Assessment orders quashed for skipping mandatory draft orders under section 144C for non-resident assessees

The ITAT Mumbai quashed assessment orders passed under sections 153A/143(3) for non-compliance with mandatory provisions of section 144C. The AO failed to issue draft assessment orders before passing final assessment orders for eligible assessees, including non-residents and foreign companies. Following the Finance Act 2020 amendment effective from April 1, 2020, all non-residents became eligible assessees requiring adherence to section 144C procedures when variations prejudicial to assessee interests are proposed. The tribunal relied on Delhi HC's decision in Principal Commissioner of Income Tax vs Sumitomo Corporation India, which similarly quashed final assessment orders passed without draft orders. The appeal was allowed.

---

---

Issues Involved:

1. Non-passing of Draft Assessment Order under Section 144C.
2. Absence of incriminating material for assessment under Section 153A.
3. Re-computation of Long-Term Capital Gain.
4. Disallowance of deduction under Section 35AC.
5. Ad-hoc addition of cash in hand.
6. Classification of rental income under "Income from Other Sources" instead of "Income from House Property."

Issue-wise Detailed Analysis:

1. Non-passing of Draft Assessment Order under Section 144C:

The primary issue revolves around the failure of the Assessing Officer (AO) to issue a draft assessment order as mandated by Section 144C of the Income-tax Act, 1961. The appellant, being a non-resident, qualifies as an "eligible assessee," thus necessitating the issuance of a draft order. The tribunal emphasized that Section 144C is a non-obstante provision, which requires its compliance irrespective of other provisions in the Act. The failure to issue a draft order constitutes a jurisdictional error, rendering the final assessment order void and non-curable. The tribunal relied on various judicial precedents, including the Bombay High Court's decision in SHL (India) P. Ltd vs. DCIT, which underscored the mandatory nature of Section 144C and the incurable nature of the defect arising from non-compliance.

2. Absence of Incriminating Material for Assessment under Section 153A:

The appellant contended that the assessment order should be quashed due to the absence of incriminating material, which is a prerequisite for issuing a notice under Section 153A. However, since the tribunal quashed the assessment order on the grounds of non-compliance with Section 144C, this issue became academic and was not further adjudicated.

3. Re-computation of Long-Term Capital Gain:

The appellant challenged the CIT(A)'s direction to assess the Long-Term Capital Gain at a higher amount than what was offered. The tribunal did not delve into this issue due to the quashing of the assessment order on procedural grounds.

4. Disallowance of Deduction under Section 35AC:

The appellant argued against the disallowance of a deduction claimed under Section 35AC. Similar to other grounds, this issue was not addressed in detail since the assessment order itself was quashed.

5. Ad-hoc Addition of Cash in Hand:

The CIT(A) upheld an ad-hoc addition of cash in hand, which the appellant contested. This issue was rendered academic following the quashing of the assessment order.

6. Classification of Rental Income:

The appellant disputed the classification of rental income under "Income from Other Sources" instead of "Income from House Property." The tribunal did not proceed with this issue due to the annulment of the assessment order.

Conclusion:

The tribunal quashed the assessment order due to the AO's failure to issue a draft assessment order as required under Section 144C, a mandatory procedural step for eligible assessees. This procedural lapse was deemed a jurisdictional error, rendering the assessment order void. Consequently, other grounds raised by the appellant were not adjudicated, as they became academic in light of the primary issue's resolution. All appeals were allowed, and the assessment orders for the relevant years were annulled.

---