Draft Assessment Must Be Given To Eligible Taxpayer Before Prejudicial Variation In Final Assessment: ITAT Delhi

The Income Tax Appellate Tribunal, Delhi Bench, has ruled that tax authorities must issue a draft assessment order to an eligible taxpayer before passing a final order if they propose a change prejudicial to the taxpayer's interests.

A foreign company is expressly included in the definition of an “eligible assessee” for this purpose.

The tribunal observed that the Assessing Officer “firstly has to mandatorily forward a draft” of the proposed assessment order when such a prejudicial variation is proposed.

It described this as a “mandatory and statutory requirement of law” and noted that the draft gives the taxpayer an opportunity to either accept the variation or raise objections before the Dispute Resolution Panel.

The bench comprising Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra made the observation while deciding the Revenue's appeal against relief granted to I Energizer Holdings Ltd., a Mauritius-based foreign company.

The tribunal held that the final assessment order was vitiated because the Assessing Officer had bypassed the mandatory draft-order stage.

The dispute followed a search and seizure operation under Section 132 of the Income-tax Act on the Focus Energy Group on March 22, 2012. Documents relating to I Energizer were found and seized during the search.

The case was then centralised with Central Circle-10, New Delhi, which was later restructured as Central Circle-19. A satisfaction note was recorded for invoking Section 153C, and a notice under Section 142(1) was issued.

The Assessing Officer treated I Energizer as a resident of India under Section 6(3) and assessed its income at ₹3,83,53,140 on a protective basis. The assessment was passed under Section 144.

The Commissioner of Income Tax (Appeals) granted relief to the company, following which the Revenue approached the tribunal. I Energizer, in its cross-objection, raised an additional legal challenge to the assessment. It argued that the Assessing Officer had passed the final assessment order without first issuing a draft order as required under Section 144C.

The company relied on the tribunal's earlier decision in its own case for assessment years 2008-09 to 2011-12. In that case, final assessment orders passed without draft orders had been held unsustainable in law. I Energizer also relied on decisions of the Delhi High Court and the tribunal concerning the mandatory nature of the draft-assessment procedure.

The Revenue, through its Departmental Representative, relied on the Assessing Officer's order.

The tribunal noted that, in I Energizer's own earlier case, a coordinate bench had held that the company was a foreign company and therefore an “eligible assessee” for the purposes of Section 144C.

Section 144C(15)(b)(ii) expressly includes any foreign company within the definition of an eligible assessee. Section 144C(1), in turn, requires the Assessing Officer to first forward a draft of the proposed assessment order where a variation prejudicial to an eligible assessee is proposed.

This draft gives the taxpayer an opportunity to accept the proposed variation or raise objections before the Dispute Resolution Panel. The Assessing Officer then has to complete the assessment in conformity with the directions issued under the statutory process.

In this case, the Assessing Officer passed the final order under Section 144 without first framing a draft order under Section 144C(1). The tribunal identified the validity of this final assessment, rather than the merits of the tax addition, as the issue for adjudication.

The tribunal treated the failure as a jurisdictional error, rather than a mere procedural irregularity that could be cured under Section 292B. It relied on earlier decisions holding that non-compliance with the mandatory draft-order requirement vitiates the final assessment.

The tribunal also referred to Delhi High Court decisions holding that an eligible assessee must be assessed in accordance with the procedure under Section 144C. It noted that non-compliance with the requirement to first frame a draft assessment order renders the final order vitiated.

Applying that position, the tribunal held that I Energizer's assessment had to follow the draft-order procedure. Since the Assessing Officer had passed the final assessment without first issuing the draft, the assessment order was vitiated.

“The failure by the AO to adhere to the mandatory requirement of Section 144C(1) of the Act, to first pass a draft assessment order and thereafter the Final order u/s 144C(13), has resulted in vitiating the impugned final assessment order,” the tribunal observed.

Subsequently, the tribunal held that the Revenue's appeal on merits had become infructuous. It therefore dismissed the Revenue's appeal and allowed I Energizer's cross-objection.

For Assessee: Shri Amit Goel, CA and Shri Pranav Yadav, Advocate

For Revenue: Dr. Shalini Verma, CIT-DR