ITAT Bangalore Quashes Assessment Order: Premature Demand Notice and Penalty Proceedings at Draft Order Stage Held as Jurisdictional Defect Under Section 144C

Case Reference

DCIT/ACIT Vs CSG Systems International (India) Pvt. Ltd.
(ITAT Bangalore | Assessment Year 2013-14)

Overview of the Dispute

The Income Tax Appellate Tribunal, Bangalore Bench, recently delivered a significant ruling addressing a fundamental procedural question under the Income-tax Act, 1961 — whether an Assessing Officer can lawfully issue a demand notice under Section 156 and initiate penalty proceedings under Section 271(1)(c) simultaneously with a draft assessment order issued under Section 143(3) read with Section 144C. The case involved both an appeal preferred by the Revenue and a cross objection filed by the assessee, both pertaining to Assessment Year 2013-14, arising out of an order passed by the Commissioner of Income Tax (Appeals), Bengaluru, dated 07.01.2025.

The ruling carries considerable weight for assessees involved in international transactions and transfer pricing disputes, where the Section 144C draft assessment mechanism is routinely triggered.

Preliminary Procedural Matters

Delay Condonation — Revenue's Appeal

Before diving into the substantive legal question, the Tribunal addressed procedural objections concerning delay in filing. The Revenue's appeal came with a delay of 65 days. The Department explained that the delay arose from unavoidable administrative constraints, specifically, the pressure of assessment proceedings becoming time-barred and the proximity of limitation dates for reopening proceedings. The Tribunal, upon careful consideration of these submissions, found the explanation to constitute sufficient cause within the meaning of the relevant provisions and accordingly condoned the delay, admitting the Revenue's appeal for hearing.

Delay Condonation — Assessee's Cross Objection

The assessee's cross objection, on the other hand, was filed with a delay of 20 days. The assessee placed on record an affidavit elaborating the circumstances that contributed to the delay. After reviewing the affidavit and the oral submissions advanced, the Tribunal accepted the explanation as satisfactory and condoned the delay, thereby allowing the cross objection to proceed on merits.

Prior to the hearing on merits, the assessee moved a petition for admission of additional grounds of appeal, which raised purely legal questions. The Tribunal noted that these grounds did not necessitate any fresh inquiry into facts, as the foundational facts were already forming part of the existing record. Drawing on settled judicial precedents that recognize the Tribunal's power to entertain new legal grounds at any stage of appellate proceedings — particularly those going to the root of the matter — the Tribunal admitted the additional grounds for adjudication.

Note: The admission of additional legal grounds at the appellate stage is well-recognized in Indian tax jurisprudence, especially where such grounds touch upon jurisdictional validity of the assessment proceedings.

Background: The Assessee's Business and Assessment History

CSG Systems International (India) Pvt. Ltd. was engaged in providing software development and marketing support services to its associated enterprises. For Assessment Year 2013-14, the assessee filed its return of income declaring a total income of ₹9,77,69,437.