2018 (4) TMI 864 - AT - Income Tax

Invalid Draft Assessment Order under Income Tax Act; Procedural Requirements Not Met

The Tribunal held that the draft assessment order issued by the Assessing Officer (AO) under section 144C of the Income Tax Act was invalid as it did not ... Mandatory requirement of issuing draft assessment order under section 144C - nullity of assessment passed without complying with section 144C - crystallisation of demand in purported draft assessment order - initiation of penalty proceedings along with draft order vitiates procedure - jurisdictional defect in assessment vitiates consequential ordersMandatory requirement of issuing draft assessment order under section 144C - crystallisation of demand in purported draft assessment order - jurisdictional defect in assessment vitiates consequential orders - Validity of a draft assessment order which crystallised demand and issued penalty notice without compliance with the draft-order procedure under section 144C. - HELD THAT: - The Tribunal held that where the TPO proposes a variation prejudicial to the assessee, the Assessing Officer must first forward a draft assessment order to the assessee under the statutory scheme so that the assessee may accept the variation or file objections with the Dispute Resolution Panel (DRP). In the present case the document styled as a 'draft' in substance assessed income, crystallised demand by issuing a demand notice and initiated penalty proceedings; consequently the procedural protections afforded by section 144C were rendered nugatory. The Tribunal found that issuance of demand and penalty show-cause in the so-called draft amounted to a finalisation of assessment in violation of the mandatory statutory procedure, producing a jurisdictional defect which vitiates the assessment and consequential orders. The Tribunal noted that the Revenue's contention that the demand was not served was untenable because the demand notice was on record and relied upon by the assessee. Applying the settled principle that non-compliance with the mandatory pre-conditions of section 144C renders the assessment without jurisdiction, the Tribunal set aside the draft order and declined to decide the merits of the underlying additions as they became academic. [Paras 9, 12, 13]The purported draft assessment order that crystallised demand and initiated penalty proceedings without complying with the mandatory draft-order procedure under section 144C is invalid and set aside; consequential grounds on merits are rendered academic.Final Conclusion: Appeal allowed: the draft assessment order which in substance completed assessment by crystallising demand and issuing penalty notice without complying with section 144C is invalid; consequential orders do not survive and other grounds become academic. Issues Involved:1. Validity of the assessment order issued under section 144C of the Income Tax Act, 1961.2. Issuance of demand and penalty notices along with the draft assessment order.Issue-Wise Detailed Analysis:1. Validity of the assessment order issued under section 144C of the Income Tax Act, 1961:The primary issue in the appeal was whether the draft assessment order issued by the Assessing Officer (AO) was valid under section 144C of the Income Tax Act, 1961. The assessee contended that the assessment order dated March 26, 2013, was bad in law and void ab initio as it violated section 144C. The AO had issued a draft assessment order that not only crystallized the demand but also initiated penalty proceedings under section 271(1)(c) of the Act. The Tribunal noted that the draft assessment order should only propose additions and issue a show cause notice to the assessee, allowing them to either accept the proposed additions or file objections before the Dispute Resolution Panel (DRP). However, in this case, the AO had issued a final assessment order under the guise of a draft assessment order, thereby violating the procedural requirements of section 144C. The Tribunal relied on various precedents, including the decisions in M/s. Sandvik Asia Pvt. Ltd. Vs. DCIT, Walter Tools India Pvt. Ltd. Vs. ACIT, and Soktas India (P.) Ltd. Vs. ACIT, to conclude that the draft assessment order was invalid as it did not follow the mandatory procedure outlined in section 144C.2. Issuance of demand and penalty notices along with the draft assessment order:The second issue was the AO's issuance of demand and penalty notices along with the draft assessment order. The Tribunal observed that the AO had issued a demand notice under section 156 and a notice for initiation of penalty proceedings under section 271(1)(c) along with the draft assessment order. This action was contrary to the provisions of section 144C, which mandates that a draft assessment order should only propose additions and not crystallize the demand. The Tribunal referred to the decision in DCIT Vs. M/s. Rehau Polymers Pvt. Ltd., where it was held that the issuance of a demand notice along with the draft assessment order renders the proceedings null and void. The Tribunal also cited the Hon'ble Madras High Court's decision in Vijay Television Pvt. Ltd. Vs. DRP & Others, which emphasized that non-compliance with the mandatory procedure of issuing a draft assessment order invalidates the entire assessment proceedings. Consequently, the Tribunal held that the AO's actions in issuing demand and penalty notices along with the draft assessment order were invalid and not in accordance with the law.Conclusion:Based on the above analysis, the Tribunal concluded that the draft assessment order passed by the AO was invalid in law, and the consequent final assessment order did not survive. The Tribunal allowed the additional grounds of appeal raised by the assessee, thereby rendering the original grounds of appeal academic. The appeal of the assessee was allowed, and the assessment order dated March 26, 2013, along with the demand and penalty notices, was set aside.