Case Law Details
DCIT/ACIT Vs CSG Systems International (India) Pvt. Ltd. (ITAT Bangalore)
The Income Tax Appellate Tribunal, Bangalore Bench, adjudicated an appeal filed by the Revenue and a cross objection filed by the assessee for Assessment Year 2013-14. The appeal arose from an order of the Commissioner of Income Tax (Appeals), Bengaluru, dated 07.01.2025.
Delay in Filing Appeal and Cross Objection
At the outset, the Tribunal considered the issue of delay in filing both the Revenue’s appeal and the assessee’s cross objection. The Revenue’s appeal was filed with a delay of 65 days. The Department submitted that the delay occurred due to unavoidable circumstances, including the time constraints relating to assessment proceedings becoming time-barred and reopening proceedings nearing limitation dates. After examining the explanation, the Tribunal held that the reasons constituted sufficient cause preventing timely filing. Consequently, the delay was condoned and the appeal was admitted for adjudication.
Similarly, the assessee’s cross objection was filed with a delay of 20 days. The assessee submitted an affidavit explaining the circumstances leading to the delay. Upon reviewing the affidavit and submissions, the Tribunal accepted the explanation and condoned the delay, thereby admitting the cross objection for consideration.
Admission of Additional Grounds
The assessee also filed a petition seeking admission of additional legal grounds. The Tribunal noted that these grounds were purely legal in nature and arose from facts already available on record. Judicial precedents were cited to support the proposition that legal issues going to the root of the matter can be raised at any stage of appellate proceedings.
The Tribunal observed that the additional ground raised by the assessee did not require investigation of fresh facts and was essential for determining the correct tax liability. Relying on judicial authorities emphasizing the Tribunal’s power to admit new legal grounds, it admitted the additional grounds for adjudication.
Core Legal Issue
After admitting the additional ground, the Tribunal decided to address the legal issue raised by the assessee before examining the Revenue’s appeal. The primary issue was whether the Assessing Officer erred in issuing a notice of demand under section 156 of the Income-tax Act and initiating penalty proceedings under section 271(1)(c) along with a draft assessment order issued under section 143(3) read with section 144C of the Act. The question was whether such action violated the procedure prescribed under section 144C and rendered the final assessment order invalid.
Background of the Assessment
The assessee was engaged in providing software development and marketing support services to its associated enterprises. It filed its return of income declaring total income of ₹9,77,69,437. During scrutiny assessment, the Assessing Officer referred the international transactions to the Transfer Pricing Officer for determination of the arm’s length price.
The Transfer Pricing Officer proposed a transfer pricing adjustment of ₹4,99,47,693 relating to the software development segment. Based on this adjustment, the Assessing Officer issued a draft assessment order dated 10.11.2016 purportedly under section 143(3) read with section 144C(1).
However, while issuing the draft assessment order, the Assessing Officer also computed the taxable income, determined the tax payable, issued a demand notice under section 156 requiring payment of ₹2,34,11,024, and initiated penalty proceedings under section 271(1)(c).
Assessee’s Contentions
The assessee contended that under section 144C of the Act, the Assessing Officer must first issue only a draft assessment order to the eligible assessee. The assessee is then entitled to file objections before the Dispute Resolution Panel within the prescribed period. Only after completion of this process can the Assessing Officer pass a final assessment order determining tax liability and issue demand notices or initiate penalty proceedings.
According to the assessee, by determining tax liability and issuing demand and penalty notices simultaneously with the draft order, the Assessing Officer effectively completed the assessment at the draft stage itself. This violated the mandatory procedure laid down under section 144C and rendered the final assessment order invalid.
Revenue’s Arguments
The Revenue argued that the order issued by the Assessing Officer clearly mentioned that it was a draft assessment order. The assessee was aware of the intention of the Assessing Officer and had communicated that it did not intend to file objections before the Dispute Resolution Panel.
It was further contended that the issuance of demand and penalty notices along with the draft order constituted only a curable defect under section 292B of the Act. Therefore, according to the Revenue, the assessment order remained valid.
Tribunal’s Findings
After considering the rival submissions, the Tribunal examined the procedure mandated under section 144C. It noted that the Assessing Officer is required to first pass a draft assessment order proposing variations in income. Only after the assessee’s response or directions from the Dispute Resolution Panel can a final assessment order be passed. Demand notices and penalty proceedings can arise only after the final determination of tax liability.
The Tribunal observed that in the present case the Assessing Officer, while issuing the draft assessment order, had already computed taxable income, determined tax liability, issued a demand notice, and initiated penalty proceedings. Such actions indicated that the assessment had effectively been completed at the stage of the so-called draft order.
The Tribunal held that issuing a demand notice and initiating penalty proceedings at the stage of a draft assessment order was contrary to law. These steps are permissible only after the final assessment order is passed. The determination of tax payable itself demonstrated that the order functioned as a final assessment order rather than a draft.
Mandatory Nature of Section 144C Procedure
The Tribunal emphasized that the procedure prescribed under section 144C is mandatory and not merely procedural. The Assessing Officer is duty-bound to follow this process strictly. Failure to adhere to the statutory requirement results in a jurisdictional error rather than a simple procedural irregularity.
Because the statutory procedure was not followed, the Tribunal concluded that the assessment was invalid. It also rejected the Revenue’s contention that the defect could be cured under section 292B, stating that a violation of mandatory provisions cannot be treated as a curable defect.
Reliance on Judicial Precedents
The Tribunal relied on judicial decisions that addressed similar issues. These decisions held that when a draft assessment order includes determination of tax liability along with demand and penalty notices, it effectively becomes a final assessment order and violates the statutory procedure under section 144C.
Such violations were held to be jurisdictional defects rendering the assessment order invalid and incapable of being cured through corrective measures.
Tribunal’s Conclusion
Based on the analysis of statutory provisions and judicial precedents, the Tribunal concluded that the Assessing Officer had failed to follow the mandatory procedure prescribed under section 144C. By issuing a demand notice and initiating penalty proceedings along with the draft assessment order, the Assessing Officer effectively completed the assessment prematurely.
This failure constituted a jurisdictional defect and rendered the final assessment order invalid in law. Consequently, the assessment order and related proceedings were liable to be quashed.
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