August 2021
Assessment order passed in violation of mandatory procedure laid under section 144C of the Act liable to be set aside – Bombay High Court
In brief
Recently, the High Court of Bombay (High Court)1held that an assessment order passed in contrary to the provisions of section 144C of the Income-tax Act, 1961 (the Act) and a failure to follow the binding procedure laid down therein, would render the order without jurisdiction and void ab initio, and thereby, ought to be quashed.
In detail
Facts
● The taxpayer is engaged in the trading of psychometric test products, assessment, consultancy and training services to clients in India across various industries.
● During the year under consideration, the taxpayer had entered into an international transaction of payment for support service charges to its Associated Enterprise.
● The return of income filed by the taxpayer was selected for scrutiny and a reference was made to the Transfer Pricing Officer (TPO).
● The TPO proposed an adjustment to the aforesaid international transaction entered by the taxpayer.
● Thereafter, the National e-Assessment Centre (NeAC) sought taxpayer’s rebuttals to the adjustment proposed by the TPO, which was duly filed by the taxpayer with the NeAC.
● Subsequently, the NeAC directly passed the final assessment order under section 143(3) read with sections 143(3A) and 143(3B) of the Act along with a notice of demand under section 156 of the Act and a penalty notice under section 274 read with section 270A of the Act.
Issues before the High Court
As the NeAC passed the final assessment order without following the Dispute Resolution Panel (DRP) route as per section 144C of the Act, the questions for consideration before the High Court were as follows:
(i) Whether the provisions contained in section 144C(1) of the Act are mandatory or directory?
(ii) Whether there has been a mere procedural error on the part of the NeAC or a jurisdictional error in passing the final assessment order without passing a draft assessment order, as required under section 144C(1) of the Act?
Taxpayer’s contentions
● The Tax Officer (TO)/ NeAC was necessarily required to forward a draft assessment order at the first instance in terms of sub-section (1) of section 144C of the Act, if they proposed to make any variation to the returned income of the taxpayer, it being an ‘eligible assessee’.
● The TO/ NeAC could have passed the final assessment order only after the receipt of and in conformity with directions of the DRP in terms of section 144C of the Act.
● The provisions of section 144C of the Act are required to be mandatorily followed; an order passed contrary to the provisions of said section led to a jurisdictional defect.
● The action of the NeAC in passing the final assessment order without passing the draft assessment error was a fundamental error and was not a curable defect under section 292B of the Act.
Revenue’s contentions
● While the Department accepted that there was a lapse on the part of the NeAC, it contended that such a lapse was merely procedural, committed inadvertently by the NeAC and it was a rectifiable mistake.
● Sufficient opportunity was given to the taxpayer for rebuttal of the proposed transfer pricing addition through a show cause notice and no prejudice was caused to the taxpayer.
● The order could not be an invalid one because the sum and substance of the order was on a strong footing and therefore, could not be challenged.
● Relying on a decision of the Supreme Court2, the Department contended that the order cannot be quashed but can be set aside for remedial action.
High Court’s decision
Placing reliance on several other High Court decisions3, the Bombay High Court held that:
● Section 144C(1) of the Act is a non-obstante provision, which requires its compliance, irrespective of the other provisions that may be contained in the Act.
● The procedure prescribed under section 144C of the Act needs to be mandatorily followed and is not merely directory.
● Failure to follow the procedure leads to a jurisdictional error and not merely a procedural error or
irregularity, as it was not a case of mistake in the order but beyond the power of the TO to issue an order.
● Section 292B of the Act cannot save an order passed in breach of the provisions of section 144C of the Act, the same being an incurable illegality.
● Non-issuance of a draft assessment order in case of an ‘eligible assesee’ leads to denial of substantive right, as the legislature intends to grant an opportunity to raise an objection before the DRP.
Based on the above findings, it was directed that that the assessment order passed without following the provisions of section 144C of the Act was liable to be set aside as voidab initio.
The takeaways
● The decision provides much granted relief to the taxpayer. It reinstates, rather strengthens, the proposition that it is mandatory to follow the provisions of section 144C of the Act in eligible cases; non-adherence of the provisions leads to errors that are jurisdictional in nature, and therefore, are not curable in terms of section 292B of the Act.
● It can also serve as a precedent for other cases where a mandatory provision is not abided and the Department seeks to take recourse to sections like 292B of the Act to undo a jurisdictional mistake.
● Even though in this case the taxpayer preferred a writ before the High Court, the issue being legal in nature can also be taken up before the lower Courts.
1WP (L) No. 11293 of 2021
2ITOv.M Pirai Choodi [2011] 334 ITR 262 (SC)
3Zuari Cement Limitedv.ACIT (WP No. 5557 of 2012) (AP High Court), CITv.C-Sam (India) (P) Limited [2017] 84 taxmann.com 261 (Gujarat High Court), International Air Transport Associationv.DCIT (WP(L) No. 351 of 2016) (Bombay
High Court), JCB India Limitedv.DCIT [2017] 85 taxmann.com 155 (Delhi High Court)
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