2025 (9) TMI 1675 - AT - Income Tax

Second assessment invalid where final assessment attained finality and DRP lacked power to direct fresh assessment

ITAT AHMEDABAD held the second assessment order dated 31.05.2022 invalid because once the AO's final assessment order dated 15.09.2021 had attained ... Simultaneous assessments - Two assessment orders for the same year - AO has passed two assessment orders as the first assessment order is dated 15.09.2021 and appeal against such order is pending disposal before CIT(A), thereafter, AO passed another assessment order, pursuant to directions of DRP against which the appeal is pending before us - HELD THAT:- In the light of the decision of Undercarriage and Tractor Parts Pvt. Ltd. [2023 (9) TMI 759 - BOMBAY HIGH COURT] held that DRP can give directions only in pending assessment proceedings, and once assessment order is passed, DRP would have no power to pass any directions, we are of the view that DRP should not have proceeded with the matter so as to warrant a situation that two assessment orders are passed for the same assessment year. Accordingly, we are of the view that once the assessing officer has passed the final assessment order on 15-09-2021, then DRP cannot issue directions with respect to the draft order for the same assessment year, since at the time of giving directions, the assessment order had attained finality and was no longer at “draft’ stage, in respect of which directions could be issued. Second assessment order dated 31.05.2022, in our view cannot be sustained. Accordingly, we are hereby allowing ground no. 2 of the assessee’s appeal on the legal ground that in light of the above observations, the assessment order is invalid in the eyes of law. Since we have held that the second assessment order, against which the assessee is in appeal before us is invalid in the eyes of law, the grounds raised by the assessee on merits do not require any adjudication. Accordingly, having held that the present/ subsequent assessment order is invalid in the eyes of law, assessee would be at liberty to pursue it’s appeal before Ld. CIT(A) against the first assessment order. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a faceless Assessing Officer can validly pass a final assessment order under section 143(3) read with sections 144C(3) and 144B of the Act without awaiting directions of the Dispute Resolution Panel (DRP) where the assessee contends objections were filed within time. 2. Whether two final assessment orders for the same assessment year - one passed before DRP directions and another purportedly passed pursuant to later DRP directions - can both be valid, or whether the second order is invalid as the AO is functus officio after the first final order. 3. Whether the DRP may proceed to entertain objections and issue directions in respect of an assessment year where a final assessment order has already been passed and an appeal against that order is pending before the first appellate authority. 4. Ancillary issue: If a second assessment order is held invalid on legal grounds, whether merits-based transfer-pricing and other substantive grounds require adjudication before the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of passing a final faceless assessment order without awaiting DRP directions where assessee alleges intimation of objections: Legal framework: Sections 144B and 144C create the faceless assessment mechanism and prescribe the procedure for passing draft and final assessment orders including the role of the DRP when objections are filed within prescribed time. Precedent treatment: The Court referred to judicial authorities that interpret the DRP procedure as mandatory and protective of assessee rights where valid objections are filed; other decisions emphasize compliance with prescribed electronic filing/communication requirements under the faceless scheme. Interpretation and reasoning: The validity of the AO's first final order depends on whether the assessee validly intimated the filing of objections to the DRP/AO in the manner and within the time prescribed by the faceless procedure. The faceless regime requires communications through designated electronic channels (registered account on the e-filing portal). Communications sent to non-designated email addresses or from unregistered email IDs are not treated as reaching the FAO for purposes of suspending finalization. In the present facts the AO recorded non-receipt of a valid intimation and therefore concluded the draft proceedings by passing a final order. Ratio vs. Obiter: Ratio - Where statutory faceless-procedure requirements for intimation are not complied with, the AO may validly proceed to pass the final order; Obiter - procedural flexibility or equitable considerations (e.g., system failures, DRP email confirmations) are noted but do not override statutory channel requirements. Conclusion: An AO's passing of a final faceless assessment without awaiting DRP directions can be valid if the assessee failed to effectuate intimation in the prescribed manner and within the statutory period. Issue 2 - Validity of second final assessment order passed pursuant to DRP directions when an earlier final order already existed for same year: Legal framework: The Act contemplates a single final assessment order under section 143(3) for a given assessment year; once a final order is passed, the assessing authority ordinarily becomes functus officio. DRP directions under section 144C(5) are intended to apply to draft assessment orders where objections have been validly filed. Precedent treatment: Authorities hold that DRP can give directions only in pending (draft-stage) assessment proceedings and lacks power to give directions once the assessment has been finalized; similarly, once a final assessment order is passed, the AO cannot lawfully pass another final order for the same year. Interpretation and reasoning: Where an AO has already finalized assessment and the assessee has filed an appeal against that order, DRP lacks jurisdiction to reject a request to withdraw objections and then issue directions leading to a second final order for the same year. The Court emphasized that when the DRP proceeded despite being informed that a final order had been passed and an appeal was pending, it created a situation incompatible with the statutory scheme and controlling precedents. Ratio vs. Obiter: Ratio - A second final assessment order for the same assessment year is invalid if it is made after a prior final assessment order has attained finality; Obiter - questions of whether the assessee's intimation to DRP was timely or the DRP's treatment of withdrawal applications may be context-specific and do not negate the principle of finality. Conclusion: The second assessment order passed pursuant to DRP directions for the same assessment year is not sustainable and is invalid where a prior final assessment order had already been passed and appeal against it was pending. Issue 3 - Jurisdiction of DRP to proceed when a final assessment order has been passed and appeal is pending before the first appellate authority: Legal framework: DRP's authority to issue directions under section 144C(5) is confined to pending assessment proceedings (i.e., where valid objections have suspended finalization). Once the assessment is finalized, DRP's supervisory role over that draft order ceases. Precedent treatment: High Court and Tribunal precedents have held that DRP cannot issue directions in respect of assessment proceedings that have attained finality; DRP's power is procedural and linked to draft-stage assessments. Interpretation and reasoning: In the present facts the assessee informed DRP that a final order had been passed and an appeal was pending; notwithstanding this, DRP rejected the withdrawal of objections and issued directions. The Court treated such conduct as inconsistent with the statutory limit on DRP's jurisdiction and existing judicial authority, concluding that DRP should not have proceeded to issue directions that resulted in a second final order. Ratio vs. Obiter: Ratio - DRP lacks jurisdiction to give directions in respect of assessment proceedings already finalized and under appeal; Obiter - the adequacy of the assessee's communications with DRP/AO and any system-related allowances are fact-dependent but do not expand DRP's jurisdiction. Conclusion: DRP should not have proceeded to consider objections or issue directions once informed that the assessment had been finalized and an appeal was pending; consequently, directions issued in that state are impermissible to the extent they result in a second final order. Issue 4 - Necessity of adjudicating substantive transfer-pricing and other merits once the second order is held invalid: Legal framework: If an order is invalid on a jurisdictional/procedural ground, merits-based inquiries in respect of that invalid order need not be adjudicated by the forum that has found lack of jurisdiction; the assessee retains the right to pursue available appeals against the validly-executed first final order. Precedent treatment: Established practice shows that when an order is struck down on legal/ procedural grounds, merits need not be gone into; substantive grounds are preserved for prosecution before the competent forum on the validly operative order. Interpretation and reasoning: Having held the second assessment order invalid, the Tribunal declined to adjudicate the transfer-pricing and other substantive grounds raised against that second order, leaving the assessee free to pursue appellate remedies against the first assessment order already under challenge before the first appellate authority. Ratio vs. Obiter: Ratio - Where an impugned order is invalid for jurisdictional reasons, merits thereof need not be decided by the forum invalidating the order; Obiter - the Tribunal noted the procedural facts (e.g., system acknowledgements, DRP relief) without allowing them to cure jurisdictional defects. Conclusion: Merits-based grounds against the invalidated second assessment order were not adjudicated; the assessee is permitted to continue appellate proceedings against the first final assessment order. Overall Conclusion The second final assessment order passed pursuant to DRP directions is invalid because a prior final assessment order for the same assessment year had already been passed and appeal against it was pending; DRP lacked jurisdiction to issue directions that resulted in a second final order once the assessment had attained finality. Accordingly, the appeal succeeds on this legal ground and substantive grounds against the second order were not adjudicated, with liberty granted to pursue the pending appeal against the first final order.