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of <h1>Income Tax officer must send draft assessment under Section 144C before finalizing order prejudicial to assessee</h1> <h3>IBS SOFTWARE SERVICES PRIVATE LIMITED Versus COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM, ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 (1), THIRUVANANTHAPURAM And SUNTEC BUSINESS SOLUTIONS PRIVATE LIMITED Versus COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM, ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 (1), THIRUVANANTHAPURAM, THE TRANSFER PRICING OFFICER-II, INCOME TAX DEPARTMENT, KOCHI</h3> IBS SOFTWARE SERVICES PRIVATE LIMITED Versus COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM, ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1 (1), ... 1. ISSUES: 1. Whether the mandatory procedure under Section 144C(1) of the Income Tax Act, 1961, requiring the Assessing Officer to forward a draft of the proposed order of assessment to an eligible assessee when proposing any variation prejudicial to the assessee's interest, must be followed irrespective of the assessment year.2. Whether failure to comply with the procedure under Section 144C(1) results in the assessment order being void ab initio due to incurable jurisdictional error.3. Whether the Circular No.5/2010 issued by the Central Board of Direct Taxes (CBDT), which limited the applicability of Section 144C to assessment years 2010-11 and subsequent years, is a correct interpretation of the statutory provision.4. Whether the subsequent Circular No.9/2013, which clarified the applicability of Section 144C irrespective of assessment year, affects the validity of assessments completed prior to its issuance.5. Whether non-compliance with Section 144C(1) can be cured or validated under Section 292-B of the Income Tax Act.6. Whether remitting the matter for fresh assessment is permissible when the limitation period under Section 153 has expired. 2. RULINGS / HOLDINGS: 1. The Court held that Section 144C(1) contains a non obstante clause and mandates that the Assessing Officer must forward a draft of the proposed order of assessment to the eligible assessee if any variation prejudicial to the assessee is proposed on or after 1st October 2009, 'irrespective of the assessment year to which it pertains.'2. Failure to comply with the procedure under Section 144C(1) is a 'fatal error' constituting a jurisdictional error, rendering the assessment order 'void ab initio' and not merely a procedural irregularity.3. The explanation in paragraph 45.5 of Circular No.5/2010, which limited the applicability of Section 144C to assessment year 2010-11 and subsequent years, was held to be an 'improper and illegal' misinterpretation of the statutory provision by the CBDT.4. Circular No.9/2013 correctly replaced the earlier circular's paragraph 45.5, clarifying that Section 144C applies to any order proposing variation on or after 1st October 2009, 'irrespective of the assessment year to which it pertains.'5. Section 292-B cannot cure or validate an assessment order passed in breach of the mandatory provisions of Section 144C(1), as such breach is an 'incurable illegality' and a jurisdictional error.6. Remitting the matter for fresh assessment after the expiry of the limitation period under Section 153 is impermissible, as held in the Supreme Court precedent, and would frustrate the legislative intent. 3. RATIONALE: The Court applied the plain language of Section 144C(1), emphasizing the non obstante clause that gives the provision overriding effect over any other conflicting provisions in the Income Tax Act. The absence of any reference to assessment years in the statutory text led to the conclusion that the provision applies uniformly to all assessments from 1st October 2009 onwards.The Court rejected the CBDT's initial interpretation in Circular No.5/2010 as ultra vires and inconsistent with legislative intent, noting that even the Board cannot 'misconstrue the provisions of the Act and thus defeat the legislative intention.'The mandatory nature of Section 144C(1) was supported by precedents from multiple High Courts which held that failure to follow the prescribed procedure results in jurisdictional error and invalidation of the assessment order. The Court relied on these precedents to affirm that the procedure is substantive and not merely procedural.The Court further noted that Section 292-B, which allows for rectification of errors, cannot be invoked to cure a jurisdictional defect arising from non-compliance with Section 144C(1).Regarding remand for fresh assessment, the Court relied on authoritative Supreme Court precedent holding that reopening assessments beyond the limitation period is impermissible, thus precluding fresh assessments in such cases.
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