Draft assessment order invalid when issued with demand and penalty notices under sections 156 and 271

The ITAT Mumbai held that a draft assessment order became invalid when the AO issued it alongside a demand notice u/s 156 and penalty notice u/s 274 r.w.s. 271(1)(c), effectively treating it as a final order rather than a draft. Following the precedent in Cisco Systems Services B.V., the tribunal ruled that demand notices create enforceable civil consequences, making the draft order final in nature. Since the error was not curable under s. 292B, both the draft and subsequent final assessment orders were quashed. The tribunal also determined the total income should reflect returned income plus amounts agreed in MAP proceedings.

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Issues Involved:

1. General Ground
2. Time barring and validity of the order of the TPO and the AO
3. Validity of reassessment proceedings
4. Without prejudice, passing the final assessment order as against the draft assessment order
5. Transfer Pricing Grounds
6. Corporate tax grounds
7. Non grant of credit for DDT
8. Charging of interest under section 234B
9. Initiation of penalty proceedings under section 271(1)(c)

Summary:

General Ground:
The assessee challenged the computation of total income at INR 142,78,72,790 and the resultant demand of INR 13,96,46,300.

Time Barring and Validity of the Order of the TPO and the AO:
The assessee contended that the assessment order dated 30 November 2018 was time-barred under section 153 of the Act and that the transfer pricing order under section 92CA(3) dated 30 October 2018 was invalid. The reference to the TPO was questioned as it was made before the notice under section 143(2) and before the disposal of objections to reassessment, contrary to the Bombay High Court's directions.

Validity of Reassessment Proceedings:
The reassessment proceedings under section 147 were challenged as being invalid due to the absence of fresh tangible material indicating income escaping assessment. The proceedings were alleged to be initiated merely to revive original assessment proceedings that had become time-barred.

Without Prejudice, Passing the Final Assessment Order as Against the Draft Assessment Order:
The assessee argued that the final assessment order was invalid as it was based on a draft assessment order accompanied by a notice of demand under Section 156 and a penalty notice under Section 271(1)(c), which contravenes Section 144C.

Transfer Pricing Grounds:
The assessee initially contested the adjustment of INR 11,00,72,725 for payment of royalty for the use of trademarks but later withdrew these grounds following a Mutual Agreement Procedure (MAP) resolution.

Corporate Tax Grounds:
The assessee disputed the calculation of total income, the disallowance of deduction under section 80-IC for scrap sales and other income, and the reduction of interest income while computing the deduction.

Non Grant of Credit for DDT:
The assessee claimed that the credit for Dividend Distribution Tax paid of INR 4,83,38,022 was not granted.

Charging of Interest Under Section 234B:
The assessee contested the charging of interest under section 234B amounting to INR 4,05,81,440.

Initiation of Penalty Proceedings Under Section 271(1)(c):
The initiation of penalty proceedings under section 271(1)(c) was challenged.

Judgment:

Draft Assessment Order:
The Tribunal found that the draft assessment order dated 30th November 2018 was invalid as it was accompanied by a notice of demand and a penalty notice, making it effectively a final assessment order. This contravened Section 144C, as confirmed by judicial precedents from various High Courts.

Final Assessment Order:
Since the final assessment order was based on the invalid draft assessment order, it was also quashed.

Transfer Pricing Adjustments:
The assessee's acceptance of the MAP resolution led to the withdrawal of grounds related to transfer pricing adjustments. The Tribunal directed that the total income should include the returned income plus the income agreed upon in the MAP proceedings.

Other Grounds:
Given the quashing of the assessment order, other grounds of appeal were not adjudicated.

Conclusion:
The appeal was partly allowed, quashing the assessment order and directing the computation of total income as per the returned income and MAP resolution. The order was pronounced on 19.12.2023.

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