Draft Assessment vs Final Assessment: Calcutta High Court Clarifies Jurisdiction under Section 144C
The Calcutta High Court in Almatis Alumina Private Limited Vs A/DCIT has clarified an important aspect of the Section 144C regime under the Income Tax Act 1961—whether a draft assessment order and the accompanying Section 156 notice can create a valid and enforceable tax demand in the absence of a final assessment order.
The Court held that once the special procedure under Section 144C is triggered, a draft assessment order cannot, by itself, crystallize tax liability. Unless a final assessment order is passed within the strict time frame mandated by Section 144C(13), no lawful demand can be raised or recovered.
Background of the Dispute
Return of income and transfer pricing reference
For Assessment Year 2017–18, the assessee filed its return of income declaring:
- Total income under normal provisions: nil
- Book loss under
Section 115JB: Rs. 21,34,14,840/-
During the relevant period, the assessee entered into international transactions with its associated enterprises. This triggered a reference by the Assessing Officer to the Transfer Pricing Officer (Section 92CA(1)) to determine the arm’s length price.
On January 25, 2021, the Transfer Pricing Officer passed an order under Section 92CA(3) proposing a transfer pricing adjustment of Rs. 41,13,22,617/-. As this proposed variation was adverse to the assessee, the special procedure under Section 144C became applicable.
Issuance of draft assessment order and demand
In compliance with Section 144C(1), the National e-Assessment Centre issued:
- A draft assessment order dated March 16, 2021, incorporating the transfer pricing adjustment,
- A notice of demand under
Section 156, and - A penalty initiation notice under
Section 274read withSection 270A.
The assessee invoked its statutory right and filed objections before the Dispute Resolution Panel (DRP) within the time allowed under Section 144C(2). Both the Assessing Officer and the National e-Assessment Centre were informed that objections had been duly lodged.
Directions of the DRP and subsequent TPO order
The Dispute Resolution Panel issued its directions under Section 144C(5) on August 31, 2021. These directions were received by the tax authorities in September 2021.
Pursuant to these directions, the Transfer Pricing Officer passed an order dated October 29, 2021, reducing the transfer pricing adjustment from Rs. 41,13,22,617/- to Rs. 29,94,72,101/-.
However, despite the issuance and receipt of DRP directions, the Assessing Officer did not proceed to pass any final assessment order in conformity with the DRP’s directions, as required by Section 144C(13).
Statutory Time Limits and the Special Scheme under Section 144C
General time limit under Section 153
For AY 2017–18, the normal period for completing assessment under Section 153 was:
- 21 months from the end of the assessment year → up to December 31, 2019.
- Due to the reference to the Transfer Pricing Officer under
Section 92CA, the limitation was extended by 12 months, thereby pushing the last date to December 31, 2020. - Owing to the COVID-19 pandemic, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 read with Notification No. 10 of 2021 dated February 27, 2021 further extended the time limit for completion of assessment to September 30, 2021.
Overriding timeline under Section 144C(13)
The High Court emphasized that once Section 144C is invoked, the procedure and timeline in that provision override the general limitation provisions.
Under Section 144C(13):
Upon receipt of directions from the DRP under
Section 144C(5), the Assessing Officer shall complete the assessment in conformity with such directions within one month from the end of the month in which the directions are received, notwithstanding anything contained in Section 153 or Section 153B.
In this case: