Draft assessment mandatory under sections 144C(1) and 144C(15); final order void, section 124(3) no bar

ITAT held that the assessee was an "eligible assessee" under section 144C(15), and therefore the AO was mandatorily required to first issue a draft assessment order under section 144C(1). Instead, the AO directly passed a final assessment order, violating the special scheme prescribed in section 144C, which is a complete code governing assessments of such assessees. ITAT further held that the assessee's challenge was not barred by section 124(3), as jurisdiction in such cases vests with the International Taxation Circle. The order of the CIT(A) accepting this position was upheld.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the delay in filing the appeals before the Tribunal warranted dismissal or could be condoned and the appeals heard on merits.

1.2 Whether the appeals for certain assessment years were not maintainable before the Tribunal on account of low tax effect in view of CBDT Circular No. 05/2024 and non-applicability of the stated exception therein.

1.3 Whether, in the case of a non-resident "eligible assessee", omission by the Assessing Officer to first issue a draft assessment order under section 144C(1) vitiates the assessment as a jurisdictional defect.

1.4 Whether the bar under section 124(3) regarding objections to jurisdiction applied to preclude the assessee from challenging the assessment framed without following the procedure under section 144C, and the applicability of the judicial precedents relied upon by the Revenue on this point.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Condonation of delay in filing appeals

Interpretation and reasoning: The Tribunal noted that the Registry had marked the appeals as barred by limitation. The authorised representative did not resist hearing of the appeals on merits. The Tribunal proceeded to condone the delay and to hear the appeals on merits.

Conclusion: Delay in filing the appeals was condoned; appeals were admitted and heard on merits.

Issue 2: Maintainability of low tax effect appeals and scope of CBDT Circular No. 05/2024

Legal framework (as discussed): The Tribunal considered CBDT Circular No. 05/2024 dated 15.03.2024 prescribing monetary limits for filing appeals and its exception in para 3.1(a) relating to cases involving constitutional or legal validity of provisions.

Interpretation and reasoning: For the assessment years 2012-13, 2013-14, 2014-15 and 2016-17, it was pointed out that the tax effect was less than Rs. 60 lakhs. The Departmental Representative submitted a report claiming that these cases fell within exception 3.1(a) of the Circular. The Tribunal examined the record and found that no question concerning the constitutionality or legality of any provision of law was involved for adjudication by the Tribunal. Consequently, there was no substantive basis for invoking the exception relied upon by the Assessing Officer.

Conclusion: Appeals relating to the said assessment years were held to be covered by the monetary limit without attracting the stated exception. They were dismissed as not maintainable on account of low tax effect.

Issue 3: Requirement of draft assessment order under section 144C for a non-resident "eligible assessee" and effect of its non-issuance

Legal framework (as discussed): The Tribunal examined section 144C, particularly sub-section (1) and the definition of "eligible assessee" in section 144C(15), noting that section 144C creates a separate assessment mechanism for such assessees. It recognised that section 144C is a "complete code in itself" for eligible assessees, including non-residents, and prescribes the mandatory issue of a draft assessment order before passing a final assessment.

Interpretation and reasoning: For the relevant years (2015-16 and 2017-18), it was undisputed that the assessee was a non-resident individual residing in the United Kingdom. Returns for later years had been filed and processed showing non-resident status, and the Assessing Officer himself noted deduction of tax under section 195, a provision applicable to non-residents. The Tribunal accepted that the assessee was an "eligible assessee" for purposes of section 144C(15). In such a case, the Assessing Officer was required to first issue a draft assessment order under section 144C(1), thereby affording the assessee the statutory option to approach the Dispute Resolution Panel or to accept the draft and pursue regular appellate remedies. Instead, the Assessing Officer directly passed a final assessment order without issuing a draft. The Tribunal characterised this lapse as a "jurisdictional infirmity" and agreed with the first appellate authority that non-compliance with the mandatory procedure under section 144C rendered the assessment unsustainable.

Conclusion: Non-issuance of a draft assessment order to an "eligible assessee" under section 144C(1) was held to be a jurisdictional defect vitiating the assessment. The Tribunal upheld the quashing of the assessment proceedings by the first appellate authority.

Issue 4: Applicability of section 124(3) and precedents cited by Revenue to challenges based on section 144C non-compliance

Legal framework (as discussed): The Tribunal considered section 124(3), which restricts the time for raising objections to the "jurisdiction" of an Assessing Officer, and examined two decisions of the jurisdictional High Court cited by the Revenue (concerning challenges to territorial jurisdiction between two Assessing Officers).

Interpretation and reasoning: The Departmental Representative argued that failure to follow section 144C did not vitiate the assessment and was not a jurisdictional defect, placing reliance on the cited High Court decisions dealing with section 124(3). The Tribunal, after examining those decisions, found they related to disputes over territorial jurisdiction between different Assessing Officers and the requirement to raise such objections at the threshold. In contrast, assessments governed by section 144C concern a distinct regime where both the assessee (as an eligible assessee) and the subject matter are vested with the International Taxation Circle and are governed by a specific statutory process. Section 144C was treated as a separate, self-contained code that grants eligible assessees the right to a draft order and the choice of forum. Therefore, the assessee's challenge to non-compliance with section 144C was not barred or circumscribed by section 124(3). The Tribunal held that the precedents on territorial jurisdiction did not apply to the issue of mandatory procedural compliance under section 144C.

Conclusion: The bar under section 124(3) was held inapplicable to a challenge based on non-issuance of a draft order under section 144C. The judicial precedents invoked by the Revenue were distinguished and did not undermine the assessee's contention that the assessment was void for breach of section 144C.

Overall disposition

Appeals relating to years with low tax effect were dismissed as not maintainable in terms of CBDT Circular No. 05/2024. Appeals concerning the non-resident years were dismissed on the ground that the first appellate authority rightly quashed the assessments due to jurisdictional infirmity arising from non-compliance with the mandatory procedure under section 144C.

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