Tribunal quashes assessment order for failure to issue draft order. Assessee's appeal allowed.

The tribunal quashed the assessment order passed by the AO under section 143(3) read with section 144C due to the failure to issue a draft assessment order, which is a mandatory requirement under the statute. Consequently, the other grounds raised by the assessee regarding the disallowance of interest, various expenses, and additional depreciation were rendered infructuous and dismissed. The appeal of the assessee was allowed.

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Issues Involved:
1. Legality of the assessment order passed without providing a draft of the proposed order of assessment as required under section 144C of the Income Tax Act, 1961.
2. Disallowance of interest paid to Associated Enterprises.
3. Disallowance of various expenses claimed by the assessee.
4. Disallowance of additional depreciation claimed by the assessee.

Issue-wise Detailed Analysis:

1. Legality of the Assessment Order:
The primary issue raised by the assessee was the legality of the assessment order passed by the Assessing Officer (AO) without providing a draft of the proposed order of assessment, as mandated by section 144C of the Income Tax Act, 1961. The assessee argued that the failure to issue a draft order deprived them of the opportunity to file objections before the Dispute Resolution Panel (DRP), thus violating the principles of natural justice and the statutory provisions.

The tribunal referred to the scheme of section 144C, which unambiguously requires the issuance of a draft order before passing a regular assessment order under section 143(3). The tribunal noted that the AO had made an addition based on the ALP adjustment proposed by the Transfer Pricing Officer (TPO) without issuing a draft assessment order. The tribunal emphasized that the issuance of a draft order is not merely procedural but a mandatory requirement that grants substantive rights to the assessee.

The tribunal cited several judicial precedents, including decisions from the Andhra Pradesh High Court and the Madras High Court, which held that the failure to issue a draft assessment order renders the final assessment order null and void. Consequently, the tribunal quashed the assessment order passed by the AO under section 143(3) read with section 144C, deeming it without jurisdiction.

2. Disallowance of Interest Paid to Associated Enterprises:
The assessee challenged the disallowance of Rs. 1,31,425/- made by the AO based on the TPO's order under section 92C(3). The TPO had proposed an adjustment to the interest paid to related parties, determining the Arm's Length Price (ALP) of the interest at 12.83% based on the Prime Lending Rate (PLR) of the State Bank of India (SBI) plus 300 basis points.

The tribunal upheld the findings of the lower authorities, noting that the TPO's adoption of the ALP rate based on the PLR of SBI was reasonable and justified. The tribunal found no merit in the assessee's contention that the interest rate of 15% paid to related parties was justifiable. As such, the disallowance of Rs. 1,31,425/- was sustained.

3. Disallowance of Various Expenses:
The assessee contested the disallowance of Rs. 2,00,000/- out of a lump sum disallowance of Rs. 5,00,000/- made by the AO on various expenses such as general, office, and traveling expenses. The assessee argued that complete details of the expenses claimed were submitted before the AO.

Given that the tribunal quashed the assessment order on the primary ground of non-issuance of a draft order, it did not delve into the merits of this disallowance. Consequently, this ground was rendered infructuous and dismissed.

4. Disallowance of Additional Depreciation:
The assessee also challenged the disallowance of Rs. 8,42,792/- out of the depreciation claimed, arguing that the special benefit of additional depreciation under section 32(1) should be allowed to be carried forward to the next year. The assessee contended that the insertion of the third proviso to section 32(1)(ii) by the Finance Act 2015, which allows the carry forward of balance additional depreciation, is clarificatory in nature.

Similar to the previous issue, the tribunal did not address the merits of this disallowance due to the quashing of the assessment order on procedural grounds. This ground was also rendered infructuous and dismissed.

Conclusion:
The tribunal quashed the assessment order passed by the AO under section 143(3) read with section 144C due to the failure to issue a draft assessment order, which is a mandatory requirement under the statute. Consequently, the other grounds raised by the assessee regarding the disallowance of interest, various expenses, and additional depreciation were rendered infructuous and dismissed. The appeal of the assessee was allowed.

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