without adherence to the procedural safeguards under Section 144C are liable to be quashed. The remedy is to remit the matter to the DRP for consideration of objections and thereafter for the Assessing Officer to pass orders in conformity with the DRP's directions.

Court's interpretation and reasoning: The Court held that the Assessing Officer's premature finalization of the assessment order was without jurisdiction and illegal. The statutory scheme mandates that the Assessing Officer act only after the DRP's directions, and failure to comply vitiates the assessment proceedings.

Application of law to facts: The impugned assessment order and consequential demand and penalty notices were quashed. The Court directed the DRP to conclude proceedings by considering the petitioner's objections and the Assessing Officer to proceed thereafter in accordance with law.

Treatment of competing arguments: The respondents urged dismissal of the petition and upheld the validity of the assessment order. The Court rejected this, emphasizing the mandatory nature of the procedural safeguards and the illegality of the Assessing Officer's action.

Conclusions: The impugned assessment order, demand notice, and penalty notice were quashed. The matter was remitted to the DRP and Assessing Officer for further proceedings in accordance with Section 144C.

3. SIGNIFICANT HOLDINGS

The Court crystallized the following core principles and made key determinations:

"Once objections are 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 impugned Assessment Order passed by respondent No.1- Assessing Officer without awaiting directions from the DRP, before whom the matter was pending pursuant to the petitioner filing his objections within the prescribed period is clearly arbitrary, illegal and without jurisdiction or authority of law and the same deserves to be quashed."

"Non-intimation due to technical glitches in the portal/website maintained by the respondents does not disentitle the petitioner from the protection under Section 144C of the Income Tax Act."

"The Assessing Officer is required to await the outcome of the DRP proceedings and cannot proceed to pass final assessment order and issue demand or penalty notices in the meanwhile."

"The matter is restored to the stage of Section 144C(13) and the assessing officer shall proceed further in terms of the procedure under Section 144C(13) and the time contemplated under Section 144C(13) is deemed to commence from the date of receipt of certified copy of this order by the assessing officer."