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The Hon’ble Delhi High Court, in a bunch of writ petitions, led by Principal Commissioner of Income Tax vs Sumitomo Corporation India (P.) Ltd.[1] has quashed the final assessment orders passed without a draft order of assessment being passed as per the provisions of section 144C(1) of the Income-tax Act, 1961 (‘the Act’). The summary of the judgment is as follows:

In these writ petitions, the two principal questions before the Hon’ble Delhi High Court were as follows:

1. Whether the Assessing Officer (‘AO’) was justified in proceeding to frame a Final Assessment Order without passing a Draft Assessment Order as per the provisions of section 144C(1) of the Act; and
2. Since the final assessment order was passed after expiry of time limit prescribed under section 153 of the Act, was liable to be quashed.

The key observations of the Hon’ble Delhi High Court for question (1) above are as follows:

• It has been the consistent view of the Hon’ble Delhi High Court in a catena of judgments that a failure to frame an assessment order in draft is clearly violative of the mandatory provisions of section 144C of the Act and any final assessment order framed in violation thereof would be a nullity.
• Relying upon various judgments and comparing section 144C of the Act with erstwhile section 144B (i.e., Reference to Inspecting Assistant Commissioner in certain cases) of the Act, the contention of the Revenue that a failure to frame a draft assessment order was a mere procedural irregularity which could be remedied by restoring the file to the AO to pass a draft assessment order was rejected.
• Section 144C of the Act is a special assessment mechanism wherein the Transfer Pricing Officer (‘TPO’) has the power to compute and assess arm’s length price under section 92CA and the AO has the power to assess other segments of income during the relevant Assessment Year.
• Section 144C of the Act is a special assessment mechanism wherein the AO is bound by the views of the TPO recognized in the draft assessment order and further, the directions of the Hon’ble Dispute Resolution Panel (‘DRP’) are also binding on the AO requiring him/her to complete an assessment in terms of the directions set out by the DRP.
• It was also stated that a failure to frame a draft order of assessment not only curtails the right of the assessee to adopt corrective measures, but also deprives the assessee of a salutary right to challenge the draft in terms of the salutary mechanism laid in place.

Accordingly, the writ petitions filed by various petitioners (taxpayers) were allowed and the writ petitions filed by the Revenue were dismissed and final assessment orders passed without draft assessment orders being passed were quashed. Thus, the rulings of the Hon’ble Income Tax Appellate Tribunal were upheld.

KNAV Comments:

Various courts, including the Hon’ble Delhi High Court have held that a final assessment order passed without following the procedure prescribed in section 144C of the Income-tax Act, 1961 would be liable to be quashed. Accordingly, if an assessee receives any final assessment order which has been passed without following the procedure laid down in section 144C, the assessee may challenge the final assessment order on these grounds itself rather than going into the merits of the case.

Further, this judgment further settles the already settled position that any final assessment order passed without following the procedure as laid down in section 144C is liable to be quashed.

Further, the Hon’ble Delhi High Court has not adjudicated on question (2) mentioned above, i.e., section 153 timelines. However, the Hon’ble Bombay High Court in Shelf Drilling Ron Tappmeyer Ltd. vs Assistant Commissioner of Income-tax, International Taxation[2] has held that time limits prescribed in section 153 of the Act would prevail over and above assessment time limits prescribed under section 144C of the Act. However, a Special Leave Petition is filed by the Revenue against this judgment before the Hon’ble Supreme Court of India and the Hon’ble Supreme Court has granted interim stay.

[1] [TS-378-HC-2024(DEL)-TP]

[2] [2023] 153 taxmann.com 162 (Bombay)