AO not competent to pass Draft Assessment Order u/s 144C(1) of Income Tax Act when TPO Makes no Variation: Bombay HC [Read Order]
When there is no variation, there is no question of any prejudice being caused to the Assessee which would then entail him to file any objections to the Draft Order as contemplated under sub-section 2 of Section 144C.
AO - Draft Assessment Order - Income Tax Act - TPO - Bombay HC - Taxscan
AO - Draft Assessment Order - Income Tax Act - TPO - Bombay HC - Taxscan
The Bombay High Court has held that a draft assessment order is not permissible under section 144C(1) of the Income Tax Act when the TPO (transfer pricing officer) makes no variation.
Classic Legends Pvt Ltd, the petitioner sought to quash and set aside the impugned Draft Assessment Order dated 8th March 2025 passed under Section 144C and the Final Assessment Order dated 7th April 2025 passed under Section 143 (3) read with Section 144C and Section 144B of the Income Tax Act, 1961 (I. T. Act). Consequently, the Demand Notice issued under Section 156 as well as the Show Cause Notice issued for imposing penalty under Section 270A and Section 271AAC are also impugned.
The short ground on which all these orders and notices are impugned is that the Assessing Officer has wrongly invoked the provisions of Section 144C which relate to a reference to the Dispute Resolution Panel. According to the Petitioner, in the facts of the present case, initially the Assessing Officer had made a reference to the Transfer Pricing Officer (“TPO”) under Section 92CA of the I. T. Act.
Pursuant to this reference, the TPO issued notices to the Petitioner and thereafter passed an order under Section 92CA(3) accepting that the international transactions entered into by the Petitioner with its Associated Enterprises were at an Arms Length Price. In other words, the TPO made no variation. According to the Petitioner, by virtue of the definition of the words “eligible assessee” appearing in Section 144C(15), the Petitioner could never fall within the aforesaid definition because the TPO never made any variation.
Since no variation was made, there was no occasion for the Assessing Officer to pass any Draft Assessment Order and thereafter serve it upon the Petitioner. In other words, the Assessing Officer ought to have passed his Assessment Order under Section 143 (3) without invoking the provisions of Section 144C of the I. T. Act.
On the other hand, in the affidavit in reply dated 14th August 2025 filed by the Revenue, it is contention of the Revenue that it is totally incorrect to submit that the Draft Assessment Order as well as the Final Assessment Order passed under the provisions of Section 144C read with Section 143 (3) are without jurisdiction. Though the Revenue admits that the TPO did not propose any variation, it contends that this would not mean that the Assessing Officer was powerless to issue a Draft Assessment Order under Section 144C.
According to the Revenue, the Petitioner puts a very restrictive meaning to the words “eligible assessee” when infact a broader meaning has to be given which would include all Assessees where a reference to the TPO is made by the Assessing Officer proposing a variation to the income declared by the Assessee. As the meaning of income includes loss, a similar meaning of “variation” would also include “no variation” by the TPO, is the submission of the Revenue.
The short question that falls for consideration in the present Petition is really whether the Petitioner is an “eligible assessee”. Section 144C provides for a detailed procedure to be followed in cases where any variation in income or loss returned, which is prejudicial to the interest of an assessee, occurs on account of a reference made under Section 92CA of the I. T. Act.
The Petitioner is not a non-resident or a foreign company as contemplated under Section 144C (15) (b)(ii). The question is whether the Petitioner would fall within the definition of “eligible assessee” as contemplated under Section 144C (15) (b) (i). On a plain reading of the said provision, the Petitioner can be stated to be an “eligible assessee” only if there is a case of variation referred to in the said sub-section 1 and which arises as a consequence of the order passed by the TPO under sub-section 3 of Section 92CA.
It is an admitted position that there was no variation in the income of the Petitioner by virtue of the order of the TPO. That being the position, the Petitioner cannot be stated to be an “eligible assessee” as defined in clause (b) of sub-section 15 of Section 144C of the I. T. Act. Once this is the case, the entire procedure for issuance of a draft order calling for the Petitioner’s objections thereon and taking further steps as laid down under Section 144C would, therefore, not apply.
Section 144C(1) itself which categorically states that the Assessing Officer would have to forward a draft assessment order to the “eligible assesee”, if he proposes to make, on or after 1st October 2009, any variation which is prejudicial to the interest of such Assessee. When there is no variation, there is no question of any prejudice being caused to the Assessee which would then entail him to file any objections to the Draft Order as contemplated under sub-section 2 of Section 144C.
Justices B.P. Colabawalla and Amit S. Jamsandekar observed that the Petitioner in the present case, not being an “eligible assessee” in terms of Section 144C15(b) of the I. T. Act, the Assessing Officer was not competent to pass the Draft Assessment Order under Section 144C(1) of the I. T. Act. Consequently, there was no occasion for him to thereafter pass a Final Assessment Order under Section 143 (3) read with Section 144C (3) read with Section 144B of the I. T. Act.
Accordingly, the Draft Assessment Order dated 8th March 2025; the Final Assessment Order dated 7th April 2025 and the Demand Notice dated 7th April 2025 as well as the Show Cause Notices dated 7th April 2025 seeking to impose penalty, are all hereby quashed and set aside.
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