DINA MAHABIR RE-ROLLERS PVT LTD,PATNA vs. PR. CIT -1, PATNA

At the outset, it has been brought to our notice that the issues involved in these two appeals are common; therefore, both the appeals have been heard together and disposed of by a consolidated order for the sake of convenience.

First of all we will take up which is a departmental appeal against the action of the Ld. CIT(A), Patna-1 and thereafter Ld. Pr. CIT, Patna-1 passed u/s. 263 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). The grounds of appeal raised & Dina Mahabir Re-Rollers Pvt. Ltd., AY: 2015-16 by the revenue is against the action of the Ld. CIT(A) in holding that the AO could not have passed the final assessment order u/s. 143(3) of the Act without passing the draft assessment order u/s. 144(1) of the Act pursuant to the TPO’s order. Let us examine this action of Ld. CIT(A).

Brief facts of the case are that the assessee is a private limited company engaged in the manufacturing business of TMT Bars. The assessee had filed its return of income for the AY 2015-16 on 29.09.2015 and had declared total income of Rs.91,66,620/-. The case was selected for scrutiny through CASS and the statutory notices u/s. 143(2)/142(1) of the Act was issued by the AO. Later the AO referred the assessee’s specified domestic transaction to TPO u/s. 92CA(1) of the Act. Pursuant to the reference made by the AO, the TPO passed an order u/s. 92CA(3) of the Act dated 31.10.2018 by making adjustment of Rs.5,30,80,102/-. Thereafter, the AO has passed the assessment order u/s. 143(3) of the Act on 23.12.2018 by making an addition of Rs.5,30,80,102/-. Aggrieved by the aforesaid action of the AO, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to hold vide the impugned order dated 09.09.2020 that the AO could not have passed the final assessment order u/s. 143(3) of the Act without first passing a draft assessment order u/s. 144C(1) of the Act and the failure to pass the draft assessment order is in violation of section 144C(1) of the Act and is not a curable defect and would vitiate entire assessment order. Aggrieved by the aforesaid action of the Ld. CIT(A) the revenue has preferred this appeal (ITA No. 115/Pat/2020) before us.

We have heard rival submissions and gone through the facts and circumstances of the case. We note that the question to be adjudicated is what would be the fate of an assessment order (final) made by an AO without complying with the provisions of section 144C(1) of the Act by not framing the draft assessment order and in that process in not providing the assessee’s discretion to file objection before the Dispute Resolution Panel (DRP) within the statutory prescribed time provided therein. We note that this issue is no longer res integra as held by the Hon’ble Madras High court in the case of M/s. Vijay Television Vs. DRP (2014) 225 Taxman 35 (Mad) and the Hon’ble High Court of Andhra Pradesh in M/s. Zuari Cements Ltd. Vs. ACIT (Petition CC No. 16694/2013 dated 27.09.2013) and the department’s appeal (SLP) in the case of M/s. Zuari Cements Ltd. has & Dina Mahabir Re-Rollers Pvt. Ltd., AY: 2015-16 been dismissed by the Hon’ble Supreme Court after hearing the counsel for the department. According to the ratio decidendi of the aforesaid judicial precedents it was laid down that the omission on the part of the AO not to comply with the provisions of section 144(1) & (2) of the Act and thereby not framing the draft assessment order and consequently not providing the assessee the discretion to file objection before the DRP within the statutory prescribed time provided therein, makes the assessment order (final) passed by the AO to be without jurisdiction and so void.

It is noted that under the provisions of section 144C of the Act, it is provided that where the Assessing Officer proposes to make, on or after 01.10.2009, any variation in the income or loss returned of the eligible assessee, which is prejudicial to the interest of assessee, then the Assessing Officer shall in the first instance forward the draft of the proposed order of assessment to the eligible assessee. Under sub-section (2) of section 144C of the Act on receipt of the draft order, the eligible assessee shall within 30 days of the receipt, file his acceptance of the variation to the Assessing Officer or file his objections, if any, to such variation with the DRP. And as per sub-section (3) of section 144C of the Act, if the assessee intimates to the Assessing Officer the acceptance of the variation or no objections are received by him within period specified (30 days) in sub- section (2) of section 144C of the Act, then the AO shall complete the assessment on the basis of the draft order within one month from the end of month, in which the acceptance is received or the period of filing objections under sub-section (2) of section 144C of the Act has expired. And in case, if the assessee had opted to file objection before the DRP in exercise of the discretion conferred upon it u/s. 144(2)(b), then the AO shall not pass the final assessment order and await for the DRP direction as contemplated under sub-section (5) of section 144C of the Act, which empowers the DRP to issue such directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment. Upon receipt of the DRP directions, the AO shall complete the assessment as per sub-section (3) to section 144C of the Act, in conformity with the directions of the DRP, without providing any further opportunity of hearing to the assessee within one month from the end of the month in which such direction is received by him, notwithstanding anything to the contrary contained in section 153 or 153B of the Act. In & Dina Mahabir Re-Rollers Pvt. Ltd., AY: 2015-16 view of the aforesaid provisions of section 144C of the Act it can be seen that where the TPO proposes any variation in the income or loss returned by the eligible assessee, which is prejudicial to the interest of assessee, the Assessing Officer shall in the first instance forward the draft of the proposed assessment order to the assessee and thereafter, if no objections are received and/or the assessee files his acceptance to the variation to the Assessing Officer, then the Assessing Officer is empowered to complete the assessment within one month from the end of the month thereof. However, in the event the assessee exercises his discretion as per section 144C(2)(b) of the Act and files his objection before the DRP, then the AO cannot pass the final order and has to await for the directions of the DRP; and thereafter the DRP on the objection raised by the assessee gives directions to the AO, then the Assessing Officer on receipt of such directions shall complete the assessment (final) in conformity with such directions of the DRP. Therefore, in view of the aforesaid provisions of the Act, we note that the compliance of the aforesaid exercise as contemplated under section 144C of the Act is mandatory in the event where the TPO proposes variation in the income or loss returned in the case of an eligible assessee to the prejudice of the assessee. Only after complying with the exercise as laid down in section 144C of the Act, the Assessing Officer is empowered to pass the assessment order under section 143(3) r.w.s. 144C of the Act by completing the assessment on such enhanced income or variation in the loss returned by the assessee. Any failure to comply with the procedure laid down as per section 144C(2)(b) of the Act as discussed, vitiates the final assessment order passed by the AO. So, if an AO issues final assessment order without framing the draft assessment order is bad in law and is void in the eyes of law since it is not a curable defect.

Further we note that the Hon’ble High Court of Andhra Pradesh in M/s. Zuari Cements Ltd. Vs. ACIT (Petition CC NO. 16694/2013 dated 27.09.2013) on similar issue where after receipt of the order passed by the TPO under section 92CA(3) of the Act, the Assessing Officer had passed the assessment order under section 143(3) of the Act raising a demand of Rs.27,40,71,913/- without giving an opportunity/discretion to the assessee under section 144C of the Act as to whether it prefers to file objection before the DRP i.e. the AO without passing the draft assessment order as contemplated u/s. 144C(1) of the Act having passed the final assessment order, the Hon’ble High Court observed that where the Assessing Officer proposes to make on or after 01.10.2009, any variation in the income or loss returned by the eligible assessee, then notwithstanding anything to the contrary contained in the Act, he shall first pass the draft assessment order, and then forward the same to the assessee and give the assessee opportunity/discretion to file his objections if any before the DRP; and in the event if the assessee has no objection then the Assessing Officer shall complete the assessment within one month as per section 144C(4) of the Act. The Hon’ble High Court further observed that in case if the assessee had filed an objection before the DRP, then based on the directions issued by the DRP to Assessing Officer he has to complete the final assessment. Thus according to the Hon’ble High Court where the Assessing Officer accepted the variation submitted by the TPO without giving the assessee any opportunity to object to it and pass the assessment order, then in such an event the impugned order of assessment was contrary to section 144C of the Act and was without jurisdiction, null and void and thus unenforceable. The Hon’ble High Court (Andhra Pradesh) held as under:- & Dina Mahabir Re-Rollers Pvt. Ltd., AY: 2015-16 “In this view of the matter we are of the view that the impugned order of assessment dt. 23.12.2011 passed by the respondent is contrary to the mandatory provisions of S.144C of the Act and is passed in violation thereof. Therefore, it is declared as one without jurisdiction, null and void and unenforceable. Consequently, the demand notice dated 23.12.2011 issued by the respondent is set aside.”

And further it was brought to our notice that the Hon’ble Supreme Court (supra) in ACIT Vs. Zuari Cements Ltd. (supra) had dismissed the Special Leave Petition filed by the Department upon hearing the Counsel. According to the Ld. Senior Advocate Shri A. K. Rastogi since the said Special Leave Petition was dismissed after hearing the Counsel for the department, the view taken by the Hon’ble High Court of Andhra Pradesh has been approved by the Apex Court. In the light of the aforesaid discussion and judicial precedents (supra), we are of the view that AO was bound to follow the mandatory provision of law prescribed in section 144C of the Act especially sub-section (1) and (2) of section 144C of the Act and then only ought to have passed the final assessment order.

In view of the aforesaid discussion, we hold that the AO’s omission to frame draft assessment order breached the Rule of Law and consequently, his non-action to frame draft assessment order before passing the final assessment order was in contravention of mandatory provision of law as stipulated in section 144C of the Act. Consequently his action is arbitrary & whimsical and such exercise of power by the AO offends Article 14 & 21 of the Constitution of India and therefore framing of final assessment order without framing draft assessment order is held to be an action without jurisdiction and ergo the assessment order dated 23.12.2018 is null in the eyes of law and, therefore, the impugned action of Ld. CIT(A) in holding that the AO could not have passed the final assessment order without first passing a draft assessment order is in violation of section 144(1) of the Act and is not a curable defect and would vitiate the entire assessment order is upheld. Therefore, we uphold the impugned action of Ld. CIT(A) dated 09.09.2020 on the reasons aforerstated by us and, therefore, we hold that the order of the AO dated 23.12.2018 is null in the eyes of law and so unenforceable. Therefore, the appeal of the revenue stands dismissed.

Now, coming to assessee’s appeal ( ). This appeal has been preferred by the assessee against the order of the Ld. Pr. CIT-1, Patna u/s. 263 of the Act dated 24.03.2021 for AY 2015-16. & Dina Mahabir Re-Rollers Pvt. Ltd., AY: 2015-16 12. Brief facts of the case are that the Ld. Pr. CIT has interfered with the order of the AO dated 23.12.2018 passed u/s. 143(3) of the Act making an addition of Rs.5,30,80,102/- pursuant to the TPO’s order u/s. 92CA(3) of the Act dated 31.10.2018. The Ld. Pr. CIT has interfered with the AO’s order u/s. 143(3) of the Act, and after hearing the assessee has held as under:

Accordingly, the assessment order passed u/s. 143(3) of the I. T. Act, 1961 dated 23.12.2018 for AY 2015-16 is cancelled and set aside with direction to the AO to frame the assessment de novo by making fresh enquiries, investigation and verification for determination of Arm’s Length Price in respect of Specified Domestic Transactions entered by the assessee with Associated Enterprises after making fresh reference to the TPOI in the light of deficiencies and infirmities discovered in the order of the TPO u/s. 92CA(3) of the I. T Act, 1961 dated 31.10.2018.”

Thus, it is noted that the Ld. Pr. CIT was pleased to cancel and set aside the AO’s assessment order passed u/s. 143(3) dated 23.12.2018 for AY 2015-16 with direction to the AO to frame assessment de novo by making fresh enquiries and verification for determination of Arms Length Price in respect of the Specified Domestic Transaction entered into by the assessee with Associated Enterprises after making fresh reference to the TPO. Aggrieved by the aforesaid action of the Ld. Pr. CIT the assessee is in appeal before & Dina Mahabir Re-Rollers Pvt. Ltd., AY: 2015-16 us. After hearing both the parties, we find merit in the contention of Ld. Sr. Counsel Shri Ajay Rastogi that the action of the Ld. Pr. CIT is without jurisdiction on two counts: