The Delhi High Court has quashed the income tax assessment orders issued against MNCs including Microsoft, Sumitomo and AT Kearney India on the ground that the draft assessment order under Section 144C of the Income Tax was not issued before the final order.
The bench of Justice Yashwant Varma and Justice Ravinder Dudeja has observed that a failure to frame a draft order of assessment not only curtails the right of the assessee to adopt corrective measures, it also deprives it of a salutary right to challenge the draft in terms of the statutory mechanism laid in place.
The bench stated that the imperative of framing an order in draft was a legal imperative and not merely a procedural irregularity.
The petitioner-MNCs filed a batch of writ petitions challenging the action of the Jurisdictional Assessing Officer who had proceeded to frame a final order of assessment pursuant to directions of remand framed by the Income Tax Appellate Tribunal and thus having acted in breach of the procedure prescribed by Section 144C of the Income Tax Act, 1961.
Microsoft India (R&D) Pvt. Ltd. filed its Return of Income pertaining to Assessment Year 2008-09 on 30 September 2008. The return was stated to have been selected for scrutiny assessment and pursuant to which the AO made a reference to the Transfer Pricing Officer in terms contemplated under Section 92CA of the Income Tax Act.
The TPO passed an order recommending an upward adjustment to the total income of the petitioner. A draft assessment order came to be framed on 27 December 2011. Assailing the proposed additions, the petitioner filed objections before the Dispute Resolution Panel6 in terms envisaged under Section 144C(2) of the Act. The objections did not find favour with the DRP which and in terms of its directions affirmed the additions which were proposed in the draft assessment order. Pursuant to those directions, a final assessment order came to be framed on 19 November 2012.
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The petitioner approached the Tribunal. The Tribunal allowed the appeal and directed fresh adjudication.
The TPO issued a notice in the second round of proceedings which ensued on 09 November 2016. On 31 October 2018, the TPO passed its final order referable to Section 92CA computing the total upward adjustment of income at INR 106,07,00,458/-. Although the AO was issued a notice on 20 November 2018 under Section 142(1) of the Income Tax Act, it proceeded to frame a final order.
The writ petition was entertained on 22 January 2019 and an interim order passed restraining the respondents from enforcing the consequential demand.
The issue raised was whether the AO could ignore the requirement of drawing up a draft assessment order and pass a final order and the same being in violation of the procedure contemplated under Section 144C appears to have arisen before our Court on previous occasions also.
The department contended that an obligation to frame a draft assessment order and a failure to abide by that process being a mere irregularity.
The court stated that a failure to frame an assessment order in draft would clearly be violative of the mandatory prescriptions of Section 144C and the final order of assessment framed in violation is liable to be viewed as a nullity.
The court while enumerating the procedure stated that a failure on the part of the AO to comply with Section 144B (4) and which required it to forward a draft of the order proposed along with the objections of the assessee to the Deputy Commissioner. As per the scheme of Section 144B, as it existed at the relevant time, in case the AO was proposing any variation in the income or loss returned by the assessee and which would be prejudicial, it was obliged to forward a draft of the proposed order of assessment to the assessee concerned.
The court held that the assessee was entitled to submit objections in respect of the proposed variations. In case such objections were filed, the assessee was required to forward the draft order along with those objections to the Deputy Commissioner in terms of Section 144B(4). That provision empowered the Deputy Commissioner to frame such directions as it thought fit for the guidance of the AO to enable it to complete the assessment. A direction issued by the Deputy Commissioner was made binding on the AO by virtue of Section 144B (5).
The court while ruling in favour of the MNCs and denying the prayer of the department held that the direction of extending the period of limitation would additionally and necessarily have to be in accordance with the scheme of the Act and the statutory prescriptions. It would clearly not warrant or justify the Court enlarging the period of limitation as statutorily prescribed. As is well settled, while courts may, where legally permissible, consider condonation of delay, they are not entitled to expand or enlarge a period of limitation as statutorily prescribed.
Case Details
Case Title: Microsoft India (R&D) Pvt. Ltd. Versus DCIT
Citation: W.P.(C) 688/2019
Decision date: 02/09/2024
