2025 (6) TMI 1409 - HC - Income Tax

Validity of final assessment orders passed u/s 147 r/w Section 144 - As argued subsequent communication intimating the DIN for DRP proceedings did not satisfy the conditions prescribed in paragraph No.3 of the circular; and that therefore those orders are invalid in law and as a sequitur the assessment orders which were impugned before ITAT are liable to be quashed - HELD THAT - DIN in fact was generated for DRP proceedings written by hand and subsequently communicated on 21.12.2022 and therefore the conditions prescribed in paragraph No.3 of the circular have been complied with. Admittedly the reason for writing the DIN number by hand and the reason for not generating the DIN electronically have not been specified in the format prescribed in paragraph No.3 of the circular. Even prior written approval of the Chief Commissioner/Director General of Income-Tax as prescribed in Clause (3) of the Circular was not brought to our notice. If such prior permission has not been taken that will also be another ground to make the communication to be treated as invalid and having never been issued. Therefore the communication or the proceedings of the DRP is not in conformity with paragraph Nos.2 and 3 of the circular and are invalid and deemed to have never been issued. Consequently the assessment orders under Section 144C(13) of the Act which are passed on those directions of DRP cannot be sustainable. Therefore the findings of ITAT are in accordance with law and no interference is called for. The substantial questions of law are answered accordingly. It is alleged that ITAT chose to hold that the orders are invalid which had led to huge revenue loss to the department. It is however the responsibility of the Assessing Officer to ensure that he strictly complies with the Circulars issued by his Department and instead of blaming the ITAT he should personally take the responsibility of causing revenue loss to the department. We note another disturbing feature in these cases. According to the communication dated 21.12.2022 the DIN for the directions under Section 144C (5) of the Act ends with the following number 1048133274(1) whereas the DIN quoted in the DRP is the number ending with 1048143460(1). In fact the latter number is the DIN generated in the communication dated 21.12.2022. It is not known as to how a DIN generated on 21.12.2022 could find a place in the proceedings of DRP dated 19.12.2022. Learned counsel for appellant was unable to give any satisfactory explanation. Therefore we are of the view that the DIN has been interpolated subsequently in the proceedings of the DRP and would not have been generated in real time as claimed by appellant. The false claim by appellant therefore has to be viewed seriously. We are of the view that the appellant would be liable to pay costs of Rs. 1, 00, 000/- Rupees One Lakh only . Hence we direct appellant to pay a sum of Rs. 1, 00, 000/- Rupees One Lakh only to PM CARES Fund and this amount shall be paid within two weeks from the date of uploading this order.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these appeals are:

(a) Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that the Department failed to comply with the Central Board of Direct Taxes (CBDT) Circular No.19/2019 dated 14.08.2019 regarding the mandatory quoting of a Document Identification Number (DIN) in the directions issued by the Dispute Resolution Panel (DRP) under Section 144C(5) of the Income Tax Act, 1961 (the Act).

(b) Whether the subsequent communication of the DIN to the assessee, after the DRP directions were issued without a valid DIN, constitutes sufficient compliance with the CBDT Circular.

(c) Whether the absence or irregularity in the quoting of DIN in the DRP directions invalidates those directions and consequently renders the final assessment orders passed under Section 147 read with Section 144 of the Act, which rely on such directions, invalid.

(d) Whether the DRP directions are themselves communications requiring DIN under the CBDT Circular, or whether only the final assessment orders require such DIN.

(e) Whether the ITAT erred in setting aside the assessment orders despite the assessment orders containing valid DINs, on the ground that the DRP directions lacked valid DINs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Compliance with CBDT Circular No.19/2019 regarding DIN in DRP directions

The CBDT Circular No.19/2019 mandates that all communications issued by income-tax authorities, including notices, orders, summons, letters, and correspondence, must contain a computer-generated DIN to ensure proper audit trail and transparency. Paragraph 2 of the Circular makes this mandatory from 1 October 2019 onwards. Paragraph 3 provides for limited exceptional circumstances where manual communication without DIN may be issued, but only after recording reasons in writing and obtaining prior written approval from the Chief Commissioner or Director General of Income Tax. Paragraph 4 states that any communication not conforming to these requirements shall be treated as invalid and deemed never to have been issued. Paragraph 5 allows for regularization of manual communications without DIN within 15 working days by uploading the communication on the system, generating the DIN, and communicating it electronically to the concerned person.

The Court emphasized the binding nature of the CBDT Circular issued under Section 119 of the Act and reiterated that failure to comply with its mandatory directions renders the communication invalid.

In the present case, the DRP directions under Section 144C(5) were issued without quoting a valid DIN at the time of issuance. Although the appellant contended that a DIN was manually written on the DRP directions and subsequently communicated electronically to the assessee within 15 days, the Court found that the manual DIN was not generated electronically on the date of the DRP directions and the subsequent communication did not comply with the prescribed format or obtain prior written approval as required under paragraph 3 of the Circular. The reasons for manual issuance without DIN were not recorded in writing in the prescribed format, nor was prior approval from the Chief Commissioner/Director General obtained.

The Court also noted discrepancies in the DIN numbers quoted in the DRP directions and the subsequent intimation letters, indicating interpolation of the DIN after the fact rather than real-time generation. This was considered a serious breach of compliance and undermined the genuineness of the communication.

The Court referred to binding precedent from a Division Bench of Bombay High Court which held that communications such as satisfaction notes and assessment orders without valid DIN are invalid and deemed never to have been issued. By analogy, the Court held that DRP directions, being communications issued by income-tax authorities, fall within the scope of the Circular and must comply with its requirements.

Issue (c) and (e): Effect of invalid DRP directions on final assessment orders

The DRP directions under Section 144C(5) serve as the basis for the Assessing Officer to pass final assessment orders under Section 144C(13) of the Act. The Court held that if the DRP directions are invalid due to non-compliance with the CBDT Circular, the consequential final assessment orders passed pursuant to those directions cannot be sustained. The ITAT rightly quashed the assessment orders on this ground.

The appellant's argument that the final assessment orders contained valid DINs and therefore should not be set aside was rejected. The Court emphasized that the DRP directions are integral to the assessment process and are themselves communications requiring DIN compliance. The final assessment orders merely give effect to the DRP directions and cannot cure the fundamental invalidity of the directions themselves.

Issue (d): Whether DRP directions require DIN under the Circular

The appellant contended that the DRP directions are not orders of an income-tax authority and therefore the requirement of DIN quoting under the Circular does not apply. The Court rejected this submission, holding that the DRP is a collegium of Income Tax Commissioners and its directions constitute communications within the ambit of paragraph 2 of the Circular. The purpose of the Circular is to create an audit trail for all communications issued by income-tax authorities, including those relating to assessments and appeals. Hence, DRP directions must comply with the DIN requirements.

Treatment of competing arguments

The appellant's arguments regarding procedural nature of DIN, subsequent compliance by electronic communication, and validity of assessment orders despite invalid DRP directions were considered and rejected based on the clear language and binding effect of the CBDT Circular, the factual findings on non-compliance, and relevant judicial precedents. The respondent's contentions regarding the invalidity of DRP directions and consequential invalidity of assessment orders were accepted.

3. SIGNIFICANT HOLDINGS

The Court held:

"Any communication which is not in conformity with Para-2 and Para-3 of the circular shall be treated as invalid and shall be deemed to have never been issued."

"The directions of the DRP which consists of a collegium of three Income Tax Commissioners also would fall within the scope of paragraph No.2 of the circular."

"If the DRP directions are invalid due to non-compliance with the CBDT Circular, the consequential assessment orders passed pursuant to those directions cannot be sustainable."

"The appellant has interpolated the DIN subsequently in the proceedings of the DRP and would not have been generated in real time as claimed, which is a serious breach."

"The responsibility lies with the Assessing Officer to ensure strict compliance with the Circulars issued by the Department and failure to do so cannot be blamed on the ITAT."

Accordingly, the ITAT's orders quashing the assessment orders were upheld, and the appeals dismissed with costs imposed on the appellant for making false claims regarding DIN generation.