2025 (7) TMI 451 - HC - Income Tax

Assessment orders under Section 143(3) with 144B quashed for failing to issue mandatory draft orders under Section 144C(1)

The Madras HC quashed assessment orders passed under Section 143(3) read with Section 144B without issuing mandatory draft assessment orders under Section ... Validity of order passed u/s 143(3) r/w Section 144B - Effect of non issuance of a draft assessment order u/s 144C(1) - HELD THAT:- This Court having held that issuance of a draft assessment order u/s 144C(1) of the Act is mandatory and non-issuance is not just a procedural lapse, which is curable, we are unable to accept the learned Single Judge's view that the impugned assessment orders have been passed by mistake and that the mistake occurred on account of change of law and, therefore, the assessments cannot abate, as there was only infraction of one of the procedures prescribed under the amended Section 144C(1) of the Act. We do not agree with the learned Single Judge that the matter ought to have been remanded to the Assessing Officer to pass draft assessment order u/s 144C(1) of the Act. To that extent, the impugned order is quashed and set aside 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court include:Whether the issuance of a draft assessment order under Section 144C(1) of the Income Tax Act, 1961 is a mandatory requirement or merely a procedural formality.Whether failure to issue the draft assessment order deprives the assessee of a substantive right to raise objections before the Dispute Resolution Panel (DRP).Whether non-compliance with the provisions of Section 144C(1) constitutes a jurisdictional error or a curable procedural irregularity.The correctness of remitting the matter back to the Assessing Officer to treat the assessment order as a draft assessment order and allow the assessee to raise objections.The validity of the learned Single Judge's order setting aside the impugned order but remitting the matter to the Assessing Officer.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Mandatory Nature of Draft Assessment Order under Section 144C(1)Relevant Legal Framework and Precedents: Section 144C(1) of the Income Tax Act mandates issuance of a draft assessment order to the assessee, providing an opportunity to raise objections before the DRP. The Bombay High Court in Shell India Market Pvt. Ltd. and SHL (India) Pvt. Ltd. cases held that this requirement is mandatory and confers a substantive right on the assessee.Court's Interpretation and Reasoning: The Court reaffirmed the principle that the issuance of the draft assessment order is not a mere procedural formality but a mandatory condition precedent. The failure to issue it results in denial of a valuable substantive right to the assessee to object to prejudicial variations.Key Evidence and Findings: The appellant was an eligible assessee under the Act, and no challenge was made to this finding. The impugned order did not comply with Section 144C(1), as no draft assessment order was issued.Application of Law to Facts: Given the non-issuance of the draft assessment order, the appellant was deprived of the opportunity to raise objections before the DRP, thereby violating the mandatory statutory procedure.Treatment of Competing Arguments: The revenue's contention that the Single Judge erred in holding the appellant as an eligible assessee was rejected, as it was not challenged. The Court did not accept the view that the failure was a mere procedural lapse.Conclusions: The Court held that the issuance of the draft assessment order under Section 144C(1) is mandatory and non-compliance results in jurisdictional error.Issue 2: Jurisdictional Error vs. Procedural IrregularityRelevant Legal Framework and Precedents: The Bombay High Court's precedent established that failure to comply with Section 144C(1) is a jurisdictional error, not a curable procedural irregularity.Court's Interpretation and Reasoning: The Court agreed with the precedent that non-issuance of the draft assessment order is an incurable irregularity and a jurisdictional defect, thus invalidating the assessment order passed without following the mandatory procedure.Key Evidence and Findings: The impugned assessment order was passed without issuing the draft order, violating the statutory mandate.Application of Law to Facts: Since the procedure was not followed, the assessment order lacked jurisdiction and was liable to be quashed.Treatment of Competing Arguments: The Single Judge's view that the irregularity was due to a change in law and hence the assessments could not abate was rejected by the Court.Conclusions: The Court concluded that the irregularity was jurisdictional and not curable by remand or treating the order as a draft.Issue 3: Validity of Remitting the Matter to the Assessing OfficerRelevant Legal Framework and Precedents: The statutory scheme under Section 144C(1) requires the draft assessment order to be issued before finalizing the assessment. Remanding after an invalid assessment order to treat it as draft is inconsistent with the mandatory nature of the procedure.Court's Interpretation and Reasoning: The Court did not agree with the Single Judge's order remitting the matter to the Assessing Officer to treat the assessment order as a draft. Such a direction would circumvent the mandatory requirement and the jurisdictional error.Key Evidence and Findings: The impugned order was remitted to provide the appellant an opportunity to raise objections, but the Court found this remedy impermissible.Application of Law to Facts: The Court held that the correct course was to quash and set aside the impugned order outright, without remand.Treatment of Competing Arguments: The appellant argued that the Single Judge erred in giving the revenue a 'second inning.' The Court agreed and set aside the remand direction.Conclusions: The Court quashed the impugned order to the extent it remanded the matter, holding that no further proceedings should be allowed without compliance with Section 144C(1).3. SIGNIFICANT HOLDINGSThe Court articulated the following crucial legal principles and determinations:'The requirement under Section 144C(1) of the Act, to first pass the draft assessment order and to provide a copy thereof to the assessee is a mandatory requirement that gave substantive right to the assessee to object to any variation, that is prejudicial to the assessee. Depriving assessee of this valuable right to raise objection before DRP would be denial of substantive right to the assessee.''Failure to follow the procedure under Section 144C(1) of the Act would be a jurisdictional error and not merely procedural error or a mere irregularity and it is an incurable irregularity.'The Court's final determinations on the issues were:The issuance of the draft assessment order under Section 144C(1) is mandatory and non-compliance results in jurisdictional error.Non-issuance deprives the assessee of a substantive right to raise objections before the DRP.The impugned assessment order passed without issuance of the draft order is invalid and liable to be quashed and set aside.The remedy of remitting the matter to the Assessing Officer to treat the order as draft is impermissible and was set aside.The appeal was disposed of by quashing the impugned order, with no order as to costs.