AO Cannot Issue Income Tax Demand Notice at Draft Assessment Stage u/s 144C: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that an Assessing Officer cannot issue a demand notice and initiate penalty proceedings at the draft assessment stage under Section 144C of the Income Tax Act.

Marriott International Inc., the assessee, is a non-resident company incorporated in the United States and a tax resident of the USA. It maintained and administered a centralized marketing fund for advertising, marketing, promotional and sales activities for hotel owners and franchisees using Marriott brands.

For AYs 2013-14 and 2014-15, the assessee filed returns declaring nil income and claiming refund of TDS. During assessment, the AO found that the assessee had received International Service Marketing fees and reimbursements from India.

The AO treated these receipts as royalty under the Income Tax Act and the India-USA DTAA. The AO issued orders described as draft assessment orders under Section 143(3) read with Section 144C(1).

The assessee’s counsel argued before the ITAT that the so-called draft assessment orders were actually final assessment orders. They pointed out that the AO had computed tax, issued demand notices under Section 156, attached computation sheets, adjusted prepaid taxes and initiated penalty proceedings under Section 271(1)(c). They argued that this violated the mandatory procedure under Section 144C, which requires only a draft order to be issued first to an eligible assessee.

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The revenue argued that the orders and demand notices used the word “draft.” They submitted that issuing computation sheets, demand notices and penalty notices did not invalidate the draft orders.

The two-member bench comprising Saktijit Dey (Vice President) and Prabhash Shankar (Accountant Member) observed that while framing a draft assessment order, there is no question of computing final tax liability, issuing a demand notice or initiating penalty proceedings. It held that the AO had passed final assessment orders in the garb of draft assessment orders.

The tribunal also relied on earlier orders in the assessee’s own case for AYs 2006-07 to 2009-10 and other judicial precedents. It held that the AO had not complied with the mandatory provisions of Section 144C(1). The tribunal quashed the assessment orders for AYs 2013-14 and 2014-15 as invalid. Since the legal ground was allowed, other grounds were kept open as academic.

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