2024 (1) TMI 1314 - AT - Income Tax

Assessment orders under Section 153C invalid for non-compliance with mandatory Section 144C(1) draft order requirement

ITAT Delhi held that assessment orders u/s 153C were invalid due to non-compliance with Section 144C(1) requiring forwarding of draft assessment orders to ... Validity of assessment u/s 153C without forwarding any draft of the proposed order of assessment to the assessee - effect of Non-issuance of draft assessment order u/s 144C - HELD THAT:- A plain reading of Section indicates that it is obligatory on the part of the AO to forward a draft Assessment Order as per the provisions of Section 144C(1) of the Act. The sub-Section (1) of Section 144C being a non-obstante clause overrides all the provisions of the Act if they are contrary to Section 144C of the Act. This provision is applicable from 1st October 2009 in all the cases where the Assessing Officer proposes any variation to the income returned by an ‘eligible assessee’. We have examined the expression of ‘eligible assessee’ as per the Act. The expression ‘eligible assessee’ has been defined under sub-Section (15) of Section 144C of the Act. As per sub-Section (15)(b)(i) of Section 144C of the Act, ‘eligible assessee’ means any person in whose case the variation referred to in sub-Section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-Section (3) of Section 92CA of the Act. Thus, on going through the provisions of Section 144C(1) of the Income Tax Act, 1961 mandating forwarding of a draft Assessment Order, Explanatory notes to the Finance (2) Act, 2009, Circular No. 05/2010 and Circular No. 09/2013 of the CBDT, we hold that the Assessment Orders passed by the Assessing Officer are bad in law, hence, unsustainable for not passing the draft Assessment Order as per the provisions of Section 144C(1) of the Income Tax Act, 1961. Decided against revenue. Issues Involved:1. Initiation of proceedings under Section 153C of the Income Tax Act.2. Determination of the tax residency status of the assessee company under Section 6(3)(ii).3. Consideration of underlying assets and revenue sources of overseas companies.4. Ignoring substantial evidence regarding control and management of companies.5. Application of Section 9(1) of the Income Tax Act.6. Deletion of addition made by the Assessing Officer.7. Jurisdictional errors and procedural lapses in assessment proceedings.8. Validity of proceedings initiated under Section 153C.9. Non-issuance of draft assessment order under Section 144C.10. Non-issuance of statutory notice under Section 143(2).Issue-wise Detailed Analysis:1. Initiation of proceedings under Section 153C of the Income Tax Act:The Revenue contended that the Commissioner of Income Tax (Appeals) erred in holding that there was substantial force in the submission made by the appellant regarding the initiation of proceedings under Section 153C. The Tribunal examined the facts and found that the proceedings initiated by the Assessing Officer (AO) under Section 153C were not in accordance with statutory provisions, rendering them invalid.2. Determination of the tax residency status of the assessee company under Section 6(3)(ii):The Revenue argued that the Commissioner of Income Tax (Appeals) erred in holding that the assessee company is not a resident for tax purposes. The Tribunal noted that the control and management of the assessee company were situated wholly in India based on seized documents and statements. However, the Tribunal upheld the Commissioner's decision, finding no substantial error in the determination of the tax residency status.3. Consideration of underlying assets and revenue sources of overseas companies:The Revenue claimed that the Commissioner ignored the fact that the underlying assets and revenue sources of all overseas companies were Indian companies. The Tribunal found that the Commissioner had considered the evidence but concluded that the control and management of the companies were not solely based on the location of assets and revenue sources.4. Ignoring substantial evidence regarding control and management of companies:The Revenue argued that the Commissioner ignored substantial evidence, including seized material, emails, and shareholding patterns, indicating that the ultimate control and management of Indian and overseas companies lay with specific individuals. The Tribunal reviewed the evidence and found that the Commissioner had appropriately considered it and did not err in his judgment.5. Application of Section 9(1) of the Income Tax Act:The Revenue contended that the Commissioner erred in ignoring the provisions of Section 9(1), which pertain to income deemed to accrue or arise in India. The Tribunal found that the Commissioner had correctly applied the provisions of Section 9(1) and did not err in his judgment.6. Deletion of addition made by the Assessing Officer:The Revenue argued that the Commissioner erred in deleting an addition of Rs. 17,79,28,594 made by the AO. The Tribunal upheld the Commissioner's decision, finding that the addition was not justified based on the evidence presented.7. Jurisdictional errors and procedural lapses in assessment proceedings:The assessee argued that the AO erred in assuming jurisdiction and proceeding with assessment without considering jurisdictional aspects under Section 124(4). The Tribunal found that the AO's assumption of jurisdiction was contrary to the scheme of the Act, rendering the assessment order void ab initio.8. Validity of proceedings initiated under Section 153C:The assessee contended that the proceedings initiated under Section 153C were bad in law and barred by limitation. The Tribunal agreed, finding that the initiation of proceedings and the consequent assessment were not in accordance with statutory provisions.9. Non-issuance of draft assessment order under Section 144C:The assessee argued that the AO erred in passing the assessment order without issuing a draft assessment order as required under Section 144C. The Tribunal found that the AO's failure to issue a draft order violated the mandatory procedure, rendering the assessment order invalid. The Tribunal cited various judgments, including those of the Hon'ble High Court of Gujarat and the Hon'ble Delhi High Court, which emphasized the importance of adhering to the procedure under Section 144C.10. Non-issuance of statutory notice under Section 143(2):The assessee argued that the assessment framed without issuing a statutory notice under Section 143(2) after filing the return was bad in law. The Tribunal found that the AO's failure to issue the notice rendered the assessment order invalid.Conclusion:The Tribunal concluded that the assessment orders passed by the AO were unsustainable in law due to the failure to issue a draft assessment order under Section 144C and other procedural lapses. Consequently, the Cross Objections of the assessees were allowed, and the appeals of the Revenue were dismissed. The Tribunal emphasized the mandatory nature of the procedure under Section 144C and the necessity of adhering to statutory provisions and CBDT Circulars. The judgment was pronounced in the open court on 10/01/2024.