Final assessment quashed for breaching Section 144C timelines, protecting assessee's right to DRP objections and deleting tax demand

The ITAT set aside the final assessment order for violation of the mandatory procedure under Section 144C. It held that the AO was statutorily barred from passing the final assessment order before expiry of the 30-day period granted to the assessee to file objections to the draft assessment order. By issuing the final order prematurely, the AO frustrated the assessee's vested right to approach the DRP, rendering the assessment procedurally invalid. The ITAT therefore quashed the final assessment order passed under Section 144C, with all resultant additions, disallowances and corresponding tax demand deleted in entirety.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the final assessment order was invalid for non-compliance with the mandatory procedure under Section 144C of the Income Tax Act, 1961.

1.2 Whether the approach of the appellate authority in treating the transfer pricing officer's order as the effective order under challenge could cure the defect in the final assessment order.

1.3 Consequences of invalidity of the final assessment order on the additions/disallowances and demand raised, and on the remaining grounds of appeal.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Validity of the final assessment order for non-compliance with Section 144C

2.1.1 Legal framework discussed

(a) The Court reproduced and considered Section 144C(1)-(4), noting in particular:

- Under Section 144C(1), where variation prejudicial to an eligible assessee is proposed, the Assessing Officer must first forward a draft of the proposed order of assessment ("draft order").

- Under Section 144C(2), upon receipt of the draft order, the assessee has 30 days to either (i) file acceptance of the variations with the Assessing Officer, or (ii) file objections to such variations before the Dispute Resolution Panel and the Assessing Officer.

- Under Section 144C(3)-(4), if the assessee accepts the variations or does not file objections within the 30-day period, the Assessing Officer shall complete the assessment on the basis of the draft order and pass the assessment order within one month from the end of the month in which acceptance is received or the 30-day objection period expires.

2.1.2 Interpretation and reasoning

(b) The Court noted the assessee's contention that no draft assessment order was received and that the final assessment order had been passed without issuance of a draft order. A report was therefore called from the Assessing Officer.

(c) On examining the case history and the documents produced (including the draft assessment order and internal workflow entries), the Court found that:

- A draft assessment order was prepared on 15/04/2021.

- The final assessment order was generated on 23/04/2021.

(d) The Court treated the entries in the case history as, arguendo, correct but focused on the statutory requirement that even where a draft order exists, the assessee is statutorily entitled to a full 30-day period under Section 144C(2) to file objections or convey acceptance.

(e) It was recorded that it was not the case of the Revenue that the assessee had accepted the draft order. Accordingly, in the absence of such acceptance, the Assessing Officer could not lawfully pass the final assessment order before the expiry of the 30-day period granted by Section 144C(2).

(f) The Court found that passing the final assessment order on 23/04/2021, i.e., prior to expiry of the 30-day window from preparation/issuance of the draft order on 15/04/2021, frustrated the assessee's statutory right to file objections to the draft assessment order.

(g) The Court held that this non-observance of the time-frame and sequence mandated in Section 144C(2)-(4) amounted to violation of the procedure prescribed in Section 144C.

2.1.3 Conclusion

(h) The Court concluded that the final assessment order dated 23/04/2021 was passed in violation of the mandate of Section 144C of the Act and, therefore, could not be sustained in law.

(i) The final assessment order dated 23/04/2021 passed under Section 144C of the Act was quashed.

2.2 Effect of the appellate authority's approach treating the transfer pricing order as the effective order under challenge

2.2.1 Legal framework (as discussed)

(a) The appellate authority had referred to Section 92CA and the mechanism by which, when a reference is made to the Transfer Pricing Officer (TPO), the arm's length price determined by the TPO is incorporated by the Assessing Officer in the order under Section 143(3).

2.2.2 Interpretation and reasoning

(b) The appellate authority recorded that the Assessing Officer had not discussed anything about the transfer pricing adjustments made by the TPO and had accepted those adjustments in toto, and therefore treated the TPO's order as the order effectively under appeal.

(c) It further observed that a rectification order under Section 154 read with Section 143(3) had reduced the tax demand by changing the applicable rate, and then set aside the assessment "for the limited purpose of redoing the 143(3) order appealed against by incorporating the TP adjustments," and in result set aside the appeal for doing it de novo.

(d) The Court, on perusal, noted that the appellate authority had in substance proceeded as if the appeal was against the TPO's order and not squarely addressed the foundational validity of the final assessment order in light of Section 144C.

(e) By holding the final assessment order itself to be unsustainable for breach of Section 144C, the Court implicitly rejected the notion that the appellate authority's characterisation of the proceedings as effectively against the TPO's order could validate or cure the jurisdictional/ procedural defect in the final assessment order.

2.2.3 Conclusion

(f) The manner in which the appellate authority treated the TPO's order as the effective order under challenge did not and could not cure the illegality arising from non-compliance with Section 144C in passing the final assessment order.

2.3 Consequences of invalidity of the final assessment order on additions, demand, and remaining grounds

2.3.1 Interpretation and reasoning

(a) Having held the final assessment order dated 23/04/2021 to be invalid and quashed it, the Court treated all additions/disallowances incorporated therein, and the corresponding demand raised on the assessee, as having no legal foundation.

(b) Since the final assessment order itself stood quashed, the substantive grounds relating to the merits of transfer pricing adjustments and other additions became academic.

2.3.2 Conclusion

(c) Consequent upon quashing of the final assessment order, all additions/disallowances made therein and the corresponding demand raised on the assessee stood deleted.

(d) Ground No. 5, challenging the validity of the assessment order and consequential transfer pricing adjustments, was allowed.

(e) All other grounds raised by the assessee were dismissed as having been rendered infructuous.

(f) The appeal was thus partly allowed in the above terms.

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