2023 (11) TMI 230 - AT - Income Tax

Assessment order invalid when demand and penalty notices issued simultaneously with draft assessment order under section 144C

ITAT Delhi held that an assessment order u/s 144C was invalid where the AO issued demand and penalty notices simultaneously with the draft assessment ... Validity of Assessment order u/s 144C - While issuing Draft order, AO issued demand notice with penalty notice - assessee vehemently stated that the assessment order so framed by AO by any stretch of imagination, cannot be called as “draft assessment order” and, is therefore, in violation of provisions of section 144C - HELD THAT:- A perusal of Section 144C of the Act shows that the Assessing Officer shall, at the first instance, forward a draft of the proposed order of assessment and on receiving such order, the assessee may approach the DRP by raising objections. If the assessee accepts the variation, then the Assessing Officer shall proceed by framing the final assessment order and if the objections are raised before the DRP, then, upon receipt of directions issued by the DRP, the AO shall complete the assessment. However, we find that while framing the said draft assessment order, the AO not only issued and served demand notice, but has also initiated the penalty proceedings. Though the ld. DR time and again has stated that the conclusion of the AO speaks for the order as a draft assessment order and there should not be any confusion on that point. In our considered view, the impugned order by the AO has bypassed the relevant sub-section i.e. sub-section (3) and (13) to section 144C of the Act. Whether by by-passing mandatory provisions of the Act can assessment survive? - As decided in Dipak Babaria [2015 (8) TMI 775 - SUPREME COURT] if the law requires that a particular thing should be done in a particular manner, it must be done in that way and none other. State cannot ignore the policy intent and procedure contemplated by the statute. We are of the considered opinion that by issuing the demand notice on 28.06.2022 itself the Assessing Officer has bypassed all the mandatory sub-sections of section 144C. DR stated that by participating in the subsequent proceedings, the assessee was well aware that the order passes is merely a draft assessment order and not final assessment order and the assessee cannot blow hot and cold in the same breath - As decided in MR. P. FIRM, MAUR. [1964 (10) TMI 13 - SUPREME COURT] Approbate and Reprobate” is only species of estoppel. It applies only to conduct of parties as in the case of estoppel, it cannot operate against the provisions of a statute. If particular income is taxable under the I.T. Act, it cannot be taxed on the basis of estoppel or any other equal document. Equity is out of placed in tax place. A particular income is either exigible under the Income tax under taxing statute or not. If it is not, the ITO Has no power to tax the said income. Argument of the ld. DR that merely issue of notice of demand and penalty notice will not convert draft assessment order into final assessment order, does not hold any water, in as much as the mandatory provisions of the Act have to be followed and the Assessing Officer does not get any leverage for bypassing the mandatory provisions of the Act. Whether a curable defect u/s 292B? - As decided in M/S NOKIA INDIA PVT LTD [2018 (5) TMI 1913 - SC ORDER] there is a clear order of setting aside of an assessment order with the requirement of the AO/TPO to undertake fresh exercise of determining the arm’s length price, failure to pass draft assessment order would violate the provisions of section 144(1) - This is not a curable defect in terms of section 292B Thus we have no hesitation to hold that the proceedings culminated on 28.06.20228 when the demand notice was issued and served upon the assessee along with penalty notice u/s 274 and, therefore, all the subsequent proceedings and orders become non est. Decided in favour of assessee/ Issues Involved:1. Legality of the assessment order passed by the Assessing Officer (AO) under section 143(3) read with section 144C(13) of the Income Tax Act, 1961.2. Whether the AO's order dated 28.06.2022 was a draft assessment order or a final assessment order.3. Validity of the demand notice and penalty proceedings initiated by the AO.Summary:Legality of the Assessment Order:The assessee contended that the order passed by the AO under section 143(3) read with section 144C(13) of the Act dated 27.04.2023 is illegal, bad in law, and void as it contravenes section 144C of the Act. The AO erred in passing a final order instead of a draft order, evident from the issuance of a demand notice under section 156 and initiation of penalty proceedings under section 271AAB(1A)(b) read with section 274 of the Act.Draft or Final Assessment Order:The underlying issue was whether the AO's order dated 28.06.2022 was a draft assessment order or a final assessment order. The AO titled the order as 'Assessment order' and directed to calculate tax and charge interest, which brought the proceedings to an end. The assessee argued that this action violated section 144C of the Act, as the AO's actions indicated the conclusion of the assessment process, not a draft order.Validity of Demand Notice and Penalty Proceedings:The assessee argued that the issuance of a demand notice and initiation of penalty proceedings with the draft order indicated that the AO treated it as a final assessment order. The Tribunal agreed, stating that the AO's actions on 28.06.2022 concluded the proceedings, making any subsequent orders non est. The Tribunal emphasized that the assessment process is one integrated process involving both the assessment of total income and the determination of tax, and both steps must be completed within the prescribed time limit.Conclusion:The Tribunal held that the AO's issuance of the demand notice and initiation of penalty proceedings on 28.06.2022 bypassed the mandatory provisions of section 144C of the Act. The Tribunal found that the AO's actions concluded the proceedings, rendering all subsequent orders non est. The Tribunal allowed the assessee's appeal, declaring the order of the DRP and the final assessment order as non est and unnecessary to dwell into other grounds raised in the appeal.The appeal of the assessee in ITA No. 1818/DEL/2023 was allowed, and the order was pronounced in the open court on 17.10.2023.