Draft Assessment Procedure Under Section 144C Is Compulsory for Foreign Companies: Delhi High Court in CIT Vs Rolland Enterprises Ltd.

Background of the Dispute

The Delhi High Court, in CIT Vs Rolland Enterprises Ltd. (Delhi High Court), examined whether assessment orders passed against a foreign company could be sustained when the Assessing Officer did not first issue a draft assessment order as required under Section 144C(1) of the Income Tax Act 1961.

The appeals were preferred by the Revenue under Section 260A challenging a common order dated 10.01.2024 of the Income Tax Appellate Tribunal (ITAT) in ITA Nos. 3349/Del/2015, 3350/Del/2015, 3351/Del/2015 & 3352/Del/2015 and cross-objections in Co. Nos. 353/Del/2015, 354/Del/2015, 355/Del/2015 & 356/Del/2015.

The controversy essentially turned on two issues:

  • Whether Section 144C(1) applied to the assessee, and
  • Whether non-compliance with that provision rendered the assessments invalid.

Facts Leading to the Litigation

Search and Initiation of Proceedings

  • A search and seizure operation under the Act was conducted on 22.03.2012 in the case of entities forming part of the “M/s Focus Energy Group”.
  • During this exercise, documents were found and seized which related to Rolland Enterprises Ltd.
  • On the basis of these materials, notices were issued to the assessee under Section 153C.
  • Assessments for AY 2008-09, AY 2009-10, AY 2010-11 and AY 2011-12 were completed under Section 153C/144.

Nature and Status of the Assessee

  • The assessee was incorporated under the laws of the British Virgin Islands.
  • According to the assessee, it owned equipment deployed for exploration and development of oil fields.
  • This equipment was leased to M/s Focus Energy Limited, which paid lease rentals after deducting tax at source (TDS).

The assessee maintained that it was an “eligible assessee” within the meaning of Section 144C(15)(b) and, therefore, the Assessing Officer (AO) was required to first pass a draft assessment order before finalising the assessment.

Assessment Orders Passed by AO

  • The AO concluded that the assessee’s income was liable to tax in India because, in his view, the control and management of the assessee’s affairs were located in India.
  • On that premise, the AO treated the assessee as a resident in India under Section 6(3) and framed assessments under Section 153C/144 by orders dated 28.03.2014.
  • These orders were passed straightaway as final assessment orders, without preceding them by draft orders under Section 144C(1).

Relief Before CIT(A)

  • Aggrieved, the assessee filed appeals before the Commissioner of Income Tax (Appeals) [CIT(A)].
  • By orders dated 27.02.2015, the CIT(A) allowed the appeals:
    • Holding that the control and management of the assessee vested in its Board of Directors.
    • Observing that the members of the Board were not residents of India.
    • Criticising the AO’s conclusion that the assessee was a resident under Section 6(3)(ii).

Thus, at the first appellate stage, the CIT(A) rejected the AO’s finding of Indian residency.

Appeals Before ITAT and Cross-Objections

  • The Revenue carried the matter to the ITAT by filing appeals against the CIT(A)’s orders.
  • The assessee, in turn, filed cross-objections, asserting that:
    • It was an “eligible assessee” under Section 144C(15)(b), and
    • The statutory procedure under Section 144C was not adhered to because no draft assessment order was issued.

The ITAT upheld the assessee’s objection and held that the assessments were unsustainable for breach of the mandatory procedure in Section 144C. Consequently, the Revenue’s appeals were dismissed.

Questions of Law Before the High Court

The Revenue, in its appeals under Section 260A, framed the following principal questions of law: