DEFSYS SOLUTIONS P.LTD,NEW DELHI vs. ACIT, CENTRAL CIRCLE-15, NEW DELHI

PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-

2. Though the assessee has raised as many as 12 grounds of appeal with sub grounds, only the following grounds were argued before us:

“1. That the order passed by the Ld. Assessing Officer (hereinafter referred to as "the Ld. AO") under section 143(3) r.w.s 144C (13) of the Income Tax Act 1961 ("the Act") dated 27.04.2023 is illegal, bad in law and void as the same has been passed in contravention of section 144C of the Act.

2. That the Ld. AO has grossly erred in law and on the facts in passing the final order dated 28.06.2022 instead of passing the draft order u/s 143(3) r.w.s 144C (1) of the Act, which is evident from the fact that the notice of demand u/s 156 of the Act was issued along with said purported draft order dated 28.06.2022 and the penalty proceedings u/s 271AAB (1A) (b) r.w.s section 274 of the Act were also initiated therein.

2.1 The so-called draft assessment order dated 28.06.2022 passed by the Ld. AO is in contravention of the provisions of section 144C (1) of the Act, and therefore, the subsequent order passed by the Hon'ble DRP-1 u/s 144C (5) of the Act dated 16.03.2023, as well as the impugned order passed by the Ld, AO u/s 143(3) read with section 144C(13) of the Act dated 27.04.20203, are illegal and void.

2.2 The Hon'ble DRP has also erred in law and on the facts in holding that the order passed by the. AO dated 28.06.2022 was a draft order and omission of words like "Proposed Initiation of Penalty "and "Proposed adjustments" ete. can at best to be considered to be technical irregularity and the same does not vitiate the entire draft order.

3. The underlying facts in the aforementioned quarrel are that while framing the order dated 28.06.2022, the Assessing Officer has mentioned section 143(3) r.w.s 144C of the Act and titled the order as “Assessment order”.

4. While framing the said order, the Assessing Officer concluded the assessment by observing at Para 13 as under:

Total Income as per return of income filed 5,68,38,810 uls 139 of the IT Act on 30.03.2021 61,83,77,505/- Deemed total income under MAT All adjustment made in earlier assessments NIL reassessments (uls 143(3),147, 153A, 153C rectificationl appellate orderl revisions etc.

Add: Addition as per recommendation of TPO uls 11,27,15,4101- 92CA -" Add: Addition as per issue of ~ 12,175/- Disallowance Add: Addition on account of excess physical 14,28,834/- stock Add: Addition on account of less physical ~~~ 20,00,9801- stock Add: Addition on account of deemed account in the Rs. 1,25,00,0001- case of Mis Spiral EHL Engineering Pvt Ltd . Add: Addition on account of deemed account in the Rs 41,10,00,0001 case of MIs BDS Developers Private Ltd -

Add: Addition on account of deemed account in the Rs. 12,60,00,000 case of MIs Horizon Aerospace India Private Ltd Total income uls 143(3) r.w.S. 144C of the IT 72,24,96,209/- Act, 1961 Assessed income u/s 143(3) r.w.s. 144C of 72,24,96,209/- the IT ACT 1961

/

Assessed u/s 143(3) r.w.s 144C of the I.T. Act,1961. Calculate tax and charge interest as per the IT Act. Give credit for prepaid taxes, if any. Copy of the order and demand notice are being issued to the assessee. Penalty Proceedings u/s 271AAB(1A)(b) r..w.s 274 of the Act.”

7090/2018 and also the decision of the co-ordinate bench in the case of Perfetti Van Melle [India] Pvt Ltd ITA No. 9116/DEL/2019

“Further, if the assessee wants to file objections, against the said draft order, he may do so by filing objections before the DRP within 30 days from the date of issue of this order.”

12. In support of his contention, the ld. DR placed strong reliance on the following decisions:

14. The ld. DR read the operative part of the decisions relied upon by him.

15. We have given thoughtful consideration to the orders of the authorities below and have carefully considered the judicial decisions relied upon by both the sides. Provisions of section 144C read under:

“144C. (1) 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.”

“(3) The Assessing Officer shall complete the assessment on the basis of the draft order, if—

(a) the assessee intimates to the Assessing Officer the acceptance of the variation; or (b) no objections are received within the period specified in sub-section (2).

(13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 51a[or section 153B], the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.”

17. In light of the aforesaid provisions, let us now consider the facts.

The impugned order is dated 28.06.2022. Tax Computation Sheet is dated 28.06.2022. Notice of demand is also dated 28.06.2022 and penalty notice is also dated 28.06.2022. Irrespective of the language of the order for all intent and purposes, keeping in mind the relevant provisions of the Act, it can be said that the proceedings ended on 28.06.2022 and, therefore, any orders passed thereafter are non est.

18. The contentions of the ld. DR that not only the assessee has participated in the proceedings, but has also filed objections before the DRP and also participated thereon. It is the say of the ld. DR that now at this stage, the assessee cannot say that the said order is not a draft order and is in contravention of the provisions of section 144C(1) of the Act.

19. We do not find much force in these contentions of the ld. DR, as, in our considered view, provisions of section 144C of the Act trigger a series of steps prescribed in sub-section (2) to sub-section (13) and as can be seen from the most relevant sub-sections (3) and (13) extracted hereinabove, the assessment is complete either under sub-section (3) or sub section (13).

21. A perusal of Section 144C of the Act shows that the Assessing Officer shall, at the first instance, forward a draft of the proposed order of assessment and on receiving such order, the assessee may approach the DRP by raising objections. If the assessee accepts the variation, then the Assessing Officer shall proceed by framing the final assessment order and if the objections are raised before the DRP, then, upon receipt of directions issued by the DRP, the Assessing Officer shall complete the assessment. However, we find that while framing the said draft assessment order, the Assessing Officer not only issued and served demand notice, but has also initiated the penalty proceedings.

" '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 as the former. The Income- tax Officer has to determine, by an order in writing, not only the total income but also the net sum which will be payable by the assessee for the assessment year in question and the demand notice has to be issued under section 156 of the Incometax Act, 1961, in consequence of such an order. The statute does not, Page No : 55 however, require that both the computations (i.e., of the total income as well as of the sum payable) should be done on the same sheet of paper, the sheet that is superscribed 'assessment order'. It does not prescribe any form for the purpose. Once the assessment of the total income is complete with indications of the deductions, rebates, reliefs and adjustments available to the assessee, the calculation of the net tax payable is a process which is mostly arithmetical but generally time-consuming. If, therefore, the Income-tax Officer first draws up an order assessing the total income and, indicating the adjustments to be made, directs the office to compute © Company Law Institute of India Pvt. Ltd. - 4 - the tax payable on that basis and then approves of it, either immediately or some time later, no fault can be found with the process, though it is only when both the computation sheets are signed or initialled by the Income-tax Officer that the process described in section 143(3) will be complete." In our opinion, this decision, far from helping the Revenue, goes against it. The Supreme Court has in terms stated that assessment is one integrated process involving not only the assessment of the total income but also the determination of the tax. It has further observed that the latter is as crucial as the former. Therefore, unless the total income is determined and the determination of tax is also done, it cannot be said that the process of assessment is complete. What section 153 requires is that the assessment should be completed within the prescribed time-limit. The words "order of assessment" cannot be construed to mean assessment of total income only. Those words would mean an order in writing whereby the total income of the assessee is assessed and the tax payable by him is determined. When an order in writing in respect of both these things is passed, it can be said that there is a complete order of assessment. These two steps may be taken simultaneously or separately, but it cannot be gainsaid that both of them will have to be taken within the time prescribed by the Act. Admittedly, in this case the second step was not taken within the prescribed time. After determining the total income, the Income-tax Officer possibly left the matter to his subordinates for the purpose of calculating the tax payable by the assessee on the basis of the assessed total income. Even if we assume in favour of the Assessing Officer that he approved the said calculation when the papers were put before him for signing the demand notice, and that he signed the same, the fact remains that that step was taken by him after the prescribed period was over. The Tribunal was, therefore, right in holding that the assessment in this respect was time-barred. Page No : 56 We, therefore, answer the question in the affirmative, i.e., against the Revenue and in favour of the assessee. No order as to costs”

23. Though the ld. DR time and again has stated that the conclusion of the Assessing Officer speaks for the order as a draft assessment order and there should not be any confusion on that point. In our considered view, the impugned order by the Assessing Officer has bypassed the relevant sub-section i.e. sub-section (3) and (13) to section 144C of the Act.

24. Whether by by-passing mandatory provisions of the Act can assessment survive? The answer has been given by the Hon’ble Supreme Court in the case of Dipak Babaria 3SCC 502 wherein the Hon’ble Supreme Court has held as under:

“If the law requires that a particular thing should be done in a particular manner, it must be done in that way and none other. State cannot ignore the policy intent and procedure contemplated by the statute.

25. In light of the above ratio laid down by the Hon’ble Supreme Court, we are of the considered opinion that by issuing the demand notice on 28.06.2022 itself the Assessing Officer has bypassed all the mandatory sub-sections of section 144C of the Act.

“Approbate and Reprobate” is only species of estoppel. It applies only to conduct of parties as in the case of estoppel, it cannot operate against the provisions of a statute. If particular income is taxable under the I.T. Act, it cannot be taxed on the basis of estoppel or any other equal document. Equity is out of placed in tax place. A particular income is either exigible under the Income tax under taxing statute or not. If it is not, the ITO Has no power to tax the said income.”

“14. The short question that arises for consideration is whether, after the remand proceedings, the AO could have, without issuing a draft assessment order under Section 144 C of the Act, straightway issued the final assessment order.

assessment order without complying with the mandatory requirement under Section 144C of the Act whereby first a draft order had to be issued in respect of which an objection can be filed by the Assessee before the DRP. The failure to do so, according to Mr. Syali, was not a mere irregularity. He further referred to a decision of the Gujarat High Court dated 31st July 2017 in Tax Appeal No. 542 of 2017 (Commissioner of Income Tax, Vadodara-2 v. C-Sam (India) Pvt. Ltd.) W.P.(C) Nos. 3399/2016, 3429/2016 & 3431/2016 Page 7 of 12 16. In response, Mr. Sanjay Jain, learned Additional Solicitor General of India appearing for the Revenue, submitted that there was an efficacious alternative remedy available to the Petitioner to file appeals against the impugned final assessment orders passed by the AO. It is denied that it was mandatory on the part of the AO to pass a draft assessment order since this was a second round before the TPO pursuant to remand by the ITAT. Moreover, it was not as if the ITAT had set aside the entire assessment order of the AO. The setting aside was only in respect of the transfer pricing adjustment and that too with a specific direction to the AO for determining the arms length price “after considering fresh comparables.” Since the assessment itself was not cancelled by the ITAT or completely set aside, it is the provisions of Section 153 (3) (ii) of the Act which would apply. Mr Jain submitted that the requirement of passing a draft assessment order under Section 144C was only in the first instance and not after the remand by the ITAT.

20. The Court further observed that Section 292B of the Act cannot save an order not passed in accordance with the provisions of the Act. As the Court explained, “the issue involved is not about a mistake in the said order but the power of the AO to pass the order.”

13. In Vijay Television (P) Ltd. v. Dispute Resolution Panel [2014] 369 ITR 113 (Mad.), a similar question arose. There, the Revenue sought to rectify a mistake by issuing a corrigendum after the final assessment order was passed. Consequently, not only the final assessment order but also the corrigendum issued thereafter was challenged. Following the decision of the Andhra Pradesh High Court in Zuari Cement Ltd. v. ACIT (supra) and a number of other decisions, the Madras High Court in Vijay Television (P) Ltd. v. Dispute Resolution Panel (supra) quashed the final order of the AO and the demand notice. Interestingly, even as regards the corrigendum issued, the Madras High Court held that it was beyond the time permissible for issuance of such corrigendum and, therefore, it could not be sustained in law.

Page 10 of 12 22. In the decision of the Gujarat High Court in C-Sam (India) (supra), the Court negated the plea that non- compliance with the terms of Section 144C of the Act is merely an ‘irregularity’. The Gujarat High Court held that it was of ‘great importance and mandatory’. The following passages of the said decision of Gujarat High Court are relevant for the present purposes:

“6. These statutory provisions make it abundantly clear that the procedure laid down under Section 144C of the Act is of great importance and is mandatory. Before the Assessing Officer can make variations in the returned income of an eligible assessee, as noted, sub-section (1) of Section 144C lays down the procedure to be followed notwithstanding anything to the contrary contained in the Act. This non- obstante clause thus gives an overriding effect to the procedure 'notwithstanding anything to the contrary contained in the Act'. Sub-section (5) of Section 144C empowers the DRP to issue directions to the Assessing Officer to enable him to complete the assessment. Sub- section (10) of Section 144C makes, such directions binding on the Assessing Officer. As per Sub-Section 144C, the Assessing Officer is required to pass the order of assessment in terms of such directions without any further hearing being granted to the assessee.

7. The procedure laid

down under Section 144C of the Act is thus of great importance. When an Assessing Officer proposes to make variations to the returned income declared by an eligible assesses he has to first pass a draft order, provide a copy thereof to the assessee and only thereupon the assessee could exercise his valuable right to raise objections before the DRP on any of the proposed variations. In addition to giving such opportunity to an assessee, decision of the DRP is made binding on the Assessing Officer. It is therefore not possible to uphold the Revenue's contention that such requirement is merely a procedural. The requirement is mandatory and gives substantive rights to the assessee to object to any additions before they are made and such objections have to be considered W.P.(C) Nos. 3399/2016, 3429/2016 & 3431/2016 Page 11 of 12 not by the Assessing Officer but by the DRP. Interestingly, once the DRP gives directions under sub-section (5) of Section 144C, the Assessing Officer is expected to pass the order of assessment in terms of such directions without giving any further hearing to the assessee. Thus, at the level of the Assessing Officer, the directions of the DRP under sub- section (5) of Section 144C would bind even the assessee. He may of course challenge the order of the Assessing Officer before the Tribunal and take up all contentions. Nevertheless at the stage of assessment, he has no remedy against the directions issued by the DRP under sub-section (5). All these provisions amply demonstrate that the legislature desired to give an important opportunity to an assessee who is likely to be subjected to upward revision of income on the basis of, transfer pricing mechanism. Such opportunity cannot be taken away by treating it as purely procedural in nature.”

“Once there is a clear order of setting aside of an assessment order with the requirement of the Assessing Officer/TPO to undertake fresh exercise of determining the arm’s length price, failure to pass draft assessment order would violate the provisions of section 144(1) of the Act. This is not a curable defect in terms of section 292 B of the Act.”

The order is pronounced in the open court on 17.10.2023.