Delhi High Court: Final Assessment Order Invalid Without Draft Assessment Order
Delhi High Court: Final Assessment Order Invalid Without Draft Assessment Order
The Delhi High Court has ruled that failing to pass a draft assessment order, as required by law, invalidates the final assessment order.
Chief Justice Satish Chandra Sharma and Justice Sanjeev Narula observed that failing to pass a draft assessment order is not a mere procedural oversight, but a substantive lapse that renders the subsequent order void of jurisdiction.
The petitioner/assessee company, incorporated under Singaporean law, is primarily engaged in the business of shipping operations. It is a tax resident of Singapore, and therefore, it filed its income tax return in India, declaring its total income as nil.
The petitioner's income tax return was selected for scrutiny under Section 143(2) of the Income Tax Act, and the petitioner was issued a notice requiring them to furnish certain details, such as the nature of their business activities, a tax residency certificate, copies of agreements with Indian customers, financial statements, and details of permanent establishments in India.
The petitioner responded to the queries, asserting that they do not have a permanent establishment in India. They also submitted a tax residency certificate.
The petitioner argued that its income was covered by Article 8 of the India-Singapore Double Taxation Avoidance Agreement (DTAA), and was therefore taxable only in Singapore. The petitioner filed its return in India declaring nil income and informed the department of a time charter agreement executed with Hindustan Petroleum Corporation Limited for the transportation of LPG.
The department issued an assessment order under Section 143(3) granting the petitioner the benefit of Article 8 of the DTAA.
Exercising their power under Section 263, the CIT reviewed the material furnished by the petitioner and held that the assessment order passed by the respondent was flawed and detrimental to the department's interests. The CIT remanded the matter to the respondent with instructions to revise the assessment order and tax the petitioner's income in accordance with the provisions of the Income Tax Act.
The CIT overturned the earlier assessment order, which had denied the petitioner the benefits of the DTAA and taxed their income under the Act.
Section 144C(1) of the Income Tax Act requires the Assessing Officer (AO) to first issue a draft assessment order to an "eligible assessee," as defined in Section 144C(15)(b). However, in this case, the respondent has bypassed this statutory assessment order under Section 143(3) and granted the petitioner the benefit of Article 8 of the Double Taxation Avoidance Agreement (DTAA).
The Court observed that the petitioner, a foreign entity incorporated under Singaporean law, qualifies as an "eligible assessee." The respondent should have issued a draft assessment order before passing a prejudicial order, as required by Section 144C(1).
The Court ruled that the respondent's failure to comply with the mandatory requirement of Section 144C(1) to issue a draft assessment order would invalidate the final assessment order, the resulting demand notice, and any penalty proceedings.
