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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: This appeal by the assessee is arising out of the Commissioner of Income Tax (Appeals)-8, Chennai in ITA No.61/16-17 dated 25.10.2017. The draft assessment order was passed by the ACIT, Corporate Circle 4(2), Chennai for the assessment year 2012-13
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u/s.143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 16.03.2016.
The assessee has raised additional ground which is jurisdictional ground and the same are as under:- “1. The order of assessment arising out of violation of themandatory procedure laid down in section 144C of the Act is invalid in law and should be struck down as much.
The draft assessment order, which is in essence the final assessment order, given that the notice of demand had also been issued and penalty has also been initiated, is a patent violation of the provisions of the Act and therefore, the assessment deserved to be quashed.”
The ld.AR for the assessee argued that the additional grounds raised are purely legal ground and facts are available on record and hence, these can be admitted and adjudicated. When this was pointed out to ld.Senior DR, he only opposed the admissibility of additional ground but could not make any substantial arguments.
As the issue is purely legal and grounds raised are arising out of facts available in the order of AO as well as CIT(A), we admit these grounds and adjudicate the same.
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At the outset, the ld.AR stated that the assessee company has filed the appeal before this Tribunal on 08.01.2018 and raised additional ground on 04.05.2022. The ld.AR stated the fact that the assessee has received an order dated 16.03.2016 on 29.03.2016, which was captioned as “Draft Assessment Order” passed u/s.143(3) r.w.s. 92CA(3) of the Act. The ld.AR for the assessee took us through the draft assessment order passed by ACIT, Corporate Circle 4(2), Chennai which is dated 16.03.2016. The ld.AR also took us through the demand notice issued u/s.156 of the Act, enclosed in page 37 of appeal folder filed along with Form 36, which is dated 16.03.2016. The ld.AR stated that the AO has computed the income-tax demand and also issued demand notice u/s.156 of the Act along with this draft assessment order. The ld.AR also took us to para 2 of the draft assessment order, wherein the assessee is an eligible assessee for assessment u/s.92CA of the Act and he referred to the following para 2:- “2. As per the provisions of Chapter X of the Income Tax Act, 1961, the issue of Transfer Pricing was referred to the Transfer Pricing Officer to determine the Arms Length Price of the International transactions entered into by the assessee company with the Associated Enterprises; after obtaining the prior approval of the Commissioner of Income Tax. The Transfer Pricing officer vide an order dated 28.01.2016 u/s.92CA(3) in F.No.K-501/TPO-2)1/A.Y. 2012-13 has determined and decided that “an adjustment in the income of assessee amounting to Rs.3,06,02,103/- is to be made towards excess interest paid on FCCD.”
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5.1 In view of the above facts, the ld.AR stated that the issue is squarely covered by the Co-ordinate Bench decision of this Tribunal in the case of YCH Logistics (India) Pvt. Ltd., in ITA No.322/Chny/2016, order dated 20.07.2022, wherein the Tribunal relying on the decision of Pune Bench of the Tribunal in the case of DCIT vs. Atlas Copco (India) Limited in CO Nos.34 & 35/PUN/2019, order dated 29.08.2019, quashed the assessment by observing in para nos. 6 to 10 as under:- 6. The undisputed facts are that the assessee company is a logistics service provider and had filed return of income for the assessment year 2011-12 on 17.11.2011 admitting a loss of Rs.8,45,48,991/-. This return was processed u/s.143(1) of the Act and subsequently assessee’s case was selected for scrutiny assessment under CASS and notice u/s.143(2) r.w.s. 142(1) of the Act dated 03.08.2012 & 09.04.2013 were issued by DCIT, Company Circle 12(5), Bangalore and later the jurisdiction was transferred to Corporate Circle 3(2), Chennai. In this case, the AO noticed that the assessee has entered into international transaction with its Associated Enterprises exceeding Rs.15 crores. Therefore, as per the Board’s circular / notification, the matter was referred to the Transfer Pricing Officer and the TPO has passed order u/s.92CA of the Act dated 14.01.2015vide C.R. No.Y-603/TPO 3(2)/A.Y.2011-12, in which the TPO has recommended downward adjustment of Rs.7,40,95,333/- incurred to Management Support Services received from its Associated Enterprises YCH, Singapore. Thereafter the DCIT, Corporate Circle 3(2), Chennai passed draft assessment order u/s.143(3) r.w.s 92CA(3) of the Act dated 13.03.2015 wherein the AO along with the draft assessment order raised demand of Rs.2,82,60,180/- u/s.156 of the Act dated 13.03.2015 and along with the same, the AO also initiated penalty proceedings u/s.271(1)(c) of the Act and issued notice u/s.274 r.w.s. 271 of the Act i.e., penalty notice u/s.271(1)(c) of the Act dated 13.03.2015. The draft assessment order dated 13.03.2015 contains the following details:-
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“Case was heard and the assessment is completed. The income of the assessee company is assessed as under:-
Sl.No. Heads of Income Rs. Rs. A Loss admitted in the ROI (-) 8,45,48,991/- B ADD: 1. TPO Adjustment 7,40,95,333 2. Disallowance of Deduction u/s.10AA 10,06,80,541 3. Interest paid on TDS and 18,20,39,564/- service-tax 24,98,559 4. Disallowance of Forex Loss 47,65,131 C Total income assessed as 9,74,90,573/- per this order
Demand Notice u/s.156 and calculation sheet are enclosed. Penalty proceedings u/s.271(1)(c) initiated for the reasons discussed above.”
Thereafter final assessment order was passed by the ACIT, Corporate Circle 3(2), Chennai u/s.143(3) r.w.s. 92CA(3) r.w.s. 144C(5) of the Act dated 12.01.2016 in consequence to directions issued by DRP - 2, Bangalore vide F.No.274/DRP-2/BNG/2015-16 directions dated 17.12.2015 u/s.144C(5) of the Act.
From the above facts, it is seen that the draft assessment order passed by the AO u/s.143(3) r.w.s. 92CA of the Act, dated 13.03.2015 issuing demand notice u/s.156 of the Act and also initiating penalty proceedings by issuing notice u/s.274 r.w.s. 271 of the Act for levy of penalty u/s.271(1)(c) of the Act for concealment of income. Thereafter the AO passed final assessment order again vide dated 12.01.2016. Under such circumstances, the assessee raised additional ground, which is reproduced in the above para 3 and for the same of clarity again it is being reproduced as it is.:- “1. On the facts and circumstances of the case and in law, the assessment order being contrary to the provisions of section 144C of the Act, is bad in law and therefore, deserves to be quashed.”
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7.1 Now, the assessee has raised the issue that the final assessment order lack validity and hence, the same should be quashed as the AO and TPO failed to follow the statutorily prescribed procedure u/s.144C of the Act is vitiated. 8. The ld.counsel for the assessee relied on Co-ordinate Bench of the Tribunal in the case of DCIT vs. Atlas Copco (India) Limited in C.O. Nos.34 & 35/PUN/2019, order dated 29.08.2019, wherein on exactly identical facts, the Tribunal has considered this similar issue and the relevant discussion, facts and legal position reads as under:- 9. Section 144C of the Act with the marginal note "Reference to Dispute Resolution Panel" provides through sub-section (1) of section 144C that: "The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.' Sub- section (2) of section 144C states that the assessee shall either file his acceptance to the AO on the variations proposed in the draft order or file his objections, if any, with the DRP. In case, the assessee accepts the variation in the draft order or no objections are received within 30 days, then sub- section (3) states that: `The Assessing Officer shall complete the assessment on the basis of the draft order'. In case, the assessee does not agree with the draft order, it can, inter alia, raise objections before the DRP, which shall issue directions under sub- section (5) of section 144C. Upon receipt of the directions from the DRP, the AO completes the assessment under sub-section (13) in conformity with the directions given by the DRP. 10. An overview of section 144C of the Act deciphers that a draft order passed under sub-section (1) is only a tentative order which does not fasten any tax liability on the assessee. In case variations to the income in the draft order are accepted by the assessee or no objections are received within 30 days, the AO completes the assessment under section 144C(3) on the basis of draft order and the matter ends. In case the assessee objects to the variations in the income as proposed in the draft order and approaches the DRP, the final assessment order is passed by the AO u/s.144C (13) giving effect to the directions given by the DRP under sub-section (5). In case the assessee seeks to take the
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route of seeking redressal of its grievances through the channel of the CIT(A), in that case, again the AO has to pass a separate assessment order, which is obviously distinct from the draft order. So, it is only on the finalization of the variation in the income as per the draft order, to the extent specified in the provision, that the AO is obliged to pass an assessment order, either under sub-section (3) or (13) of section 144C of the Act, determining the tax liability, pursuant to which a notice of demand is issued. Thus it follows that, irrespective of the course of action followed by the assessee, whether or not accepting the variation in the draft order or choosing the route of the DRP or the CIT(A), a draft order has to be necessarily followed by an assessment order on the basis of which a notice of demand is issued and it is then that the assessment is said to have come to an end.
The Hon'ble Apex Court in Kalyan Kumar Ray (1991) 191 ITR 634 (SC) has held that assessment order involves determination of income and tax. It laid down that: `'Assessment' is one integrated process involving not only the assessment of the total income but also the determination of the tax. The latter is as crucial for the assessee as the former.' Again the Hon'ble Summit Court in Auto and Metal Engineers vs. UOI (1998) 229 ITR 399 (SC) has held that the process of assessment involves (i) filing of the return of income under s. 139 or under s. 142 in response to a notice issued under s. 142(1) ; (ii) inquiry by the AO in accordance with the provisions of ss. 142 and 143 ; (iii) making of the order of assessment by the AO under s. 143(3) or s. 144; and (iv) issuing of the notice of demand under s. 156 on the basis of the order of assessment. The process of assessment thus commences with the filing of the return or where the return is not filed, by the issuance by the AO of notice to file the return under s. 142(1) and it culminates with the issuance of the notice of demand under s. 156. On going through the above precedents, it is manifested that the assessment proceedings come to an end on the issue of notice of demand u/s 156 of the Act. Once a notice of demand is issued, the AO becomes functus officio in so far as the completion of assessment is concerned. It consequently follows that issue of notice of demand marks the completion of the assessment.
Turning to the facts of the instant case, it turns out that the AO issued notice of demand on 29.12.2011 tantamounting to legally
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finalizing the assessment, which was just the stage of draft order. As against that, it was incumbent upon him to statutorily pass the final assessment order after the draft order and then issue notice of demand. Issue of notice of demand brings down the curtain on the process of assessment. Until notice of demand is issued, the assessment cannot be said to have concluded. 13. The Hon'ble Madras High Court in Vijay Television (P) Ltd. Vs. DRP (2014) 369 ITR 113 (Mad.) was confronted with a situation in which the AO, pursuant to the order of the TPO, passed a final assessment order instead of a draft order. A question arose as to whether the order so passed could be treated as a valid order. Accepting the contention of the assessee, the Hon'ble High Court set aside the order passed by the AO by observing that: "where there was omission on the part of the AO to follow the mandatory procedures prescribed in the Act, such omission cannot be termed as a mere procedural irregularity and it cannot be cured". Resultantly, the assessment order was quashed. Almost similar issue came up for consideration before the Hon'ble jurisdictional High Court in Pr. CIT Vs. Lionbridge Technologies Pvt. Lt. (2019) 260 Taxman 273 (Bom.) in which the Tribunal in the first round restored the matter to the AO on the ground that the DRP failed to deal with the assessee's objections. During the remand proceedings, a reference was made to the TPO. On receipt of the TPO's order, the AO straightaway passed an order u/s.143(3) r.w.s. 144C(13), which action came to be disapproved by the Hon'ble High Court. It, ergo, follows that the statutorily mandated procedure must be adhered to by the authorities, non-observance of which renders the assessment order null and void. 14. Similar issue came up for consideration before the Pune Benches of the Tribunal in Skoda Auto India Ltd. Vs. ACIT. In that case also the AO passed the draft order and simultaneously issued notice of demand and initiated penalty proceedings by issuing notice u/s 274 of the Act. It was thereafter that the final assessment order was passed. The assessee challenged the legality of the final assessment order. Vide its order dated 02-07-2019, the Tribunal in ITA No.714/PUN/2011 has held that the demand got crystallised on passing of the draft order pursuant to issue of demand notice which is contrary to the relevant provision of the Act. Ex Consequenti, the draft order was held to be invalid in law and the consequential assessment order void ab-initio.
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The ld. DR buttressed his point of view by relying on an order passed by the Hyderabad Benches in BS Ltd. Vs. ACIT (2018) 94 taxmann.com 346 (Hyderabad-Trib.) in which it has been held that the issuance of demand notice along with the draft order is only a procedural mistake. In our considered opinion, this case does not advance the Departmental stand. Unlike the assessee in the instant case not raising objections before the DRP and pursuing the appeal straight away before the ld. CIT(A), the assessee in that case adopted the route of the DRP. Be that as it may, it is found that similar issue came up for consideration before the Pune Benches of the Tribunal in series of cases including Eaton Fluid Power Ltd. Vs. DCIT (2018) 96 taxmann.com 512 (Pune Trib.). In that case also, the AO passed the draft order u/s.143(3) r.w.s. 144C(1) of the Act. Thereafter, he issued notice of demand u/s.156 and initiated penalty proceedings u/s.271(1)(c) of the Act. When this infirmity in not following the statutorily mandated procedure was pointed out, the Tribunal declared the assessment order to be without jurisdiction and hence, null and void. 16. It is observed that the facts and circumstances of the instant case are similar to those considered by the Pune Benches of the Tribunal in the case of Skoda Auto India Ltd. Vs. ACIT (supra) and Eaton Fluid Power Ltd. Vs. DCIT (supra). As the AO in the extant case issued notice of demand at the stage of the draft order, which, actually ought to have been done at the stage of passing the final order, thereby assigning the finality to the assessment at the stage of draft order itself, we hold that the resultant final assessment order got vitiated in the eyes of law and hence cannot stand. 18. To sum up, we set-aside the assessment order by declaring it to be null and void. Thus, the income offered in the return becomes total income of the assessee. Apart from the above, the ld.counsel for the assessee relied on the following case laws:- (i) Delhi Tribunal in the case of Perfetti Van Melle (India) Pvt. Ltd., in ITA No.9116/Del/2019 (ii) Delhi Tribunal in the case of Mavenir India Pvt. Ltd., in ITA No.203/Del/2020
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(iii) Pune Tribunal in the case of Skoda Auto India Pvt. Ltd., in ITA No.546/Pun/2014 (iv) Pune Tribunal in the case of Eaton Industrial Systems Pvt. Ltd., in ITA No.536/Pun/2014 (v) Pune Tribunal in the case of Sandvik Asia Pvt. Ltd., in ITA No.467 & 564/Pun/2015 (vi) Pune Tribunal in the case of Rehau Polymers Pvt. Ltd., in ITA No.566/Pun/2015 (vii) Pune Tribunal in the case of Soktas India Pvt. Ltd., in ITA No.206/Pun/2015 (viii) Mumbai Tribunal in the case of Aker Powergas Pvt. Ltd., in ITA No.7211/Mum/2017
On the other hand, the ld.CIT-DR could not controvert the above fact situation but only stated that there is no harm in passing a draft assessment order and issuing demand notice and penalty notice u/s.271(1)(c) of the Act. According to him, this is not illegality and it is curable and particularly when the matter is restored back by Hon’ble Madras High Court, nothing survives. 10. We have heard rival contentions and gone through the issue arises on jurisdiction. We noted that this issue has been considered by Co- ordinate Benches of this Tribunal as noted above and particularly in the case of Atlas Copco (India) Limited, supra, Pune Bench has considered the issue and the facts being exactly identical, we allow this jurisdictional issue in favour of assessee.”
When the same was confronted to ld. Senior DR, he only relied on the draft assessment order and the order of CIT(A).
After hearing rival contentions and going through the facts, it is an admitted fact that the AO has issued only draft assessment order and no final assessment order was passed by the AO. Along with the draft assessment order, the AO issued demand notice
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u/s.156 of the Act. We noted that the issue is squarely covered in favour of assessee by various Co-ordinate Bench decisions. Respectfully following the same, we quash the draft assessment order and allow the appeal of assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 21st October, 2022 at Chennai.
Sd/- Sd/- (महावीर �सह ) (मनोज कुमार अ�वाल) (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 21st October, 2022 RSR आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.