Final Assessment Order Invalid without Draft Section u/s 144C(1) Order: ITAT Mumbai

Welspun Global Brands Ltd Vs DCIT (ITAT Mumbai)

In a recent case between Welspun Global Brands Ltd and the Deputy Commissioner of Income Tax (ITAT Mumbai), the Income Tax Appellate Tribunal (ITAT) addressed the validity of a final assessment order without a draft order under section 144C(1) of the Income-tax Act, 1961.

The Assessee and the Revenue had filed cross-appeals against the order dated 1st July 2022 passed by the Commissioner of Income Tax (Appeals-58, Mumbai) for the assessment year 2011-12.

The Assessee, in its appeal, raised additional legal grounds, asserting that the final assessment order was invalid due to the absence of a draft order under section 144C(1) of the Act.

During the assessment proceedings, the Transfer Pricing Officer (TPO) had made upward adjustments, which the Assessing Officer (AO) sought to incorporate into the final assessment without issuing a draft order under section 144C(1). The Assessee, however, did not challenge this omission before the Dispute Resolution Panel (DRP).

The ITAT, after considering the arguments and relevant case law, concluded that the failure to issue a draft assessment order as required under section 144C(1) amounted to a jurisdictional error, rendering the final assessment order illegal and void ab-initio.

The ITAT cited precedents and emphasized that the issuance of a draft assessment order is not a mere formality but a statutory right given to the Assessee to object and have those objections considered by the DRP. Therefore, the final assessment order passed without adhering to this procedure is illegal and without jurisdiction.

Additionally, the ITAT addressed the issue of estoppel, stating that there can be no estoppel on matters of law and jurisdiction. Even if the Assessee had waived its right to challenge the draft order, it cannot confer jurisdiction that does not exist.

In light of these findings, the ITAT allowed the Assessee’s appeal and dismissed the Revenue’s appeal, rendering the assessment order invalid.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross appeals have been preferred by the Assessee and the Revenue , against the order dated 01/07/2022 impugned herein passed by the Ld. Commissioner of Income Tax (Appeelas-58, Mumbai ( in short ^„Ld. Commissioner’ ) under section 250 of the Income-tax Act, 1961 (in short, ^„the Act’) for the A.Y. 2011-12.

2. Both the appeals emanates from same impugned order, therefore, for the sake of brevity, the same were heard together and are being disposed of by this composite order.

3. The Assessee in ITA No.2073/Mum/2022 has raised the additional grounds of appeal, which are legal in nature, therefore, we are inclined to decide ITA NO.2073/Mum/2022 as a lead.

4. In the instant case, the Assessee during the relevant assessment year has entered into some international transactions and, therefore, the case of the Assessee was referred by the ITO 7(3)(2), Mumbai on 19/07/2013 to the TPO / Addl. Commissioner of Income-tax, Transfer Pricing 4(3), Mumbai for the computation of arm’s length price (in short ^„ALP’) in relation to the international transactions as detailed in audit report in Form No.3CEB.

5. The Ld. TPO by perusing the financials of the Assessee observed that the Assessee company is engaged in the business of trading in home textile products and during the year under consideration has entered into international transactions with its Associated Enterprises (AEs) of the amount more than Rs.15 crores and by analyzing facts and circumstances vide order dated 28/01/2015 under section 92CA(3) of the Act ultimately, determined and recommended the following upward adjustments :-

6. As the Assessing Officer is required to compute the total income of the Assessee in conformity with the ALP determined by the TPO, therefore, the AO during the course of assessment proceedings, asked the Assessee as to why the arm‟s length price for the transaction be not computed by enhancing the same by Rs.10,02,14,721/-.

7. The Assessee vide submission/undertaking dated 03/03/2015 filed before the Assessing Officer claimed as under:-

“4.4 We do not wish to file any objections against the aforesaid order before the Dispute Resolution Panel as set out in 144C of the I.T. Act, 1961. However, we shall be filing an appeal before the CIT(A).”

8. Considering the peculiar facts and circumstances of the case specifically to the effects that the Assessee has specifically claimed that it does not wish to avail any objections against the order passed by the TPO before the Dispute Resolution Panel (DRP) as per provisions of section 144C of the Act, no draft order was passed by AO but in fact direct final assessment order dated 13/03/2015 u/s 143(3) read with section 92CA(4) of the Act was passed by the Assessing Officer, whereby the additions of Rs.10,02,14,721/- and Rs. 6,17,03,974/- were made respectively on account of TP adjustment and disallowance under section 14A of the Act.

9. The Assessee challenged the assessment order before the Ld. Commissioner, who partly allowed the appeal of the Assessee by sustaining the addition to the tune of Rs.36,15,481/- and Rs.3,63,846/- on account of sale margin qua Vapi TT and Vapi Rugs and interest on loan given; however, deleted the other remaining additions, including the disallowance of Rs.6,17,03,974/- made on account of disallowance u/s 14A of the Act.

10. Being aggrieved, the Assessee and the Revenue filed their respective appeals. The Assessee, during the pendency of appellate proceedings before us, filed additional grounds of appeal which are reproduced herein below:-

“ l(a) On the facts and circumstances of the case and in law, the impugned final assessment order dated 13-3-2015 passed by the Id. AC) is bad in law in as much as the said order suffers from a jurisdictional error as the mandatory procedure stipulated in section 144CJ1) of the Income-tax Act, 1961 (‘Act’) has not been followed by the Id. AC); thereby, rendering the final assessment order illegal, invalid and without authority of law.

l(b) The Id. AO failed to first pass a draft assessment order u/s. 144C(1) of the Act and forward a copy thereof to the Appellant, and instead, has directly passed the impugned final assessment order dated 13-3-2015 under section 143(3) r.w.s. 92CA of the Act, resulting in a substantive lapse on part of the Id. AO and thus, rendering the said final assessment order devoid of jurisdiction, illegal and bad in law.”

10.1 We by considering the additional grounds raised by the Assessee, observe that the additional grounds raised by the Assessee prima facie appears to be legal in nature and arising from the facts which are already on record and, therefore, in view of the decision in the case of National Thermal Power Corporation Ltd vs CIT (1998) 229 ITR 383 (SC), the same are allowed to be raised for adjudication.

11. Coming to merit of the additional grounds, we observe that it is admitted fact that in the instant case, the Assessee is an eligible Assessee as per the provision of section 144C of the Act and the Assessing Officer directly passed the final Assessment order u/s 143(3) read with section 92CA(4) of the Act without passing draft assessment order as required to be passed under section 144C(1) of the Act, which reads as 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 which is prejudicial to the interest of such assessee.”

11.1 On the basis of peculiar facts and circumstances of the case and rival submission of the parties, following questions emerged:

(1) “Whether the passing of the draft assessment order as prescribed under section 144C(1) of the Act is mandatory or not?

(2) “Whether the Assessee can be estopped from challenging the assessment order which was passed on the basis of the admission by the Assessee itself”.

(3) “Whether on the waiver/admission/undertaking of the Assessee for not challenging the draft order before the Ld.DRP u/s 144C of the Act, the AO is competent to pass the assessment order under section 92CA(4) of the Act without passing a draft assessment order as prescribed u/s 144C of the Act may be.

12. Coming to question no, 1 which is “Whether the passing of the draft assessment order as prescribed under section 144C(1) of the Act is mandatory or not”. We have given thoughtful consideration to the peculiar facts and circumstances of the case and observe that jurisdictional High Court in the case of SHL India Pvt. Ltd vs DCIT (2021) 128 taxmann.com 426(Bom) has also dealt with the identical issue and ultimately held as under:

“That the Assessing Officer has no power under the statute, as the provision of section 92CA(3) of the Act clearly mandates that the Assessing Officer to pass and furnish a draft assessment order in the first instance. The legislature in our view, has intended to give an important opportunity to the petitioner, who is an eligible Assessee, which, in our view, has been taken away. Failure to follow the procedure under section 144C(1) of the Act, would be a jurisdictional error and not merely procedural error or mere irregularity. This is not an issue which involves a mistake in the said order, but it involves power of the Assessing Officer to pass the order by following the procedure laid down in section 144C(1) of the Act to pass and furnish a draft assessment order to petitioner and directly passing a final assessment order and without giving petitioner an opportunity to raise objection before the DRP, there is a complete contravention of section 144C(1). The Assessing Officer having wrongly assumed jurisdiction to straight away pass the final assessment order. This is not a mere irregularity, but an incurable illegality. Even the provisions of section 292B of the Act would not curate such an order as section 292B of the Act cannot read to confer jurisdiction on the Assessing Officer where non exist.”

12.1 The Hon’ble jurisdictional High Court in the case of Principal Commissioner of Income-tax Vs Andrew Telecommunications Pvt Ltd (2018) 96 taxmann.com 613 (Bom) also dealt with identical issue and framed the following questions :

“It is a settled law that mere wrong reference to a provision in the order cannot be determinative of the source of power, question, which, therefore, questions arises for consideration are as follows:-

(1) What was the effect of not issuing the draft assessment order by the AO;

(2) When the proceedings were remanded, whether a draft assessment order was required to be issued;

(3) Whether the order of the Assessing Officer could be said to be an order under section 144C(13) of the Act.

12.2 The Hon’ble High Court, by taking into consideration the judgments “delivered by the Bombay High Court in the case of International Air Transport Association vs DCIT (2016) 68 taxmann.com 246 (Bom) wherein it was held that the order passed by the Assessing Office without there being any draft assessment order is illegal and without jurisdiction and by the Division Bench of Andhra Pradesh High Court in the case of Zuari Cement Ltd vs ACIT (WP) (C) NO.5557 of 2012 dated 21/02/2013 wherein it was held that failure to pass an assessment order under section 144C(1) of the Act would result in rendering the final assessment order as one without jurisdiction,” ultimately held that the issuance of draft assessment order is not an empty formality. This is a right given to the Assessee to object and to have the objections considered not by the Assessing Officer, but by the DRP. Order passed by the Assessing Office without there being any draft assessment order is illegal and without jurisdiction.

12.3 On the aforesaid analyzations and the dictum laid down by the Hon’ble High Courts, we are of the considered view that the provisions of section 144C of the Act clearly mandates that the Assessing Officer is required to pass and furnish a draft assessment order in the first instance and therefore failure to follow the procedure as prescribed under section 144C(1) of the Act, would be a jurisdictional error and not merely procedural error or irregularity. Straight way passing a final assessment order u/s 92CA(4) amounts to complete contravention of the provisions of section 144C of the Act is an incurable illegality. Such order would be illegal and without jurisdiction and entail the final assessment order as void ab-initio sans jurisdiction. Even the provisions of section 292B of the Act cannot confer and validate the jurisdiction on the Assessing Officer, which is otherwise non-existing. Hence passing of the draft assessment order as prescribed under section 144C(1) of the Act is mandatory. Question no. 1 is answered accordingly.

13. Coming to questions no 2 and 3 , we observe that the Hon’ble jurisdictional High Court in the case of Principal Commissioner of Income-tax-15 Vs Lion Bridge technology Pvt. Ltd (2018) 100 taxmann.com 413 (Bom) has also dealt with the identical issue wherein the Assessee has accepted that it does not wish to challenge the passing of the draft assessment order, the Hon’ble Court has clearly laid down that there can be no estoppels on the issue of law pertaining to jurisdiction and if the order passed by the Assessing Officer is without jurisdiction, the same can be raised at any time and the principle of estoppels will not apply. Mere consent of parties does not bestow jurisdiction, if the order is beyond jurisdiction.

13.1 We also observe that the Hon’ble co-ordinate Bench of the Tribunal at Kolkata in the case of Linc Pen & Plastics Ltd vs DCIT (2023) 148 taxman.com 273 (Kol-Trib) has also dealt with the identical issue, wherein the Assessee has specifically stated before the Assessing Officer “that they do not intend to exercise the option available under section 144C to file objections before the Ld.DRP”, therefore, in view of the aforesaid waiver of the Assessee, the Assessing Officer passed the final order without making any draft assessment order. The co-ordinate bench of the Tribunal by respectfully following the judgment of the Calcutta High Court in the case of CIT Vs Bhaskar Mittal (1994) 73 taxmann.437 wherein it was held “that there is no estoppels of conduct against the law nor is there any waiver of the legal right such as the legal liability to be assessed otherwise than according to the mandate of the law, ultimately held that passing of the proposed order of assessment is sine qua non before passing of the assessment order.

13.2 On the aforesaid analyzations, it clear that there cannot be any estoppel on the issue of law pertaining to jurisdiction and order passed without jurisdiction, the same can be raised at any time and the principle of estoppel will not apply. Waiver of any legal right can not entail passing the order otherwise than the mandate of law. Passing of the proposed order of assessment u/s 144(C)(1) of the Act is sine qua non before passing of the assessment order and consent of parties cannot confer jurisdiction, which is otherwise not available. Hence we are of the view that the Assessee cannot be estopped from challenging the assessment order, which is otherwise based on the waiver/admission/undertaking of the Assessee. Further may be there is waiver/admission/undertaking of the Assessee for not challenging the draft order before the Ld. DRP u/s 144C of the Act, but still the AO is not empowered to pass the assessment order under section 92CA(4) of the Act directly, without passing a draft assessment order as prescribed u/s 144C(1) of the Act. Hence the questions no. 2 and 3 are answered accordingly.

14. Coming to the instant case, as we have observed above “that the Assessee has categorically admitted before the Assessing Officer that it does not want to challenge the draft assessment order before the Ld. DRP under section 144C of the Act”, and therefore the AO on such waiver/admission/undertaking of the Assessee, passed the final assessment order u/s 143(3) rws 92CA(4) of the Act directly and thus at this stage can not be allowed to make u turn as it is settled law that construction which permits one to take advantage of one’s own wrong or impair one’s own objections under the statue should be disregarded. “Maxim Nullus commodum capere potest de injuria sua propria” has a clear mandate of law that, a person who by manipulation of a process, frustrates the legal rights of others, should not be permitted to take advantage of his wrong or manipulations. Even otherwise, at this stage, if allow the claim of the Assessee, then it amounts to allow “Unjust enrichment”. Nonetheless whatsoever it may be, as it is mandate of law and also well settled by Hon’ble High Court that as per the provisions of section 144C (1) of the Act, before passing a final order under section 144C(13), the Assessing Officer shall notwithstanding anything to the contrary contained in this Act, if he proposes to make any variation which is prejudicial to the interest of such Assessee, then in the first instance, is required to pass a draft proposed order of the assessment. There is no estoppel against the issue of law or jurisdiction of the authorities and waiver/undertaking of party(ies) cannot bestow the jurisdiction which is otherwise do not exist and also can not bypass the procedure established by law. Hence we are of the considered view, that the final assessment order dated 13/03/2015 u/s 143(3) read with section 92CA(4) of the Act passed by the Assessing Officer, without passing the draft assessment order as prescribed u/s 144C(1) of the Act, is without jurisdiction and void-ab-initio. Hence, the assessment order itself is quashed.

15. As we have already quashed the assessment order, and therefore, not delving into the merits of the case of the Assessee as well as the case of the Revenue as the appeal filed by the Revenue being becoming infructuous.

16. In the result, the appeal of the Assessee is allowed, whereas the appeal filed by the Revenue stands dismissed.

Order pronounced in the open court on 31/01/2024.