Tax Officer Must Issue Draft Assessment Before Final Order - Court Sets Aside Assessment

Get the full picture - access the original judgement of the court order here

Case Name

ST Microelectronics Private Limited vs The National Faceless Assessment Centre & Anr. (High Court of Delhi)

W.P.(C) 7189/2021

Date: 29th July 2021

Key Takeaways

• Mandatory Procedural Requirement: Before passing any final assessment order, tax officers must mandatorily issue a draft assessment order to eligible assessees under Section 144C(1) (of Income Tax Act, 1961)
• No Shortcuts Allowed: Tax authorities cannot bypass this procedural requirement, even if they believe the case merits immediate final assessment
• Procedural Violations Cannot Be Cured: Such fundamental procedural defects cannot be corrected through subsequent amendments or corrigendums
• Matter Remanded: When such violations occur, courts will set aside the entire assessment and direct fresh proceedings

Issue

The central legal question was: Can a tax officer pass a final assessment order directly without first issuing a mandatory draft assessment order to an eligible assessee under Section 144C(1) (of Income Tax Act, 1961)?

Facts

1. The Assessment: On June 22, 2021, the National Faceless Assessment Centre (Respondent No. 1) passed a final assessment order under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) for ST Microelectronics for Assessment Year 2016-17
2. Additional Notices: Along with the assessment order, the tax department also issued notices under Section 156 (of Income Tax Act, 1961) and Section 274 (of Income Tax Act, 1961) read with Section 271(1) (of Income Tax Act, 1961)© - these are typically penalty and demand notices
3. The Problem: The tax officer directly passed the final assessment order without first issuing a draft assessment order as required under Section 144C(1) (of Income Tax Act, 1961) for eligible assessees
4. Company’s Response: ST Microelectronics filed a writ petition challenging this procedural violation

Arguments

Petitioner’s (ST Microelectronics) Arguments:

• The tax officer erred in assuming jurisdiction to pass the final assessment order without following the mandatory procedure under Section 144C(1) (of Income Tax Act, 1961)
• For eligible assessees, a draft assessment order must be issued first before any final order
• They cited the Vijay Television case where similar procedural violations were held to be fatal defects that cannot be cured

Revenue’s (Tax Department) Arguments:

• The Revenue counsel accepted that if the company’s contentions were true, they would still have the liberty to continue proceedings
• They argued that since the limitation period for issuing a draft assessment order had not expired, they could issue a fresh draft assessment order

Key Legal Precedents

The court relied on several important precedents to establish that issuing a draft assessment order is mandatory:

1. DCIT v. Control Risks India Pvt. Ltd. [2019] 264 Taxman 291 (SC) - Supreme Court decision upholding the mandatory nature of draft assessment orders
2. Control Risks India Pvt. Ltd. Vs. DCIT : [2019] 107 taxmann.com 82 (Del.) - Delhi High Court decision
3. Turner International Pvt. Ltd. V. DCIT [2017] 398 ITR 177 (Del) - Another Delhi High Court precedent
4. JCB India Ltd. V. DCIT [2017] 398 ITR 189 (Del) - Delhi High Court decision
5. International Air Transport Association v. DCIT [2016] 290 CTR 46 (Bom) - Bombay High Court precedent
6. CIT v. C-Sam (India) P. Ltd. [2017] 398 ITR 182 (Guj) - Gujarat High Court decision
7. Vijay Television Private Limited vs DRP: [2014] 369 ITR 113 (Mad) - This case established that procedural violations cannot be cured by subsequent corrigendums

Judgement

The Court’s Decision:

The High Court ruled in favor of ST Microelectronics. Here’s what the court decided:

Legal Reasoning:

• The court held that it is “settled law” that prior to passing a final assessment order, the Assessing Officer must mandatorily pass and forward a draft assessment order to the assessee under Section 144C(1) (of Income Tax Act, 1961)
• This is not a discretionary requirement but a mandatory procedural step that cannot be bypassed

Orders Made:

1. Set Aside: The impugned Assessment Order dated June 22, 2021, and all related notices under Section 156 (of Income Tax Act, 1961), 274 (of Income Tax Act, 1961) read with Section 271(1) (of Income Tax Act, 1961)© for Assessment Year 2016-2017 were set aside
2. Remand Direction: The matter was remanded back to the Assessing Officer with specific directions:

• Issue a draft assessment order within two weeks
• Grant an opportunity of hearing to the petitioner
• Pass a reasoned order in accordance with law

Result: The petitioner (ST Microelectronics) won the case completely.

FAQs

Q1: What is Section 144C(1) (of Income Tax Act, 1961) and why is it important?

A: Section 144C(1) (of Income Tax Act, 1961) requires tax officers to issue a draft assessment order before passing a final assessment order for eligible assessees. This gives taxpayers a chance to respond to proposed adjustments before they become final.

Q2: What happens to the original assessment order?

A: It’s completely set aside and has no legal validity. The tax department has to start the assessment process fresh by first issuing a draft assessment order.

Q3: Can the tax department appeal this decision?

A: While the judgment doesn’t mention an appeal, the tax department could potentially approach a higher court. However, given the strong precedential support, such an appeal would face significant challenges.

Q4: What about the penalty notices that were issued?

A: All related notices under Section 156 (of Income Tax Act, 1961), 274 (of Income Tax Act, 1961) read with Section 271(1) (of Income Tax Act, 1961)© were also set aside along with the main assessment order.

Q5: How long does the tax department have to issue the fresh draft assessment order?

A: The court specifically directed that the draft assessment order should be issued within two weeks of the judgment.

Q6: What if the tax department had issued a corrigendum to fix the error?

A: Based on the Vijay Television precedent cited, such fundamental procedural defects cannot be cured by subsequent corrigendums or amendments.

1. The petition has been heard by way of video conferencing.

2. Present writ petition has been filed challenging the final assessment

order dated 22nd June 2021 passed under section 143(3) (of Income Tax Act, 1961) read with Section

144B of the Act, and the impugned notices issued under Section 156 (of Income Tax Act, 1961) and

Section 274 (of Income Tax Act, 1961) read with section 271(1)(c) (of Income Tax Act, 1961) by the Respondent No. 1

in the case of the petitioner for Assessment Year [AY] 2016-17 and all

proceedings initiated pursuant thereto.

3. Learned counsel for the Petitioner submits that the respondent no. 1

erred in assuming jurisdiction to pass the final assessment order dated 22nd

June 2021 under Section 143(3) (of Income Tax Act, 1961) read with Section 144B (of Income Tax Act, 1961) without

adhering to the conditions laid down in case of an eligible assessee as per

Section 144C(1) (of Income Tax Act, 1961) of passing first a draft assessment order. In support of his

submission, he relies upon the judgment in the case of Vijay Television

Private Limited vs DRP: [2014] 369 ITR 113 (Mad) wherein it has been

held as under:-

“33...In any event, such an order dated 26.03.2013 passed by

the second respondent can only be construed as a final order

passed in violation of the statutory provisions of the Act. The

corrigendum dated 15.04.2013 is also beyond the period

prescribed for limitation. Such a defect or failure on the part of

the second respondent to adhere to the statutory provisions is not

a curable defect by virtue of the corrigendum dated 15.04.2013.

By issuing the corrigendum, the respondents cannot be allowed

to develop their own case.

(emphasis supplied)”

4. Issue notice. Mr. Ruchir Bhatia, learned counsel for the Revenue

accepts notice. He states that even if the averments in the writ petition are believed to be true then also the respondent no. 1 would be at liberty to continue with the proceeding and issue a fresh draft assessment order, as in the present case the limitation period for issuance of the same has not

expired.

5. This Court is of the view that it is a settled law that prior to passing a final assessment order, the Assessing Officer has to mandatorily pass and

forward a draft assessment order to the Assessee under Section 144C(1) (of Income Tax Act, 1961) of

the Act. [See: DCIT v. Control Risks India Pvt. Ltd. [2019] 264 Taxman

291 (SC) upholding the decision of the High Court in Control Risks India

Pvt. Ltd. Vs. DCIT : [2019] 107 taxmann.com 82 (Del.), Turner

International Pvt. Ltd. V. DCIT [2017] 398 ITR 177 (Del), JCB India Ltd.

V. DCIT [2017] 398 ITR 189 (Del), International Air Transport

Association v. DCIT [2016] 290 CTR 46 (Bom), CIT v. C-Sam (India) P.

Ltd. [2017] 398 ITR 182 (Guj)]

6. Keeping in view the aforesaid, the impugned Assessment Order dated

22nd June, 2021 and impugned notices under Section 156 (of Income Tax Act, 1961), 274 (of Income Tax Act, 1961) read with

Section 271(1)(c) (of Income Tax Act, 1961) for Assessment Year 2016-2017 are set aside

and the matter is remanded back to the Assessing Officer who shall issue a

draft assessment order within two weeks and grant an opportunity of hearing

to the petitioner and pass a reasoned order in accordance with law. With the

aforesaid direction, the present writ petition stands disposed of.

7. The order be uploaded on the website forthwith. Copy of the order be

also forwarded to the learned counsel through e-mail

MANMOHAN, J

NAVIN CHAWLA, J

JULY 29, 2021