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Facts
The Revenue preferred an appeal against the deletion of penalty by the CIT(A). The penalty was levied under Section 271(1)(c) based on additions made by the Assessing Officer. However, these additions were later deleted by the Tribunal in quantum proceedings.
Held
The Tribunal held that the assessment order dated 29/12/2016 was passed without following the mandatory procedure under Section 144C of the Act, specifically by not passing a draft assessment order. Consequently, the assessment order was quashed, rendering the basis for the penalty invalid.
Key Issues
Whether the penalty levied under Section 271(1)(c) is sustainable when the additions on which it was based were deleted due to procedural defects in the assessment order.
Sections Cited
271(1)(c), 144C
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
(Assessment Year:2010-2011) Marriott International Inc 303A, 304, Fulcrum, B Wing, Sahar P & T colony SO, Mumbai - 400099 Maharashtra [PAN:AAECM8040K] …………. Appellant Vs Deputy Commissioner of Income Tax (Int. Tax) 3(2)(1), Mumbai 614 Kautilya Bhavan, Bandra Kurla Complex, Mumbai - 400051. Maharashtra. …………. Respondent Appearance For the Appellant/Department : Shri Pratik Poddar, Shri Karan Jain For the Respondent/Assessee : Shri Krishna Kumar Date Conclusion of hearing : 04.03.2026 Pronouncement of order : 06.03.2026 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. The present appeal and Cross Objection pertain to Assessment Year 2010-2010. The Revenue has preferred appeal challenging the Order, dated 25/11/2025, passed by the Commissioner of Income Tax (Appeals) - 57, Mumbai, [hereinafter referred to as ‘CIT(A)’] whereby C.O. No.89/Mum/2026 Assessment Year 2010-2011 the Learned CIT(A) had allowed the appeal against the Penalty Order, dated 31/03/2023, passed under Section 271(1)(c) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’]. The Assessee has filed Cross-Objections in the aforesaid appeal.
Year 2010-2011] 2. When the appeal was taken up for hearing, the Learned Authorized Representative for the Assessee, at the outset, stated that Revenue has preferred the present appeal challenging the order passed by the Learned CIT(A) deleting the penalty levied under Section 271(1)(c) of the Act for the Assessment Year 2010-2011. It was submitted that the Learned CIT(A) had deleted the penalty levied under Section 271(1)(c) of the Act on the ground that additions made by the Assessing Officer in respect of which penalty was levied stood deleted by the Order, dated 20/02/2023, passed by the Tribunal in the quantum proceedings.
On perusal of the grounds raised
by the Revenue, we note that Ground No.1 raised by the Revenue reads as under: “1. Whether on the fact and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the penalty without discussing the merits of the issue merely on the basis of deletion of quantum addition by the ITAT?
4. Therefore, it is admitted position that the additions made by the Assessing Officer stood deleted vide Order, dated 20/02/2023, passed by the Tribunal in pertaining to the Assessment Year 2010-2011. During the course of hearing the Learned Authorized Representative for the Assessee had placed on record copy of the aforesaid order of the Tribunal. On perusal of the same we find that the Tribunal had quashed the Assessment Order, dated 29/12/2016, passed by the Assessing Officer for the Assessment Year 2010-2011 holding as under:
“9. We have heard the submissions made by rival sides on the short C.O. No.89/Mum/2026 Assessment Year 2010-2011 legal issue raised by the assessee by way of additional ground of appeal
. From the submissions made by rival sides the fact emerges that in the second round, the AO passed final assessment order dated 29/12/2016 without passing the draft assessment order.
10. Provisions of section 144C of the Act lays down the procedure to be followed under special mechanism. The AO is first required to pass draft assessment order u/s 144C (1) of the Act. On receipt of the draft assessment order, the eligible assessee within 30 days either accepts the variations or may file objections, against such variations before the DRP. If no objections are filed against the draft assessment order, the AO shall pass the final assessment order. In case the objections are filed before the DRP, the DRP shall issue the directions and it is only after the directions of the DRP that the AO shall pass the final assessment order after giving effect to the directions of the DRP.
11. In the instant case, the Revenue has pointed that the assessment order dated 29/12/2016 was passed to give effect to the directions of the Tribunal, hence, there was no requirement to pass the draft assessment order. It is evident from the cause title of the assessment order dated 29/12/2016 that the assessment order is passed consequent to the directions of the Tribunal. The learned AR of the assessee has placed reliance on the decision of Hon’ble Bombay High Court in the case of Dimension Data Asia Pacific PTE Ltd. Vs. DCIT (supra). In the said case, the petitioner a foreign company challenged the validity of the assessment order as the final assessment order was passed without passing the draft assessment order. The said assessment order was also passed consequent to the directions of the Tribunal. The Department had raised similar objections as was raised by the DR in the present case. The Hon’ble High Court rejected the contentions of the Revenue and held that the draft assessment order has mandatorily to be passed u/s 144C of the Act, even in remand proceedings. The relevant findings of the Hon’ble Court are extracted herein below:
“8. The contention of the Revenue that the requirement of passing a draft Assessment Order under Section 144C of the Act would only extend to the orders passed in the first round of proceedings or in respect of an order passed by the Assessing Officer in remand proceedings by the Tribunal which has entirely set aside the original assessment order. This distinction which is sought to be drawn by the Revenue is not borne out by Section 144C of the Act. Infact, the Delhi High Court in JCB (India) Ltd. (supra) held that, even in partial remand proceedings from the Tribunal, the Assessing Officer is obliged to pass C.O. No.89/Mum/2026 Assessment Year 2010-2011 a draft assessment order under Section 144C(1) of the Act. According to us, the Assessing Officer, is obliged to, in terms of Section 144C of the Act to pass a Draft Assessment Order in all cases where he proposes to assess the Foreign Company under the Act by making a variation in the returned income. In this case, the impugned order dated 31st January, 2018 has been passed in terms of Section 143(3) read with Section 144C read with Section 254 of the Act and it certainly makes a variation to the returned income filed by the petitioner. This even if, one proceeds on the basis that the returned income stands varied by the order of the Tribunal in the first round, to the extent the petitioner accepts it. Therefore, the Assessing Officer correctly invokes Section 144C of the Act in the impugned order. Once having invoked Section 144C of the Act, the Assessing Officer is obliged to comply with it in full and not partly. This impugned order was passed consequent to the order of the Tribunal dated 5th May, 2017 restoring some of the issues before it to the Assessing Officer for fresh adjudication.
This "fresh adjudication" itself would imply that it would be an order which would decide the lis between the parties, may not be entire lis, but the dispute which has been restored to the Assessing Officer. According to us, the order dated 31st January, 2018 is not an order merely giving an effect to the order of the Tribunal, but it is an assessment order which has invoked Section 143(3) of the Act and also Section 144C of the Act. This invocation of Section 144C of the Act has taken place as the Assessing Officer is of the view that it applies, then the requirement of Section 144C(1) of the Act has to be complied with before he can pass the impugned order invoking Section 144C(13) of the Act. In fact, Section 144C(13) of the Act can only be invoked in cases where the assessee has approached the DRP in terms of sub- Section 144(C)(2)(b) of the Act and the DRP gives direction in terms of Section 144C(5) of the Act. In this case, the assessment order has invoked Section 144C(13) of the Act without having passed the necessary draft Assessment Order under Section 144C(1) of the Act, which alone would make an direction under Section 144C(5) of the Act by the DRP possible. Thus, the impugned order is completely without jurisdiction.
Moreover, so far as a Foreign Company is concerned, the Parliament has provided a special procedure for its assessment and appeal in cases where the Assessing Officer does not accept the returned income. In this case, in the working out of the order dated 5th May, 2017 of the Tribunal results in the returned income being varied, then the procedure of passing a draft assessment order C.O. No.89/Mum/2026 Assessment Year 2010-2011 under Section 144C(1) of the Act is mandatory and has to be complied with, which has not been done.
In the above view, the impugned order is without jurisdiction. Thus, the plea of alternate remedy advanced by the Revenue so as to not entertain this petition, does not merit acceptance in the present facts.” (Emphasized by us) 12. The Hon’ble Bombay High Court in the case of Exxon Mobil Company (P.) Ltd. Vs. DCIT in a recent decision reiterated the legal requirement of passing draft assessment order in proceeding u/s 144C of the Act arising out of remand from the Tribunal. The Hon’ble High Court held that where Tribunal remanded the matter to give effect to transfer pricing issue, assessee’s case would be eligible u/s 144C of the Act and the AO was required to pass draft assessment order before issuance of final assessment order. Similar view was taken by the Hon’ble Delhi High Court in the case of Turner International India (P.) Ltd. Vs. DCIT (supra). The Hon’ble Delhi High Court held that failure of AO to adhere to mandatory requirement of section 144C (1) of the Act, where the final assessment order has been passed without draft assessment order, such final assessment order shall be invalid.
In the instant case, the Tribunal vide order dated 09/03/2018 restored the issue back to AO with following directions:
“7. We have carefully considered the rival submissions. The action of the CIT(A) in directing the Assessing Officer to apply the order of the Tribunal dated 14.01.2015 (supra) is justified to the extent it deals with the nature of the payments received by the assessee from the two hotels stated aforesaid. So, however, the point which is sought to be raised is the non-consideration of the defence set- up by the assessee based on the principles of mutuality. The order of the Tribunal dated 14.01.2015 (supra) has not addressed that issue and so far as the instant year is concerned, the same was very much raised by the assessee before the lower authorities, which has also remained to be addressed. Considering the entirety of circumstances, we, therefore, deem it fit and proper to affirm the ultimate decision of the CIT(A) to remand the matter back to the file of Assessing Officer, but with directions that apart from considering the order of the Tribunal dated 14.01.2015 (supra), the Assessing Officer shall also address the issue raised by the assessee of mutuality or any other issue which the assessee may seek to raise in defence of its return of income. The Assessing Officer shall allow the assessee due opportunity of being heard and only thereafter pass an order afresh, as per law. Thus, the AO was required to C.O. No.89/Mum/2026 Assessment Year 2010-2011 adjudicate the issue of amount received under International Sales and Marketing Agreement afresh in line with the directions of the Tribunal. It was incumbent upon the AO to follow the procedure laid down u/s 144C of the Act, i.e. to first pass the draft assessment order. In the facts of the case and the decisions referred above, we hold that assessment order dated 29/12/2016 passed by AO without passing draft assessment order is invalid and unsustainable, ergo, the same is liable to be quashed. We hold and direct accordingly.
In the result, assessee succeeds on additional ground of appeal
. Since, we have adjudicated legal issue raised as additional ground of appeal in favour of assessee, the grounds in appeal on merits have become academic and thus, are left open.
16. In the result, appeal of the assessee is allowed.”
5. From the above, it is clear that the Assessment Order, dated 29/12/2016, passed by the Assessing Officer for the Assessment Year 2010-2011 was quashed by the Tribunal and therefore, the additions stood deleted. As a result, the very basis on which the penalty was levied under Section 271(1)(c) of the Act did not survive. Therefore, penalty levied under Section 271(1)(c) of the Act could not have been sustained. Accordingly, we do not find any infirmity in the Order, dated 25/11/2025, passed by the Learned CIT(A) deleting the penalty of INR.1,80,92,176/- levied under Section 271(1)(c) of the Act.
6. In view of the above Ground No.1 and 2 raised by the Revenue in the present appeal are dismissed.
In result, the present appeal preferred by the Revenue is dismissed. Cross Objection No.89/Mum/2026 [Assessment Year 2010-2011] 8. The Assessee has raised following Grounds of Appeal in the Cross Objection No.89/Mum/2026:
1. On facts and circumstances of the case and in law, the learned AO erred in not specifying the relevant limb of section 271(1)(c) of the Act under which penalty proceedings were initiated i.e. whether for concealment of particulars of income or for furnishing C.O. No.89/Mum/2026 Assessment Year 2010-2011 of inaccurate particulars of income. Therefore, the penalty proceedings are void-ab-initio.
2. On facts and circumstances of the case and in law, the penalty order dated 31 March 2023 passed by the Assessing Officer (‘AO’) under section 271(1)(c) r.w.s.274 of the Income Tax Act, 1961 (‘the Act’) is bad in law.”
9. Since we have dismissed the appeal preferred by the Revenue, the Cross Objections raised by the Assessee has been rendered infructuous and therefore, dismissed.