Invalid Assessment Order Due to Non-Compliance with Section 144C

The Tribunal allowed the appeal of the assessee, holding that the assessment order was invalid due to non-compliance with section 144C of the Income-tax Act. The Tribunal found that the AO's issuance of a demand notice along with the draft assessment order, without providing an opportunity to accept adjustments or file objections before the DRP, rendered the assessment proceedings invalid. Consequently, the Tribunal dismissed the Revenue's grounds of appeal and the assessee's Cross Objections on the merits of the additions as academic, emphasizing the mandatory nature of following the prescribed procedure under section 144C.

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Issues Involved:
1. Jurisdictional validity of the assessment order issued without following the procedure laid down in section 144C of the Income-tax Act, 1961.
2. Issuance of demand notice under section 156 and notice under section 274 read with section 271(1)(c) along with the draft assessment order.
3. Merits of the additions made in the hands of the assessee.

Detailed Analysis:

Issue 1: Jurisdictional Validity of the Assessment Order

The primary issue raised by the assessee was the jurisdictional validity of the assessment order issued without following the procedure laid down in section 144C of the Income-tax Act, 1961. The assessee argued that the Assessing Officer (AO) erred in completing proceedings under section 143(3) read with section 144C of the Act. Specifically, the AO issued a draft assessment order along with a demand notice under section 156 and a notice for initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Act. The assessee contended that the draft assessment order did not include directions to either accept the adjustment made on account of transfer pricing or file objections before the Dispute Resolution Panel (DRP).

The Tribunal noted that the draft assessment order should propose additions and issue a show cause notice to the assessee to either accept the adjustments or file objections before the DRP. However, in this case, the AO assessed the income and issued a demand notice, which crystallized the demand, essentially treating the draft assessment order as a final assessment order. This procedure was found to be contrary to the provisions of section 144C of the Act.

The Tribunal cited similar cases, including DCIT Vs. M/s. Rehau Polymers Pvt. Ltd., where it was held that the issuance of a demand notice along with a draft assessment order rendered the assessment invalid. The Tribunal also referred to decisions from the Hon’ble High Court of Delhi in JCB India Ltd. Vs. DCIT and Turner International India (P.) Ltd. Vs. DCIT, which emphasized the mandatory nature of issuing a draft assessment order before a final assessment order.

Issue 2: Issuance of Demand Notice and Penalty Notice

The Tribunal examined the issuance of the demand notice under section 156 and the notice for initiation of penalty proceedings under section 274 read with section 271(1)(c) along with the draft assessment order. It was observed that the AO had issued the demand notice and initiated penalty proceedings, which indicated that the draft assessment order was treated as a final assessment order. This was deemed incorrect as per the statutory requirements, which mandate that the draft assessment order should only propose adjustments and not crystallize the demand.

The Tribunal reiterated that the issuance of a demand notice along with the draft assessment order contravened the provisions of section 144C of the Act and rendered the assessment proceedings invalid.

Issue 3: Merits of the Additions

Given that the Tribunal decided the jurisdictional issue in favor of the assessee, it did not address the merits of the additions made by the AO. The Tribunal held that since the assessment order was invalid due to non-compliance with section 144C, the other grounds of appeal regarding the merits of the additions became academic and were dismissed.

Conclusion:

The Tribunal allowed the appeal of the assessee on the jurisdictional issue, holding that the draft assessment order was invalid in law. Consequently, the grounds of appeal raised by the Revenue and the Cross Objections filed by the assessee on the merits of the additions were dismissed as academic. The order pronounced on January 25, 2018, concluded that the assessment order and the subsequent proceedings were invalid due to the AO's failure to follow the mandatory procedure under section 144C of the Act.

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