Failure to Issue Mandatory Draft Assessment Order to Non-Resident u/s 144C(1) Invalidates Search Assessment: ITAT Quashes Order [Read Order]

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) quashed search assessment and ruled that the Assessing Officer (AO) failed to mandatorily issue draft assessment order to non-resident as stated under Section 144C of the Income Tax Act.

Damandeep Kaur (assessee) originated from a search and seizure action under Section 132(1) conducted on October 3, 2019, at the Chandigarh Group of Colleges. The assessee, a trustee in various educational societies, was covered under this action, leading to the issuance of notices under Section 153A of the Income Tax Act.

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The assessment proceedings resulted in additions on account of alleged unexplained household expenses, salary discrepancies, and credits in foreign bank accounts. The AO's own records for several years (AY 2018-19 and 2019-20) explicitly categorized her status as "Non-Resident”.

The AO proceeded to pass final assessment orders under Section 153A of the Income Tax Act. Aggrieved by the AO’ order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the AO’s addition.

Aggrieved by the additions confirmed by the CIT(A), the assessee appealed to the ITAT. The assessee argued that as a non-resident, she was an "eligible assessee" under Section 144C(15)(b) of the Income Tax Act.

The assessee contended that since the AO proposed variations prejudicial to her interest, it was mandatory to first issue a draft assessment order under Section 144C(1). It was further argued that Section 144C contains a non-obstante clause that overrides other provisions, including search assessments under Section 153A of the Income Tax Act.

The bench comprising Laliet Kumar (Judicial Member) and Krinwant Sahay (Accountant Member) noted that the Foreign Regional Registration Office (FRRO) and the Black Money Investigation Wing had independently verified and accepted her "Non-Resident" status for the relevant years.

The tribunal observed that once an assessee falls within the definition of an "eligible assessee," the procedure under Section 144C was not merely directory but mandatory. The bench clarified that bypassing the Dispute Resolution Panel (DRP) mechanism by failing to issue a draft order was not a mere irregularity but an incurable illegality that strikes at the power of the AO to pass the order.

The tribunal held that the final assessment orders were vitiated by a lack of jurisdiction. The tribunal quashed the assessments for AY 2016-17, 2018-19, 2019-20, and 2020-21. The appeal of the assessee was allowed

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