Case Law Details
CIT International Taxation Vs Cisco Systems Services B.V. (Karnataka High Court)
The Karnataka High Court dismissed three appeals filed by the Revenue and upheld the orders of the Income Tax Appellate Tribunal (ITAT), which had quashed the reassessment orders passed against the assessee for Assessment Years 2011-12, 2012-13, and 2013-14. The central issue before the Court was whether the Assessing Officer (AO) had followed the mandatory procedure prescribed under Section 144C of the Income-tax Act, 1961, while passing reassessment orders in the case of an eligible assessee.
The assessee, a company incorporated and registered in Amsterdam with a branch office in India, was engaged in providing technical advanced professional engineering and consultancy services. For Assessment Year 2011-12, the assessee had filed its return declaring income of ₹17.92 crore. According to the Revenue, the original assessment under Section 143(3) had been completed and the case was subsequently reopened under Section 147 based on information gathered during a survey. On December 28, 2018, the AO issued what was described as a draft assessment order under Sections 147 read with 144C. The assessee filed objections before the Dispute Resolution Panel (DRP), which issued directions on September 23, 2019. Thereafter, the AO passed a final assessment order on October 15, 2019, making additions of ₹78.76 crore while retaining earlier additions. The assessee challenged the assessment before the ITAT, which allowed the appeals.
Before the High Court, the Revenue argued that the assessee had itself understood the order dated December 28, 2018, as a draft assessment order and had approached the DRP. It contended that the mere issuance of a demand notice along with the draft order was a curable defect protected by Section 292B of the Act, particularly since the demand notice had not been enforced. The Revenue also attempted to distinguish the decision of the Madras High Court in Vijay Television Pvt. Ltd. v. DRP.
The assessee, on the other hand, contended that the AO had effectively completed the reassessment while issuing the purported draft order by simultaneously directing issuance of a demand notice and initiation of penalty proceedings. It was argued that this procedure violated the mandatory framework of Section 144C.
The High Court examined the statutory scheme of Section 144C and observed that the provision requires the AO to first forward a draft assessment order to the assessee. Upon receiving objections, the DRP is required to issue directions, and only thereafter can the AO complete the assessment and issue a demand notice under Section 156. The Court emphasized that issuance of a demand notice is permissible only after completion of the assessment under Section 144C(13).
The Court noted that, in the present case, the AO had not only passed the draft assessment order but had also directed issuance of a demand notice and initiated penalty proceedings under Section 271(1)(c) on the same date, namely December 28, 2018. Both the draft assessment order and the demand notice had been served simultaneously on the assessee. The Court held that these actions indicated that the assessment had already been completed at the draft stage itself.
Relying on the Madras High Court decision in Vijay Television Pvt. Ltd. v. DRP and the Supreme Court decision in Kalyan Kumar Ray v. CIT, the Court observed that assessment is an integrated process involving not only determination of income but also determination of tax liability. Since the AO had assessed tax liability and issued a demand notice at the draft stage, the reassessment proceedings had effectively been completed in violation of Section 144C.
The Court rejected the Revenue’s argument that the defect was curable under Section 292B. It held that passing a final assessment order at the stage meant only for issuance of a draft order was not a procedural irregularity capable of being cured under Section 292B. The Court also dismissed the contention that the demand notice was not enforced, observing that a demand notice carries civil consequences and stems directly from an assessment order.
Accordingly, the High Court held that the Revenue’s appeals lacked merit and dismissed them. The questions of law were answered in favour of the assessee and against the Revenue.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
These three appeals by the Revenue, challenging the orders passed by ITAT1 have been filed with a delay of 65 days to consider following questions of law:
“1. Whether on the facts and in the circumstances on the case, quashing the assessment order by concluding that there was no ‘Draft Assessment Order’ passed under section 144C of the Act whereas there was indeed a draft assessment order passed by assessing authority which was served on to the assessee and further availing the same opportunity was provided through such draft assessment order, the assessee approached the DRP and the directions of the DRP were passed and thereafter the ‘final Assessment order’ was passed?
2. Whether on the facts and in the circumstances on the case, the Tribunal is right in quashing final assessment order by relying on decisions of Hon’ble Madras High Court in case of Vijay Television (reported in 2014) 369 ITR page 113 (MAD) for quashing final assessment order by holding that there was no draft assessment order without appreciating that the facts are distinguishable in the case since a Draft Assessment order was passed indeed in this case and the assessee approached the Dispute Resolution Panel base on such order?
3. Whether on the facts and in the circumstances on the case, order passed by Tribunal can be said as perverse in nature in holding that ‘Draft Assessment Order’ was passed under section 144C of the Act merely because the assessing authority mentioned in such order that the demand notice has to be issued? ”
2. ITA No. 427/2022 has been filed challenging order dated January 12, 2022 in IT(IT)A No. 2572/Bang/2019. ITA No. 429/2022 has been filed challenging order dated January 19, 2022 in IT(IT)A No. 961/Bang/2017. ITA No. 428/2022 has been filed challenging order dated December 27, 2021 in IT(IT)A No. 2888/Bang/2017.
3. The questions of law raised and also the assessee in all the three appeals are common. Hence, these appeals are being disposed of by this common order.
4. Heard Shri. K. V. Aravind, learned Senior Standing Advocate for the Revenue and Shri.Nageshwar Rao, learned Advocate for the Assessee.
5. Briefly stated the facts of the case are, assessee is a company incorporated and registered in Amsterdam and having its branch office in India. It is engaged in providing technical advanced professional engineering and consultancy services. Assessee filed its return for A.Y.2 2011-12, 2012-13 and 2013-14. Learned Advocates on both sides have adverted to facts in ITA No.427/2022. Therefore, illustratively the facts of the said appeal are recorded in this order. They have submitted that the questions of law are same in all three appeals.
6. For A.Y. 2011-12, Assessee has filed its return declaring income of Rs.17,92,72,000/-. Assessee received a notice of demand dated December 28, 2018 under Section 156 of the Income Tax Act, 19613 for Rs.82,99,46,321/- along with the draft assessment order under Section 143(3) of the Act passed by the ACIT (Intl. Taxn)4, Circle I, Bengaluru.
7. Revenue’s case is, for A.Y. 2011-12, assessment under Section 143(3) was completed on December 31, 2015. Subsequently, the case was taken up for re-assessment based on the information collected during the survey.
8. On December 28, 2018, Assessing officer passed draft assessment order under Section 147 read with Section 144(C) of the Act. Assessee filed objections before the DRP5 and the DRP disposed of the objections on September 23, 2019. Assessing Authority passed the final assessment order under Section 147 read with Section 144(C) of the Act on October 15, 2019 by making an addition of Rs.78,76,82,156/-and retained additions made in the assessment order dated October 31, 2015. Assessee challenged the same before ITAT. By the impugned order, ITAT has allowed assessee’s appeal. Feeling aggrieved, Revenue has preferred these appeals.
9. Assailing ITAT’s order, Shri. K. V. Aravind submitted that:
- ITAT failed to notice that assessee had understood the order dated December 28, 2018 as ‘draft assessment order’ and filed its objections before the DRP;
- that the authority in Vijay Television Pvt Ltd Vs. DRP6 (hereinafter referred to as ‘Vijay Television Case’), case is distinguishable on the fact that draft assessment order was passed in this case;
- ITAT’s view that issuance of demand notice and initiation of penalty proceedings are fatal to the proceedings when assessee had accepted the draft assessment order and filed its objection before the DRP is erroneous;
- the demand notice was not enforced; and
- any mistake or defect shall not invalidate the draft assessment order as per Section 292B of the Act and it is a curable defect.
10. With these submissions, Shri. Aravind prayed for allowing these appeals.
11. Opposing these appeals, Shri. Nageshwar Rao for the assessee, submitted that at the stage of passing the draft assessment order the ACIT had completed the assessment and issued a demand notice. This is contrary to law laid down in various authorities. Therefore, the impugned order does not call for any interference.
12. We have carefully considered the rival contentions and perused the records.
13. Undisputed facts of the case are, in the draft assessment order, the ACIT has ordered issuance of demand notice and to initiate penalty proceeding under Section 271(1)(c) of the Act. Both the draft assessment order and the demand notice are dated December 28, 2018.
14. Argument canvassed by the Revenue is, though demand notice has been issued, assessee had understood the order dated December 28, 2018 as a draft assessment order and filed its objections before the DRP. The defect if any is a curable one. On the other hand, Shri. Nageshwar Rao’s argument is that the ACIT had completed the assessment at the stage of passing the draft assessment order and issued the demand notice. Thus, the re-assessment proceeding was complete. This procedure followed by ACIT is contrary to law laid down in Vijay Television Case and other authorities.
15. Section 144C lays down a detailed procedure. Under Section 144C(1), the AO7 is required to forward a draft of the proposed order of assessment to the assessee. Assessee may file its acceptance or objection before the DRP and the AO. If assessee intimates its acceptance or no objections are received within 30 days, the AO shall complete the assessment. Where the DRP receives any objection from the assessee, it shall issue necessary directions to the AO to enable him to complete the assessment after considering the documents/material mentioned in Section 144C (6)(a) to (g) which includes the draft order. Before issuing the directions, the DRP may also make such further enquiry by any Income Tax Authority.
16. Upon receipt of the directions from DRP under Sub-Section 5, the AO shall, in conformity with the directions, complete the assessment within one month from the end of the month in which such direction is received. A notice of demand under Section 156 may be issued after completion of the assessment under Section 144C(13).
17. In Vijay Television Case, it is held as follows:
“21. As rightly pointed out by the learned senior counsel for the petitioners, in the order passed on 26.03.2013, the second respondent even raised a demand as also imposed penalty. Such demand has to be raised only after a final order has been passed determining the tax liability. The very fact that the taxable amount has been determined itself would show that it was passed as a final order. In fact, a notice for demand under Section 156 of the Act was issued pursuant to such order dated 26.03.2013 of the second respondent. Both the order dated 26.03.2013 and the notice for demand thereof have been served simultaneously on the petitioner. Therefore, not only the assessment is complete, but also a notice dated 28.03.2013 was issued thereon calling upon the petitioner to pay the tax amount as also penalty under Section 271 of the Act.”
(Emphasis Supplied)
18. In the case on hand, though it is claimed by the Revenue that order dated December 28, 2018 was a draft assessment order, we may record that the ACIT has directed issuance of demand notice and also initiated penalty proceedings. As in Vijay Television Case, the said order along with demand notice was served on the assessee.
19. In Vijay Television Case, instead of passing the draft assessment order, the final assessment order was passed. Subsequently, Revenue sought to correct the mistake by issuing corrigendum. Following the decision of Andhra Pradesh High Court in Zuari Cement Ltd Vs. Asstt. CIT8, the Madras High Court set aside the order in Vijay Television Case.
20. In Kalyan Kumar Ray Vs. CIT9, relied upon by Shri. Nageshwar Rao, it is held that assessment is one integrated process involving not only the assessment of total income but also determination of the tax. In this case at the stage of passing the draft order, the ACIT had assessed the tax, passed a final order and also issued a demand notice.
21. Aravind also contended that the demand notice was not enforced. It is settled that demand notice stems out of an order of assessment and it is enforceable. It meets the assessee with civil consequences. The argument on behalf of the Revenue that the demand notice was not enforced is fallacious and noted only to be rejected.
22. We have carefully considered Section 292B of the Act. The mistake which the ACIT has done in passing the final order at the stage of draft order is not curable under Section 292B of the Act.
23. We have considered the appeals both on delay and merits. In the light of discussion made hereinabove, these appeals are devoid of merit and they are accordingly, dismissed. The questions of law are answered in favour of the Assessee and against the Revenue.
No costs.
Notes:
1 Income Tax Appellate Tribunal
2 Assessment Year
3 ‘the Act’ for short
4 Assistant Commissioner of Income Tax (International Taxation)
5 Dispute Resolution Panel
6 (2014) 369 ITR 113 (Mad)
7 Assessing Officer
8 W.P. No. 5557 of 2012, dated 21.02.2013
9 (1991) 191 ITR 634 SC
Author Bio
