Delhi High Court rules against IT Dept over assessing officer’s failure to adhere to mandatory requirement

The Delhi High Court has recently held that the failure of the assessing officer to adhere to the “mandatory requirement” of Section 144C(1) of the Income Tax Act, 1961 invalidates the assessment order.

The division bench of Justice Manmohan and Justice Sanjeev Narula heard the appeal challenging the order dated November 9, 2017, passed by the Income Tax Appellate Tribunal (ITAT), whereby the Revenue’s appeal, for the assessment year 2007-08, has been dismissed.

The respondent-assessee, a wholly-owned subsidiary of Headstrong Services LLC, USA, had filed its return of income declaring income of Rs 30,64,480 for the relevant assessment year. Thereafter, the revised return of income was filed on January 30, 2009 that was processed under Section 143(1) of the Income Tax Act, 1961 and subsequently, the case of the respondent-assessee was selected for scrutiny assessment and notice under Section 143(2) was issued.

During the scrutiny assessment, the Assessing Officer made a reference to the office of Transfer Pricing Officer (TPO) in relation to the international transaction between the respondent-assessee and its Associated Enterprise (AE). The draft assessment order under Section 144C(1) of the Act was passed on December 31, 2010 and the respondent-assessee filed objections before the Dispute Resolution Panel (DRP). Thereafter, assessment under Section
143(3)/144C of the Act was completed in pursuance to directions issued by the DRP, wherein addition was made on account of the excess claim of deduction under Section 10A of the Act and transfer pricing adjustment made by the TPO.

Section 144C(1), inserted in the Act by a 2009 amendment, states that Assessing Officer should forward the draft of the proposed assessment order to the eligible assessee, if any variation of the income or loss returned on or after October 1, 2009 is proposed to be made to the prejudice of the assessee. On receipt of such a draft, the assessee will have an opportunity to file objections within 30 days of its receipt.

The Court held that the provision was a “mandatory requirement” and the failure to comply with it will invalidate the final assessment order.

“The failure by the AO 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 bench said in the judgment passed in the case of Principal Commissioner of Income Tax-4 vs Headstrong Services India Pvt Ltd.

The Court observed: “Section 144C is a self-contained provision which carves out a separate class of assesses i.e. “eligible assessee‟ i.e. any person in whose case the variation arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of Section 92CA. For this class of assesses, it prescribes a collegium of three commissioners, once objections are preferred. Dispute Resolution Panel’s powers are coterminous with the CIT(A), including the power to confirm, reduce or enhance the variation proposed and to consider the issues not agitated by the Assessee in the objections. In fact, under Section 144C, the Dispute Resolution Panel can issue directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and the Dispute Resolution Panel can confirm, reduce or enhance the variations proposed in the draft order. It is specifically stipulated in Section 144C that every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. This is akin to the Assessing Officer giving effect to an order passed by the Appellate Authority or the Courts.

Consequently, Section 144C envisages a change of forum and it leads to complete cessation of the jurisdiction of the Assessing officer on passing of the draft order. Thereafter the Assessing officer is to give effect to either the direction of the Dispute Resolution Panel or pass an order on acceptance by the Assessee.”

The Court noted, in complete contravention of Section 144C, the Assessing Officer wrongfully assumed the jurisdiction and passed the final assessment order without passing a draft assessment order and without giving the respondent/assessee an opportunity to raise objections before the Dispute Resolution Panel.

The bench said the Income Tax Department ensures that the Assessing Officers follow the mandate of law, in particular, binding provisions like Section 144C and eschew filing of unnecessary appeals rather than in nearly all matters where the Assessing Officer has taken a view against the Assessee, the assessments will not achieve finality for a number of years like in the present case where the case of assessment year 2007-08 stands remanded and restored to the file of the Assessing Officer.”

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Consequently, we dismiss the appeal and confirm the impugned order of the ITAT with costs of Rs 11,000 to be paid to Delhi High Court Legal Services Committee, the order reads.