2016 (2) TMI 897 - HC - Income Tax

Invalid assessment order for foreign companies under Income Tax Act, 1961 set aside for lack of procedural compliance

The High Court held that the assessment order was invalid as it did not follow the requirement of a draft assessment order for eligible foreign companies ... Validity of assessment - Jurisdiction of AO - Held that:- An draft assessment order passed under Section 144C(1) of the Act bestows certain rights upon an eligible assessee such as to approach the DRP with its objections to such a draft assessment order. This is for the reason that an eligible assessee's grievance can be addressed before a final assessment order is passed and appellate proceedings invoked by it. However, these special rights made available to eligible assessee under Section 144C of the Act are rendered futile, if directly a final order under Section 143(3) of the Act is passed without being preceded by draft assessment order. The assessment order dated 23rd March, 2015 passed by the Assessing Officer for the assessment year 2012-13 is completely without jurisdiction. This is so as it has not been preceded by a draft assessment order. Hence, the foundational/basic order viz. the assessment order dated 23rd March, 2015 is set aside and quashed as being without jurisdiction. Consequent orders passed on rectification application as well as on penalty are also quashed and set aside being unsustainable. Issues:1. Challenge to assessment order under Income Tax Act, 1961.2. Rejection of rectification application under Section 154 of the Act.3. Imposition of penalty under Section 271(1)(c) of the Act.Analysis:1. The petitioner, a foreign company, challenged the assessment order dated 23rd March, 2015, passed under Section 143(3) of the Income Tax Act, 1961, contending that it was without jurisdiction as it was not preceded by a draft assessment order as required by Section 144C(1) of the Act. The petitioner argued that the assessment order and subsequent orders on rectification and penalty should be quashed and set aside due to this procedural irregularity.2. Following the assessment order, the petitioner filed objections under Section 144C(2) to the Dispute Resolution Panel (DRP). However, the DRP refused to entertain the objections, stating that its jurisdiction was limited to objections related to draft assessment orders under Section 144C(1) and not final orders under Section 143(3). Despite this, the DRP acknowledged the petitioner's status as a foreign company, which is crucial under Section 144C(15) as it mandates a draft assessment order for eligible foreign companies.3. The High Court found that the assessment order was indeed without jurisdiction as it did not comply with the requirement of a draft assessment order for eligible foreign companies. Citing a similar decision by the Andhra Pradesh High Court, the High Court set aside the assessment order, rectification application rejection, and penalty imposition order. The parties were allowed to pursue further legal actions, and all contentions were left open, emphasizing the importance of procedural compliance in tax assessments.In conclusion, the High Court's judgment in this case highlighted the significance of adhering to procedural requirements, especially concerning draft assessment orders for eligible foreign companies under the Income Tax Act, 1961. The decision serves as a reminder of the necessity for proper procedural steps in tax assessments to ensure fairness and compliance with the law.