2025 (9) TMI 982 - HC - Income Tax

Section 144C eligibility and draft assessment procedure: ineligible assessee leads to quashing of assessment, demand and penalty notices

The text addresses eligibility under Section 144C(15)(b) and the procedural nexus with issuance of a draft assessment under Section 144C(1). It reasons ... Eligible assessee u/s 144C(15)(b)(i) - word “variation” appearing in Section 144C(1) and 144C(15) - procedure for issuance of a draft order calling for the Petitioner’s objections thereon HELD THAT:-Petitioner in the present case, not being an “eligible assessee” in terms of Section 144C15(b) of the I. T. Act, the Assessing Officer was not competent to pass the Draft Assessment Order under Section 144C(1) of the I. T. Act. Consequently, there was no occasion for him to thereafter pass a Final Assessment Order under Section 143 (3) read with Section 144C (3) read with Section 144B of the I. T. Act. Accordingly, the Draft Assessment Order dated 8th March 2025; the Final Assessment Order dated 7th April 2025 and the Demand Notice dated 7th April 2025 as well as the Show Cause Notices dated 7th April 2025 seeking to impose penalty, are all hereby quashed and set aside. Rule is made absolute in the aforesaid terms and the Writ Petition is also disposed of in terms thereof. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessee is an 'eligible assessee' under Section 144C(15)(b)(i) of the Income Tax Act where the Transfer Pricing Officer (TPO) made no variation to the assessee's declared international transaction(s) under Section 92CA(3). 2. Whether the Assessing Officer was competent to invoke the procedure under Section 144C(1) (issue a Draft Assessment Order and refer the matter to the Dispute Resolution Panel) when there was no variation proposed by the TPO. 3. Whether a statutory construction that treats 'variation' in Section 144C as including 'no variation' is tenable. 4. Consequent legality of subsequent action taken under Section 143(3) read with Sections 144C and 144B (Final Assessment Order), and attendant Demand and penalty notices, when the Draft Assessment Order under Section 144C(1) was held to be impermissible. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Definition of 'eligible assessee' under Section 144C(15)(b)(i) Legal framework: Section 144C establishes a procedure for forwarding a draft assessment order to an 'eligible assessee' where the Assessing Officer proposes any variation in income or loss that is prejudicial to the assessee; Section 144C(15)(b)(i) defines 'eligible assessee' as 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'. Precedent treatment: The Court relied on precedents of other High Courts that considered the same statutory language (decisions of the Gujarat High Court and the Delhi High Court). Those decisions interpreted the definition stringently, treating 'means' as indicating a limiting definition and holding that absence of any variation by the TPO excludes the assessee from the category of 'eligible assessee'. The Court followed that approach. Interpretation and reasoning: A plain reading of Section 144C(15)(b)(i) confines 'eligible assessee' to cases where a variation actually arises as a consequence of the TPO's order under Section 92CA(3). The use of the word 'means' in the definition yields a closed definition, permitting no wider import. Since the TPO in the present facts recorded no variation (accepted arm's-length price; made no adjustment), the essential predicate for classification as an 'eligible assessee' is absent. Ratio vs. Obiter: Ratio - The statutory definition of 'eligible assessee' in Section 144C(15)(b)(i) is strictly limited to cases where a variation arises from the TPO's order; absence of TPO variation precludes treating an assessee as 'eligible'. Conclusion: The assessee is not an 'eligible assessee' under Section 144C(15)(b)(i) where the TPO made no variation under Section 92CA(3). Issue 2 - Competence to invoke Section 144C(1) and issue Draft Assessment Order when TPO made no variation Legal framework: Section 144C(1) mandates that the Assessing Officer shall forward a draft of the proposed order of assessment to the eligible assessee if he proposes any variation in income or loss which is prejudicial to the assessee. The procedure contemplated includes giving the assessee an opportunity to object and reference to the Dispute Resolution Panel. Precedent treatment: The Court followed the reasoning in the cited High Court decisions which held that Section 144C(1) cannot be invoked in cases where the TPO has not proposed any variation, because the section's scheme is predicated on an actual variation prejudicial to the assessee. Interpretation and reasoning: The scheme of Section 144C requires two linked conditions: (a) a proposed variation in income or loss which is prejudicial; and (b) the person to whom the draft is forwarded must be an 'eligible assessee' as defined. If the TPO records no variation, there is no variation 'which is prejudicial', and the assessee cannot be an eligible assessee as per clause (b)(i). The Assessing Officer therefore lacked jurisdiction to initiate the Section 144C mechanism, and could instead proceed under the ordinary assessment provisions (e.g., Section 143(3)) without invoking the DRP process. Ratio vs. Obiter: Ratio - The Assessing Officer is not competent to issue a Draft Assessment Order under Section 144C(1) in respect of an assessee where no variation has arisen from the TPO's order; the Section 144C procedure is inapplicable in such circumstances. Conclusion: The Assessing Officer acted without jurisdiction in issuing the Draft Assessment Order under Section 144C(1) where the TPO made no variation, and therefore the subsequent DRP-linked procedure could not be validly invoked. Issue 3 - Whether 'variation' in Section 144C can be read to include 'no variation' Legal framework: Statutory text of Section 144C(1) speaks of 'any variation in the income or loss returned which is prejudicial to the interest of such assessee'; Section 144C(15) defines terms for the section. Precedent treatment: Prior High Court authorities rejected an expansive reading that would construe 'variation' to include 'no variation', relying on the plain language and scheme of the provision. Interpretation and reasoning: Reading 'variation' to include 'no variation' would subvert the plain statutory text and the purpose of Section 144C, which is to afford an eligible assessee an opportunity to object when a prejudicial variation is proposed. When no variation exists, there is no prejudicial change to be communicated, and no statutory basis for the DRP/ draft procedure. The Court found the Revenue's argument to be contrary to the statutory framework. Ratio vs. Obiter: Ratio - 'Variation' in Section 144C does not include 'no variation'; the term must be given its ordinary and contextual meaning within the scheme of the statute. Conclusion: The contention that 'variation' includes 'no variation' is untenable; the word must be understood in its ordinary sense and applied only where an actual variation is proposed. Issue 4 - Validity of Final Assessment Order under Section 143(3) read with Section 144C and Section 144B, and attendant Demand and penalty notices Legal framework: Valid invocation of Section 144C procedure is a precondition to subsequent action under Sections 144C(3), 144B and related assessment/ penalty machinery where the DRP process is engaged. Precedent treatment: Following the determinations on eligibility and scope above, earlier High Court decisions annulled draft and final orders premised on an improper invocation of Section 144C when no TPO variation existed. Interpretation and reasoning: Because the Assessing Officer lacked power to issue the Draft Assessment Order under Section 144C(1) (see Issue 2), there was no jurisdictional foundation for the Final Assessment Order purporting to be passed under Section 143(3) read with Section 144C and Section 144B. The Demand Notice under Section 156 and Show Cause Notices for penalties under Sections 270A and 271AAC that stem from that assessment are corollaries of the invalid assessment process. Ratio vs. Obiter: Ratio - Where the draft/DRP procedure under Section 144C was improperly invoked (because the assessee was not an 'eligible assessee'), any final assessment and consequential demand or penalty notices founded on that procedure are liable to be quashed. Conclusion: The Draft Assessment Order, the Final Assessment Order effected under the DRP-linked provisions, the Demand Notice, and the Show Cause Notices for penalty were all without jurisdiction and are quashed and set aside. Cross-references Refer to Issue 1 for the threshold question of 'eligible assessee'; Issues 2 and 3 are contingent on Issue 1's finding that absence of TPO variation negates eligibility. Issue 4 is consequential on Issues 1-3, addressing the validity of downstream actions.