Karnataka High Court Quashes Final Assessment Order Passed Prior to DRP Directions Under Section 144C

The intersection of procedural compliance and substantive statutory rights often creates complex legal disputes in the realm of direct taxation. A recurring issue under the Income-tax Act, 1961 pertains to the Dispute Resolution Panel (DRP) mechanism, specifically regarding the obligations of an assessee upon receiving a draft assessment order. The High Court of Karnataka recently delivered a crucial judgment in the case of Open Silicon Research Private Limited Vs Assessment Unit, addressing the legal consequences of an assessee failing to intimate the Assessing Officer (AO) about objections filed before the DRP.

Adjudicating Writ Petition No. 14541 of 2023 (T-IT) on 19/07/2023, the Karnataka High Court provided profound clarity on the mandatory nature of the procedures enshrined under Section 144C of the Income-tax Act, 1961. The judicial directive underscored that while the assessee is obligated to inform the AO about the filing of objections, a procedural lapse in doing so does not empower the AO to bypass the DRP's jurisdiction and unilaterally finalize the assessment.

Background of the Dispute

The legal controversy in Open Silicon Research Private Limited Vs Assessment Unit originated from a sequence of procedural missteps and overlapping timelines involving the assessee, the Dispute Resolution Panel, and the National Faceless Assessment Centre.

The petitioner, an eligible assessee as defined under Section 144C(15)(b)(i) of the Income-tax Act, 1961, was subjected to scrutiny assessment. In compliance with the statutory framework governing eligible assessees, the Assessing Officer issued a draft assessment order proposing certain variations to the returned income.

Aggrieved by the proposed variations, the assessee exercised its statutory right to challenge the draft order. Within the stipulated timeframe, the assessee successfully filed detailed objections before the Dispute Resolution Panel. The successful submission was evidenced by an official acknowledgment. However, a critical procedural omission occurred at this juncture: the assessee inadvertently failed to submit a copy of these objections to the Assessing Officer, which is a specific requirement mandated by Section 144C(2)(b)(ii).

The Assessing Officer's Action

Operating under the assumption that the assessee had accepted the draft order—since no copy of the objections was received on record—the Assessing Officer proceeded to finalize the proceedings. Consequently, a final assessment order was passed on 26.10.2022. Along with this order, the corresponding computation sheet and a notice of demand were issued to the assessee.

The DRP's Subsequent Directions

Unaware that a final assessment order had already been crystallized, the Dispute Resolution Panel continued its statutory evaluation of the assessee's objections. Months after the final assessment order was passed, the DRP issued its binding directions to the Assessing Officer on 15.05.2023.