Bombay HC rebukes I-T Dept for failure to follow procedure prescribed u/s 144C(1) of Income Tax Act; calls it jurisdictional error

Read Judgment: SHL India Private Ltd. vs. Deputy Commissioner of Income Tax & Ors

Pankaj Bajpai

Mumbai, July 29, 2021: While allowing the petition of the taxpayer, the Bombay High Court has ruled that where there is an upward revision to the income on the basis of transfer pricing mechanism, opportunity of raising objections before the DRP cannot be taken away by treating it as merely procedural in nature. 

A Division Bench of Justice Sunil P Deshmukh and Justice Abhay Ahuja observed that failure on the part of the assessing officer (AO) to follow the procedure prescribed u/s 144C(1) of Income Tax Act is not a merely procedural or inadvertent error, but a breach of a mandatory provision. 

The High Court made it clear that the AO u/s 144C(1) is mandated to first pass a draft assessment order, communicate it to the assessee, hear his objections and then complete the final assessment. 

The dispute which led to filing of the present petition, was the passing of final assessment order by the AO without granting the assessee an opportunity to raise objections before the Dispute Resolution Panel (DRP). 

The AO in this case noticed certain international transactions between the assessee and its overseas Associated Enterprise (AE), and accordingly made a reference to the Transfer Pricing Officer (TPO) for computing the Arm’s Length Price (ALP). Accordingly, the TPO passed an order proposing transfer pricing adjustments. Although the assessee was requested to provide rebuttal to the proposed adjustments to the ALP, and in response the assessee filed the same, however, ignoring the same, the final assessment was passed u/s 143(3) r/w/s 143(3A) and 143(3B) of the I-T Act. In addition, demand notice was also issued along with notice for initiating penalty proceedings u/s 274 r/w/s 270A of the I-T Act.

The Bench found that whether the provisions of Section 144C(1) of the I-T Act are mandatory in nature came to be considered by the Andhra Pradesh High Court in the case of M/s. Zuari Cement Limited Vs. The Assistant Commissioner of Income Tax, Circle–2(1), Tirupathi, wherein the High Court has held that provisions of Section 144C are mandatory as the AO u/s 144C(1) is mandated to first pass a draft assessment order, communicate it to the assessee, hear his objections and then complete assessment. 

“The question whether failure to give an opportunity of filing objections to assessee u/s 144C (2) would be a mere procedural error or a jurisdictional error came to be considered by the Gujarat High Court in case of Commissioner of Income Tax, Vadodara-2 Vs. C-Sam (India) (P.) Limited, wherein it was held that the procedure laid down u/s 144C is not merely procedural as the provision to first pass a draft order and provide a copy thereof to the assessee is a mandatory requirement and gives substantive rights to the assessee to object to any additions before they are made and such objections have to be considered not by the Assessing Officer but by the DRP,” noted the Bench.

Justice Ahuja reiterated that the decision of the Delhi High Court in the case of JCB India Limited Vs. Deputy Commissioner of Income-Tax also re-emphasizes that the AO cannot straight away pass a final assessment order without issuing a draft assessment order u/s 144C(1), even in the case of remand of proceedings and that such an omission is not a mere irregularity, but an incurable illegality, which cannot be saved by Section 292B of the Income Tax Act. 

“The Assessing Officer ought to have in the first instance forwarded a draft of the proposed order of assessment to assessee, as there was a proposed variation prejudicial to the interest of the assessee. This important step has been completely omitted by the AO taking away a very necessary right of assessee to file objections to the proposed variation with the DRP and the Assessing Officer, strikes to the root of the procedure contemplated by Section 144C,” added the Bench. 

Emphasizing that the AO has wrongly assumed the jurisdiction to straight away pass the final order, which is clearly a case of jurisdictional error, Justice Ahuja stated that depriving assessee of this valuable right to raise objection before the DRP would be denial of substantive rights to the assessee, for which the AO has no power under the statute.

Accordingly, applying the judicial principles to the facts of this case, the Bombay High Court concluded that the failure on the part of AO to follow the procedure u/s 144C(1) is not a merely procedural or inadvertent error, but a breach of a mandatory provision.