Assessment under Section 144C(13) read with Sections 147 and 143(3) void ab initio without TPO order

The HC held the assessment framed under section 144C(13) read with sections 147 and 143(3) void ab initio because no Transfer Pricing Officer order existed to trigger any variation and the assessee, being an LLP, could not be treated as a foreign company; consequently the procedural provisions of section 144C did not apply. The decision was rendered in favour of the assessee.

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1. ISSUES PRESENTED AND CONSIDERED

Whether a draft assessment order under Section 144C(1) of the Income Tax Act can be validly issued to an assessee who is not an "eligible assessee" as defined in Section 144C(15)(b) (i.e., where no variation arises as a consequence of an order of the Transfer Pricing Officer under Section 92CA(3) and the assessee is not a foreign company).

Whether a draft assessment order so issued (and any final assessment passed pursuant thereto) is void ab initio and, if so, whether the consequent final assessment is time-barred under Section 153 of the Act.

Whether reliance on findings in earlier assessment years (including routing through DRP on the basis of earlier years) can sustain additions where the assessee has discontinued business and factual circumstances differ.

Whether the Assessing Officer may place the onus on the assessee to explain recipients of amounts shown in Form 26AS, instead of seeking details from payers who deducted tax at source.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Section 144C procedure - definition of "eligible assessee" (Section 144C(15)(b))

Legal framework: Section 144C(1) requires the Assessing Officer to forward a draft assessment order to the "eligible assessee" when proposing any variation prejudicial to the assessee; Section 144C(15)(b) defines "eligible assessee" as (i) any person in whose case the variation arises as a consequence of an order of the Transfer Pricing Officer under Section 92CA(3) and (ii) any foreign company.

Precedent treatment: The Court and co-ordinate benches have consistently interpreted the definition as a hard and fast, exhaustive definition such that only the two categories fall within "eligible assessee." Earlier High Court and Tribunal decisions (referred to and followed) held that where neither condition is satisfied, Section 144C procedure cannot be invoked and the draft order under Section 144C(1) is invalid.

Interpretation and reasoning: A conjoint reading of Sections 144C(1) and 144C(15)(b) shows the legislature intended a limited class of assessees for the 144C machinery. Use of the word "means" signals an exhaustive definition. If the variation is not a consequence of a TPO order under Section 92CA(3) and the assessee is not a foreign company (e.g., is an LLP/firm/partnership), the statutory preconditions for invoking Section 144C are absent. The Assessing Officer cannot unilaterally treat such an assessee as "eligible" and proceed under Section 144C(1).

Ratio vs. Obiter: Ratio - Section 144C(15)(b) is exhaustive; where its conditions are not met, Section 144C(1) cannot be validly invoked. The reliance on multiple binding authorities gives the point precedential weight (ratio). Observations about administrative practice and examples from other judgments are supportive obiter but align with the binding conclusion.

Conclusions: The Court holds that an assessee not falling within Section 144C(15)(b) is not an "eligible assessee" and the Assessing Officer lacks competence to issue a draft assessment under Section 144C(1) in such cases. The draft assessment is therefore invalid.

Issue 2: Consequence of invalid draft assessment order - voidness and limitation (Sections 144C and 153)

Legal framework: In case Section 144C procedure is inapplicable, assessments should proceed under the general assessment provisions (e.g., Section 143(3)). Section 153 prescribes time limits for completion of assessments; the applicability of Section 144C is capable of affecting limitation if wrongly invoked.

Precedent treatment: High Courts and Tribunals have held that draft assessment orders passed in respect of entities who are not "eligible assessees" are invalid and that consequent final assessment orders are without jurisdiction and thus void. Several judgments followed by the Tribunal and Court support setting aside both draft and final orders where Section 144C was wrongly invoked.

Interpretation and reasoning: If the Assessing Officer proceeds under the non-applicable Section 144C route, procedural preconditions are breached; the scheme contemplates different steps (e.g., forwarding draft to eligible assessee and routing through DRP where appropriate). A non-compliant exercise vitiates jurisdictional competence. Where the draft order is invalid, the subsequent final order passed pursuant to that draft lacks jurisdiction and is void ab initio. This has consequence for limitation: if the valid mode of assessment (e.g., Section 143(3)) would render the assessment time-barred, the erroneous invocation of Section 144C cannot revive jurisdiction.

Ratio vs. Obiter: Ratio - An assessment finalized pursuant to an invalid draft under Section 144C(1) (when the assessee is not "eligible") is void ab initio; such final orders are liable to be quashed. Observations on interplay with limitation are applied to the facts (ratio where directly considered), while broader comments on procedural choice are explanatory (obiter when not strictly necessary).

Conclusions: The Court concludes the draft assessment was invalid and the final assessment consequent upon it unsustainable; therefore the final order is quashed. Where merits have been determined in favour of the assessee in related years or by higher courts, appeals on merits may be rendered academic.

Issue 3: Use of earlier-year findings and discontinuation of business - materiality on merits

Legal framework: Assessments must be founded on relevant facts and evidence for the year under consideration; reliance on previous years' findings is permissible only where facts are identical and legally applicable.

Precedent treatment: The Tribunal and Court have admonished reliance on earlier years where there are material factual differences; binding precedent for a given year does not automatically validate like findings where the subject year facts differ.

Interpretation and reasoning: Where the assessee discontinued business after a particular assessment year, facts for subsequent years are not identical; therefore adoption of earlier years' conclusions without fresh evidence/adjustment is improper. The Assessing Officer's failure to recognise discontinuation and to base additions solely on prior years' conclusions is a substantive error. Moreover, routing the matter through DRP on the basis of earlier years compounds the error.

Ratio vs. Obiter: Ratio - Material factual divergence (e.g., discontinuation of business) defeats the legitimacy of adopting earlier years' findings wholesale; additions based on such adoption cannot survive. Observations on equitable burdens or investigatory steps are explanatory.

Conclusions: On the merits, where the assessee had discontinued business and facts were not similar, additions drawn by reference to earlier years are unsustainable; thus, even on merits the assessee succeeds insofar as such additions were upheld solely by recourse to prior-year findings.

Issue 4: Onus regarding receipts shown in Form 26AS - proper investigative approach

Legal framework: The Assessing Officer must follow fair procedure and permissible modes of inquiry; statutory provisions place obligations on payers to deduct and report TDS, but the AO's fact-finding must be directed appropriately.

Precedent treatment: Courts have criticised assessing officers who shift an inappropriate evidentiary onus onto assessees to explain third-party records without making reasonable efforts to examine the payers or record holders.

Interpretation and reasoning: Form 26AS is a statement of tax deducted/collected and need not be self-explanatory as to the ultimate recipient's tax treatment; where amounts are reflected in Form 26AS the correct procedure is for the AO to seek details from the payer who made the payment and deducted tax. Expecting the assessee to explain identities of payees or receipts shown in a third-party statement, without first seeking payer information, is procedurally improper and places an undue onus on the assessee.

Ratio vs. Obiter: Ratio - The AO should request payer details from the deductor/payee where necessary and cannot simply place the evidentiary burden on the assessee to explain Form 26AS entries; comments about investigative practice are binding in similar factual contexts.

Conclusions: The Assessing Officer erred in shifting onus to the assessee to explain Form 26AS receipts; accordingly, additions premised on such procedural failure cannot be sustained.

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