Tax dept jumped gun on assessment while DRP objections pending - Court quashes Rs.56 Cr demand

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

Case Name

SRF Ltd. Vs National Faceless Assessment Centre & Anr. (High Court of Delhi)

W.P.(C) 6484/2021

Date: 14th July 2021

Key Takeaways

• Tax authorities cannot pass final assessment orders when DRP objections are pending
• COVID-19 related time extensions must be properly considered by tax departments
• The procedural requirements under Section 144C (of Income Tax Act, 1961) must be strictly followed
• CBDT circulars extending time limits due to lockdown are binding on assessing officers
• Proper jurisdiction and timing are crucial in tax assessment procedures

Issue

The central legal question was: Can the Assessing Officer pass a final assessment order under Section 143(3) (of Income Tax Act, 1961) read with Section 144C(3) (of Income Tax Act, 1961) when objections to the draft assessment order are pending with the Dispute Resolution Panel?

Facts

1. Draft Assessment: On May 5, 2021, a draft assessment order was issued under Section 144C(1) (of Income Tax Act, 1961) proposing SRF Ltd’s total income at Rs.450,02,37,902/-
2. Time Limit Issue: Under Section 144C(2) (of Income Tax Act, 1961), SRF had 30 days to file objections with the DRP, which meant the deadline was June 4, 2021
3. COVID Impact: SRF’s office was closed due to Delhi lockdown, so they couldn’t file objections by June 4, 2021. They eventually filed on June 21, 2021
4. Government Relief: CBDT issued Circular No.12 of 2021 and Notification No.74/2021 dated June 25, 2021, extending the time limit for DRP objections to August 31, 2021, for cases where the original deadline was June 1, 2021 or later
5. Premature Assessment: Despite the extension and pending objections, the tax department passed the final assessment order on June 30, 2021, assessing total income at Rs.450,02,37,902/- and raising a demand of Rs.56,76,09,018/-

Arguments

SRF Ltd’s Arguments:

• The objections filed on June 21, 2021 were within the extended time limit per CBDT Circular No.12/2021
• The Assessing Officer had no jurisdiction to pass the final assessment while DRP objections were pending
• Section 144C(13) (of Income Tax Act, 1961) mandates that assessment should be completed only after receiving DRP directions
• The tax department ignored the COVID-related time extensions

Tax Department’s Position:

The respondent’s counsel, Ms. Vibhooti Malhotra, accepted that given the facts of the case, she had no objection to remitting the matter to the DRP

Key Legal Precedents

The judgment references specific sections of the Income Tax Act, 1961:

• Section 143(3) (of Income Tax Act, 1961) - Final assessment orders
• Section 144C(1) (of Income Tax Act, 1961) - Draft assessment orders
• Section 144C(2) (of Income Tax Act, 1961) - Time limit for filing objections
• Section 144C(3) (of Income Tax Act, 1961) - Final assessment procedure
• Section 144C(5) (of Income Tax Act, 1961) - DRP directions
• Section 144C(13) (of Income Tax Act, 1961) - Mandatory compliance with DRP directions
• Section 144B(1)(xxix) (of Income Tax Act, 1961) to (xxxi) - Assessment procedures
• Section 156 (of Income Tax Act, 1961) - Demand notice provisions

The court also relied on CBDT Circular No.12 of 2021 and Notification No.74/2021 both dated June 25, 2021, which provided COVID-related time extensions

Judgement

The Delhi High Court ruled completely in favor of SRF Ltd. Here’s what the court decided:

Court’s Reasoning:

The court held that since objections to the draft assessment order dated May 5, 2021 were filed and were pending disposal with the DRP, the Assessing Officer had no jurisdiction to pass the final assessment under Section 143(3) (of Income Tax Act, 1961) read with Section 144C(3) (of Income Tax Act, 1961)

Orders Made:

1. Quashed the final assessment order dated June 30, 2021
2. Quashed the demand notice of Rs.56,76,09,018/- issued under Section 156 (of Income Tax Act, 1961)
3. Remitted the matter to the DRP for consideration under Section 144C (of Income Tax Act, 1961)
4. Directed that thereafter, the assessment order shall be passed in accordance with procedures under Section 144B(1)(xxix) (of Income Tax Act, 1961) to (xxxi) and Section 144C (of Income Tax Act, 1961)

The petition was allowed and the case was decided on July 14, 2021, by Justices Manmohan and Navin Chawla

FAQs

Q1: What does this mean for other taxpayers facing similar situations?

A: This judgment establishes that tax authorities cannot bypass the DRP process. If you’ve filed objections with the DRP, the Assessing Officer must wait for the DRP’s decision before passing the final assessment.

Q2: Are COVID-related time extensions still relevant?

A: While this specific circular may not be current, the principle is important - CBDT circulars extending time limits are binding on tax officers and must be followed.

Q3: What happens to SRF Ltd now?

A: The matter goes back to the DRP, which will consider SRF’s objections to the draft assessment. Only after the DRP gives its directions can a fresh assessment be made.

Q4: Can the tax department appeal this decision?

A: While theoretically possible, since their own counsel agreed to remit the matter to the DRP, an appeal seems unlikely.

Q5: What’s the key lesson for tax practitioners?

A: Always ensure proper procedural compliance. The tax department cannot take shortcuts in the assessment process, especially when statutory procedures like DRP objections are involved.

CM APPL. 20376/2021 (exemption)

1. Allowed, subject to all just exceptions.

2. Accordingly, the application stands disposed of.

3. Present petition has been heard by way of video conferencing.

W.P.(C) 6484/2021 & CM APPL. 20375/2021

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

order dated 30th June, 2021 passed under Section 143(3) (of Income Tax Act, 1961) read with

Sections 144C(3) and 144B (of Income Tax Act, 1961) [‘the Act’] and

the demand notice of Rs. 56,76,09,018/- issued under Section 156 (of Income Tax Act, 1961) of the

Act for the Assessment Year 2017-18. Petitioner also seeks directions to

the Respondents not to take any action or initiate further proceedings in

furtherance of the impugned assessment order and demand notice.

5. Learned counsel for the Petitioner states that vide draft assessment

order dated 05th May, 2021 issued under Section 144C(1) (of Income Tax Act, 1961), the

total income of the Petitioner was proposed at Rs. 450,02,37,902/-. He

points out that under section 144C(2) (of Income Tax Act, 1961), the Petitioner had thirty days (30

days) to file objections to Dispute Resolution Panel [DRP] against the

draft order, i.e. by 04th June 2021.

6. He emphasises that since the office of Petitioner was closed due to

lockdown in Delhi, therefore, objections to the draft order could not be

filed within thirty days (30 days) of receipt of the draft order, i.e. by 04th June, 2021 and were filed on June, 2021.

7. He points out that the CBDT by Circular No.12 of 2021 and

Notification No.74/2021 dated 25th June 2021 provided relaxation in

respect of time limits of certain compliances and vide para 1 of the

circular, time limit to file objections to DRP, where the same were to be

filed by 01st June 2021 or thereafter were extended to 31st August, 2021

and the time limit for completion of assessment was extended to 30th

September 2021.

8. He states that in view of Circular No.12 of 2021 dated 25th June

2021, the objections under section 144(2) (of Income Tax Act, 1961) to the draft order

dated 05th May 2021, filed on 21st June 2021 were within time.

9. He points out that the Respondent No.1 erred in considering that

the Petitioner had opted not to file objections to the draft order dated 05th May, 2021 and in complete ignorance of the time limits extended by

Circular No. 12/2021 and Notification No.74/2021 both dated 25th June

2021, passed the impugned assessment order dated 30th June 2021 under section 143(3) (of Income Tax Act, 1961) read with sections 144C(3) and 144B (of Income Tax Act, 1961) and thereby, assessed the total income at Rs.450,02,37,902/- and raised a demand of Rs.56,76,09,018/- vide demand notice issued under section

156 of the Act.

10. He contends that since the objections to draft assessment order

dated 05th May 2021 were filed and the same were pending disposal with

the DRP, the Respondent No.1 had no jurisdiction to pass the impugned

assessment under Section 143(3) (of Income Tax Act, 1961) read with section 144C(3) (of Income Tax Act, 1961). He

emphasises that the mandate of Section 144C(13) (of Income Tax Act, 1961) is that on

receipt of the directions of DRP under section 144C(5) (of Income Tax Act, 1961), the

Assessing Officer (Respondent No.1 herein) shall complete the

assessment in conformity with the directions of the DRP which was not

done in the present case.

11. Issue notice. Ms, Vibhooti Malhotra accepts notice on behalf of

respondents. She states that in view of the facts of the present case, she

has no objection if the present matter is remitted to the DRP.

12. Keeping in view the aforesaid, the final assessment order dated 30th

June, 2021 as well as the demand notice of Rs. 56,76,09,018/- (Rupees

Fifty Six Crores Seventy Six Lakhs Nine Thousand and Eighteen only)

issued under Section 156 (of Income Tax Act, 1961) for the assessment year 2017-18 is

quashed and the matter is remitted to the DRP for consideration under

Section 144(C) (of Income Tax Act, 1961). Thereafter, the assessment order shall be

passed in accordance with the procedure stipulated under Section

144B(1) (xxix) to (xxxi) as well as Section 144(C) (of Income Tax Act, 1961).

13. Accordingly, the present writ petition along with pending

application stands disposed of.

14. 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 14, 2021