2025 (11) TMI 339 - HC - Income Tax

Assessment order under section 144C invalid where AO ignored objections filed before DRP; orders quashed, system directed

HC held assessment order under section 144C was invalid where the AO failed to consider objections filed before the DRP; the AO ought to have awaited the ... Assessment order u/s 144C without considering assessee's objection - HELD THAT:- This Court in ZOOMRX HEALTHCARE TECHNOLOGY SOLUTIONS (P) LTD. [2024 (9) TMI 368 - KARNATAKA HIGH COURT] inasmuch as the non-information to the AO would not take away the objections which had been filed before the DRP, and as such, AO ought to have awaited the resolution of the decision of the DRP. It would be for the Chief Commissioner of Income Tax to look into this matter and implement a system which would cater to such a requirement, such that, in cases of this kind, the objections filed before the DRP would have been made knowledgeable to the AO so as to stay the hands of the AO and not pass the orders pending the decision of the DRP. Chief Commissioner (International Taxation) to file an affidavit in that regard within four weeks from today. Writ petition is allowed. The order passed are hereby quashed. ISSUES PRESENTED AND CONSIDERED 1. Whether objections filed by an assessee before the Dispute Resolution Panel (DRP) under Section 144C(2) of the Income Tax Act, 1961 remain effective and operate to require the Assessing Officer (AO) to await the DRP decision, even when the assessee fails to inform the AO of such filing. 2. Whether an assessment order passed by the AO under Section 144C/Section 92CA(3) while unaware of objections filed before the DRP is liable to be quashed and the matter remitted for decision after the DRP has adjudicated. 3. Whether there is a systemic obligation or administrative mechanism to ensure cross-notification of objections filed before the DRP to the AO, and whether the revenue should be directed to consider implementation of such a system. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Effectiveness of objections filed before the DRP despite non-intimation to the AO Legal framework: Section 144C(2) permits the assessee to file objections to the draft assessment before the DRP within the prescribed time; Section 92CA(3) relates to transfer pricing assessments. The statutory scheme contemplates DRP consideration of objections to draft orders before finalization by the AO. Precedent Treatment: The Court follows the decision of a Co-ordinate Bench (referred to as ZoomRx) which held that non-information to the AO does not nullify objections filed before the DRP and that the AO ought to await the DRP's decision. Interpretation and reasoning: The Court reasons that the filing of objections before the DRP under Section 144C(2) is a substantive procedural act which activates the DRP process; mere failure by the assessee to notify the AO of that filing, particularly where the objections were in fact filed within time, should not deprive the assessee of the statutory mechanism of DRP adjudication. The AO passing the final order in ignorance of the objections undermines the statutory scheme and the remedial purpose of DRP review in dispute resolution. Ratio vs. Obiter: Ratio - The operative principle adopted is that objections validly filed before the DRP remain effective to engage the DRP process and require the AO to await the DRP decision; non-intimation to the AO is not fatal to the existence or effect of those objections. This follows and applies the holding of the Co-ordinate Bench. Conclusion: Objections filed before the DRP under Section 144C(2) retain their legal efficacy even if the assessee did not inform the AO; the AO is incumbent to allow the DRP process to run its course and not pass the final order pending DRP decision. Issue 2 - Validity of assessment order passed by AO unaware of DRP objections and appropriate remedial consequence Legal framework: The interplay between draft assessment under Section 144C and final assessment / transfer pricing proceedings under Section 92CA(3) requires adherence to DRP process before finalizing assessments where objections have been filed as per Section 144C(2). Precedent Treatment: The Court follows the Co-ordinate Bench approach which invalidates final orders passed without regard to pending DRP objections and remits the matter for decision after DRP disposal. Interpretation and reasoning: Since the DRP mechanism is intended to review objections to draft assessments, a final assessment order passed without knowledge of objections frustrates that statutory review. Accordingly, the Court treats such final orders as vitiated by the failure to await DRP adjudication. The appropriate remedy is quashing of the impugned assessment order and associated notices, and remittal to the AO for proceeding after DRP determination. Ratio vs. Obiter: Ratio - Final assessment orders passed while valid objections to the draft assessment are pending before the DRP (even if the AO was not informed) are liable to be quashed and the matter remitted; the DRP's decision must precede AO finalization in such cases. This is the operative holding applied to the facts. Conclusion: The impugned assessment order and consequential notices are quashed; matter is remitted to permit the DRP to decide the objections and for the AO to pass consequential orders thereafter. Issue 3 - Administrative/systemic obligation for cross-notification of DRP filings to Assessing Officers Legal framework: Administrative infrastructure and internal processes of the revenue department determine inter-office communication; no statutory mechanism mandating automatic electronic cross-notification of DRP filings to the AO was relied upon in the record. Precedent Treatment: The Court, while following legal precedent on the substantive question, addresses as an administrative issue the absence of a system to notify AOs of DRP filings; this is treated as a matter warranting administrative attention rather than as altering legal rights established by statute or precedent. Interpretation and reasoning: The Court observes that where objections to a draft assessment are filed physically, absence of a system to inform the AO can lead to the AO unknowingly passing final orders, thereby defeating the statutory DRP process. To prevent recurrence, the Court directs the Chief Commissioner (International Taxation) to examine and file an affidavit regarding implementation of a notification/systemic mechanism so that objections filed before the DRP are brought to the AO's attention and the AO refrains from passing final orders pending DRP decision. Ratio vs. Obiter: Obiter (administrative direction) - The direction to the Chief Commissioner to examine and report on a system for cross-notification is administrative and remedial in nature, aimed at preventing procedural lapses; it does not form a legal ratio deciding substantive rights beyond recommending institutional measures. The core legal holding remains that filed DRP objections are effective despite non-intimation. Conclusion: The Court directs administrative consideration and reporting by the Chief Commissioner on implementing a notification/system to ensure AOs are informed of DRP filings; this is an administrative remedial step to secure effective operation of the statutory DRP scheme. Cross-references and Outcome 1. Issues 1 and 2 are interlinked: because objections validly filed under Section 144C(2) remain effective notwithstanding non-intimation, the AO's final order issued in ignorance of those objections is quashed and the matter remitted for DRP decision (see Issue 2 conclusion). 2. Issue 3 supports implementation of procedural safeguards to avoid recurrence of the situation that gave rise to Issues 1 and 2; the Court's administrative direction is ancillary to, and does not supplant, the substantive ruling following the precedent applied in Issues 1-2.