Draft assessment requirement under Section 144C applies even in remand proceedings: Karnataka High Court

1. Background and procedural history

In PCIT Vs Cisco Systems Capital (India) Pvt. Ltd. (Karnataka High Court), the Karnataka High Court examined whether an Assessing Officer is obliged to issue a draft assessment order under Section 144C of the Income Tax Act 1961 even while completing an assessment pursuant to an order of remand by the Income Tax Appellate Tribunal.

The assessee, a company engaged in leasing and financing activities, had filed its return of income for Assessment Year 2008-09. An assessment was originally framed under Section 143(3) read with Section 144C. Subsequently, the Principal Commissioner of Income Tax invoked revisional jurisdiction under Section 263, challenging aspects of that assessment order.

The assessee carried the Section 263 order to the Tribunal. The Tribunal set aside the revisionary order and remitted the matter relating to the original assessment back to the Assessing Officer for fresh consideration.

Following this remand:

  • The Transfer Pricing Officer (TPO) passed an order under Section 92CA read with Section 254 for Assessment Year 2008-09 and Assessment Year 2009-10.
  • On receipt of the TPO’s order, the Assessing Officer proceeded to pass a final assessment order under Section 143(3) read with the remand directions, without first issuing a draft assessment order under Section 144C(1).

The assessee challenged this assessment before the Commissioner of Income Tax (Appeals) [CIT(A)], contending primarily that:

  • The Assessing Officer had not complied with the mandatory procedure laid down in Section 144C by omitting to issue a draft assessment order prior to the final order.

The CIT(A) dismissed the assessee’s appeal. The assessee, in turn, approached the Tribunal.

The Tribunal:

  • Allowed the assessee’s appeal for Assessment Year 2008-09, holding that the assessment was vitiated for non-compliance with Section 144C.
  • Consequently, the Revenue’s appeal before the Tribunal was dismissed.

Aggrieved, the Revenue filed an appeal under Section 260A before the Karnataka High Court in ITA No. 128/2021, giving rise to three substantial questions of law.

2. Substantial questions of law before the High Court

The Revenue framed the following substantial questions of law:

(a) Whether, in the facts and circumstances, the Tribunal’s finding that the Assessing Officer had not followed the procedure in Section 144C is perverse, particularly when the Assessing Officer’s order was only an order giving effect to the Tribunal’s remand under Section 143(3) & Section 144C read with Section 254, and therefore issuance of a draft assessment order did not arise?

(b) Whether the Tribunal was justified in quashing the order dated 30.03.2016 as violative of Section 144C without appreciating that this order was not an order passed “in the first instance”?

(c) Whether the Tribunal was right in dismissing the Revenue’s appeal by holding that once the assessment order itself had been quashed, no occasion arose for sustaining or examining the order passed under Section 263?

The High Court analysed questions (1) and (2) together, as they both turned on the proper interpretation and application of Section 144C in a remand situation.

3. Revenue’s core contentions

The Revenue, through counsel, advanced the following principal arguments:

  • Section 144C(1) uses the expression “in the first instance” while requiring the Assessing Officer to forward a draft of the proposed assessment order to an “eligible assessee”. According to the Revenue:

    • This phrase restricts the draft order requirement to the original assessment stage.
    • Once a draft assessment order has been issued in the initial round, there is no obligation to repeat this step while giving effect to a remand by the Tribunal.

  • It was submitted that the subsequent assessment, post-remand, was:

    • Merely an order giving effect to the Tribunal’s directions under Section 254, and
    • Therefore did not constitute an order “in the first instance” under Section 144C.

  • The Revenue relied on CBDT Circular No. 9/2013 dated 19.11.2013, contending that:

    • Section 144C is engaged only when there is a proposed variation in the income or loss returned by an eligible assessee.
    • In the second round of adjudication, there was allegedly no variation in the income or loss, and hence the requirement to issue a draft order did not arise.

  • The Revenue also invoked Section 292B and Section 292BB to argue that:

    • Even if there was a procedural lapse in not issuing a draft assessment order, such lapse was curable and should not vitiate the assessment.