2025 (10) TMI 911 - HC - Income Tax

Final faceless assessment set aside where draft under s.144C and s.144B not served, denying DRP objection opportunity

HC set aside a final faceless assessment order because the draft assessment order required under s.144C (read with s.144B(1)(xxi)-(xxix)) was not served ... Eligible assessee as contemplated u/s 144C(15)(b)(i) - Validity of order passed without serving a draft assessment order and non affording opportunity to enable it to file its objections (to the draft assessment order) before the DRP - HELD THAT:- We find that to the provisions of Section 144B(1) and more particularly Sections 144B(1)(xxi) to 144B(1)(xxix), the provisions of Sections 144C have been made applicable. These provisions clearly stipulate that in case of an eligible assessee, a draft assessment order has to be served on the Petitioner to enable the Petitioner to approach the DRP. This, in fact, has not been done in the facts of the present case. In the facts of the present case, a final assessment order has been directly passed by the Faceless Officer without serving a draft assessment order on the Petitioner to enable it to approach the DRP. This is in clear violation not only of the provisions of Section 144C but also of Section 144B(1)(xxi) to (xxix) thereof. Once this is the case, the final assessment order in the above Petition cannot stand and would have to be set aside. We are supported by the decision of this Court in the case of Danfoss Fluid Power Private Limited Vs. Union of India and Ors. [2025 (10) TMI 360 - BOMBAY HIGH COURT] as held a final assessment order was passed without serving the draft assessment order on the Petitioner. This Court held that the same would clearly be in contravention of the provisions set out in Section 144C. As far as the prayer for remand is concerned, we see no reason to remand the matter back to the AO - If the AO, in law, is entitled to initiate this process again by passing a fresh draft assessment order and serving it upon the Petitioner, they are free to do so if they are entitled to do in law. We have not opined on this aspect of the matter one way or the other. ISSUES PRESENTED AND CONSIDERED 1. Whether, where an assessee qualifies as an 'eligible assessee' under Section 144C(15)(b)(i), a final assessment order which is prejudicial to the assessee can be validly passed without first serving a draft assessment order and affording opportunity to file objections before the Dispute Resolution Panel (DRP) as mandated by Section 144C. 2. Whether the scheme of Section 144B(1), including sub-clauses (xxi)-(xxix), renders the provisions of Section 144C applicable such that the requirement to serve a draft assessment order on an eligible assessee must be complied with in faceless assessment proceedings under Section 144B. 3. Whether failure to pass and serve the draft assessment order in the circumstances indicated constitutes a mere procedural irregularity or a jurisdictional error rendering the final assessment order void. ISSUE-WISE DETAILED ANALYSIS Issue 1: Necessity of draft assessment order under Section 144C for an 'eligible assessee' Legal framework: Section 144C(1)-(3) confers on an 'eligible assessee' the right to receive a draft assessment order where variations adverse to the assessee are proposed, and to file objections before the DRP prior to passing a final assessment order. Precedent treatment: Applied and followed the reasoning in earlier decisions of the High Court which held the requirement to pass and furnish a draft assessment order to be mandatory (cited decisions treated as binding for present purposes). Interpretation and reasoning: The Court held that where a Transfer Pricing Officer or Assessing Officer makes an adjustment that is prejudicial to the assessee, the assessee falls within the statutory definition of 'eligible assessee' under Section 144C(15)(b)(i). In such cases the statute mandates that a draft assessment order be served first so that the assessee can opt to raise objections before the DRP or proceed by other remedies. Direct passing of a final assessment order without serving the draft frustrates the substantive right conferred by Section 144C. Ratio vs. Obiter: Ratio - the statutory requirement to serve a draft assessment order on an eligible assessee under Section 144C is mandatory and indispensable before a prejudicial final assessment order can be validly passed. This is a binding conclusion on the facts considered. Conclusion: Final assessment orders prejudicial to an eligible assessee passed without first serving the draft assessment order required under Section 144C cannot stand. Issue 2: Applicability of Section 144C procedure in faceless assessments under Section 144B Legal framework: Section 144B(1) contains provisions for faceless assessment proceedings and includes sub-clauses (xx)-(xxix) applying certain provisions of Section 144C; where Section 144B makes Sections 144C applicable, the procedural safeguards under Section 144C must be observed. Precedent treatment: The Court relied on prior decisions of the High Court interpreting Section 144B to incorporate Section 144C procedures and treating non-compliance with those procedures as fatal. Interpretation and reasoning: The Court examined the text of Section 144B(1)(xxi)-(xxix) and concluded that the legislative design was to make the DRP process and service of draft assessment orders under Section 144C applicable to faceless assessments in respect of eligible assessees. Consequently, a faceless final assessment that bypasses the draft order and DRP step contravenes both Section 144C and the applicable provisions of Section 144B. Ratio vs. Obiter: Ratio - in faceless assessment proceedings falling within the scope of Section 144B(1)(xxi)-(xxix), the duty to pass and serve a draft assessment order under Section 144C is mandatory and its non-observance vitiates the final order. Conclusion: Section 144B does not displace the Section 144C requirement; faceless officers must serve draft assessment orders where the assessee is eligible and a prejudicial variation is proposed. Issue 3: Characterisation of non-compliance - procedural irregularity or jurisdictional error Legal framework: Principles distinguishing procedural irregularities from jurisdictional errors; statutory mandate conferring substantive rights that cannot be bypassed by Assessing Officer; Section 292B (general regularization) does not confer jurisdiction where none exists. Precedent treatment: Followed prior High Court authority that treated failure to follow Section 144C(1) as a breach of a mandatory provision amounting to jurisdictional error and not curable under general regularisation doctrines. Interpretation and reasoning: The Court reasoned that the requirement to serve a draft assessment order is not merely procedural but creates a substantive right to object before the DRP. Deprivation of that right is not a curable irregularity; it affects the Assessing Officer's jurisdiction to pass a final order. Reliance on timelines or administrative pressure does not excuse non-compliance. Section 292B cannot be read so as to confer jurisdiction where the statute prescribes a mandatory preliminary step. Ratio vs. Obiter: Ratio - failure to pass and furnish a draft assessment order in the statutorily required circumstances results in a jurisdictional error, rendering the final assessment order void. Conclusion: Non-compliance with the mandatory draft-order requirement is incurable; the impugned final order must be quashed as void for lack of jurisdiction. Remedies and consequential observations Legal framework: Court's power to quash void orders and discretion whether to remit for fresh consideration. Interpretation and reasoning: Having quashed the final assessment order and consequential notices for want of the mandatory draft step, the Court declined to order an explicit remand, observing that the Assessing Officer remains at liberty to initiate the process afresh and follow the statutory procedure (including passing and serving a draft assessment order) if, and insofar as, entitled to do so in law. The Court expressly did not opine on whether a fresh assessment would be maintainable on the merits. Ratio vs. Obiter: Ratio - quashing of the void final order is the appropriate remedy; remand is left to the Assessing Officer's lawful entitlement and not compelled by the Court. Obiter - the Court did not determine the lawfulness of any prospective re-invocation of the assessment process on merits. Conclusion: The impugned final assessment order and associated demand and penalty notices are quashed; the department may proceed lawfully by following the mandatory draft-order and DRP procedure if entitled, without this Court expressing a view on merits of any future proceedings.