ITAT Delhi Rules DRP Assessment Orders Invalid: Time Limitation Under Section 144C Read With Section 153 Not Observed in Li & Fung India Case

Introduction

The Delhi Bench of the Income Tax Appellate Tribunal has delivered a significant ruling concerning the computation of limitation periods for completing assessment proceedings involving the Dispute Resolution Panel mechanism. The appeals filed by Li & Fung (India) Pvt. Ltd. for Assessment Years 2018-19 and 2020-21 were allowed on the ground that the final assessment orders were passed beyond the permissible time limit prescribed under the Income Tax Act, 1961.

Case Background

The assessee, Li & Fung (India) Pvt. Ltd., challenged the validity of assessment orders passed under Section 143(3) read with Section 144C(13) on the primary ground of limitation. The company raised this jurisdictional issue as Ground No. 5 in the appeal for AY 2018-19 and Ground No. 1.2 for AY 2020-21. The central question before the Tribunal was whether the final assessment orders were barred by limitation when computed in accordance with the statutory provisions.

Revenue's Preliminary Objection

Arguments Against Proceeding With Adjudication

The departmental representative raised a preliminary objection requesting deferral of adjudication on the limitation issue. The Revenue contended that the matter was sub judice before the Supreme Court following the reference to a Larger Bench in Shelf Drilling Ron Tappmeyer Ltd. The Revenue emphasized that the Supreme Court's interim order dated 22.09.2023 specifically directed that the operative portion of the Bombay High Court judgment in Shelf Drilling Ron Tappmeyer Ltd. should not be cited as precedent in subsequent matters.

Reference to PayPal Payments Case

The departmental representative referred to the judgment of the Bombay High Court in PayPal Payments P. Ltd. vs ACIT in Writ Petition (L) No. 30944 of 2023 decided on 13.08.2024. The Revenue argued that the Bombay High Court, after considering the Supreme Court's stay order, had refrained from quashing assessment orders on identical grounds and granted liberty to parties to apply after the Supreme Court's final determination.

Judicial Propriety Arguments

Drawing upon the decision in UP Rashtriya Chini Mill Adhikari Parishad, Lucknow Vs. State of U.P. and Others reported as (1995) AIR SC 2148, the Revenue submitted that when matters are referred to a Larger Bench, courts and tribunals should avoid adjudicating identical issues pending such reference. The departmental representative argued that proceeding with the adjudication would lack judicial propriety given the pending Supreme Court reference.

Assessee's Response to Preliminary Objection

Reliance on Roca Bathroom Products Decision

The counsel for the assessee countered that the company had relied exclusively on the judgment of the Madras High Court in CIT vs. M/s. Roca Bathroom Products Pvt. Ltd., reported in 140 taxmann.com 304 (Mad.), which remained unstayed by the Supreme Court. The assessee emphasized that unlike the Shelf Drilling case, no interim order had been passed staying the operation of the Roca Bathroom Products judgment.

The assessee's counsel argued that even when a higher court stays an order, the ratio decidendi of the judgment remains valid unless explicitly reversed or set aside. Supporting this proposition, reference was made to Shree Chamundi Mopeds Ltd. v. Church of South India Trust, 1992 AIR SC 1439, which established that interim stay orders do not result in quashing or nullifying the precedential value of judgments.

Supporting Decisions

The assessee pointed to the Bombay High Court's observation in the PayPal Payments case that decisions of the Madras High Court in Roca Bathroom Products and the Delhi High Court in Nokia India P. Ltd. vs. DCIT in Writ Petition No.1773 of 2016 remained unstayed. Furthermore, multiple Tribunal Benches had already decided the limitation issue following Roca Bathroom Products, including:

  • Aveva Solutions India LLP vs. ITO, 180 com731 (Hyd-Trib)
  • Western UP Tollway Ltd. vs. DCIT, 181 com406 (Hyd-Trib)
  • Hindustan Zinc Ltd. vs ACIT, ITA No.623/JODH/2024 decided on 03.01.2025

Tribunal's Resolution of Preliminary Objection

Analysis of Precedential Value

The Tribunal examined whether adjudication should proceed when the Supreme Court had stayed the operative portion of the Bombay High Court judgment in Shelf Drilling. The Bench noted that the assessee had not relied upon the Shelf Drilling decision but had based its case on Roca Bathroom Products, which remained unstayed.

Distinction Between Stay and Nullification

The Tribunal observed that an interim stay order affects enforcement of the operative portion but does not wipe out the ratio decidendi unless explicitly set aside. Reference was made to Govt of AP vs. N. Rami Reddy & Others 2011 AIR-AP 226, wherein it was held that interim stay orders do not nullify the reasoning supporting the conclusion reached by the court.

Decision on Preliminary Objection

Finding no impediment to proceeding with adjudication, the Tribunal rejected the Revenue's preliminary objection. The Bench concluded that since the Roca Bathroom Products judgment remained unstayed and formed the basis of the assessee's challenge, the appeals could be heard and decided on merits.

Revenue's Submissions on Merits

Section 144C as Self-Contained Code

The departmental representative argued that Section 144C constitutes a complete statutory framework independent of Section 153. The Revenue emphasized the multiple non-obstante clauses in Section 144C, contending that Parliament intended the DRP mechanism to operate with its own distinct timelines without reference to Section 153.

Legislative Design Arguments

The Revenue submitted that Section 144C prescribes a comprehensive statutory cycle covering draft orders, filing of objections, DRP directions, and final orders, each with statutorily defined timeframes. According to the departmental representative, this multi-stage mechanism indicates Parliament's intention that different authorities operate beyond the draft assessment stage with separate time allocations.

Harmonious Construction Proposal

The Revenue proposed a harmonious interpretation whereby Section 153 governs the period up to passing the draft order, while Section 144C governs the post-draft stage including DRP proceedings and finalization. The departmental representative argued that otherwise, the mandatory statutory windows within Section 144C would become redundant or illusory.

Doctrine of Election

The Revenue emphasized that eligible assessees possess the option to activate or not activate the DRP route. According to this argument, when assessees voluntarily choose DRP proceedings and benefit from expedited dispute resolution replacing the Commissioner (Appeals) stage, they cannot subsequently contend that time consumed in the statutorily created process renders assessments void.

Absurdity Arguments

The departmental representative contended that accepting the assessee's interpretation would create multiple absurdities:

  • Assessing Officers would need to pass draft orders at least 11 months before the time-barring date in every eligible case, regardless of whether DRP is invoked
  • With decreasing overall time limits under Section 153, draft orders might need to be issued before the relevant assessment year ends
  • Meaningful verification and scrutiny would become impossible, frustrating the very purpose of assessment provisions

Distinguishing Roca Bathroom Products