Mandatory Compliance with Section 144C of the Income Tax Act: DCIT v. Dina Mahabir Re-Rollers Pvt Ltd Establishes Strict Procedural Requirements for Final Assessment Orders

Introduction

The case of DCIT, Circle-1, Patna v. Dina Mahabir Re-Rollers Pvt Ltd adjudicated by the Income Tax Appellate Tribunal (ITAT) Patna Bench on January 5, 2022, addresses critical procedural obligations under the Income Tax Act, 1961. This case consolidates two related appeals concerning the assessment year 2015-16, where the taxpayer was engaged in the manufacturing of TMT Bars. The primary issue revolves around the Assessing Officer's (AO) failure to comply with the mandatory provisions of section 144C of the Act before passing the final assessment order under section 143(3).

Summary of the Judgment

The ITAT Patna Bench heard both ITA No.115/Pat/2020 and ITA No.31/Pat/2021 jointly due to the common issues involved. The AO had made a significant addition of ₹5,30,80,102/- to the assessee's income based on a Transfer Pricing Officer’s (TPO) order under section 92CA(3). However, the AO did not issue a draft assessment order as mandated by section 144C(1) before passing the final assessment order under section 143(3). The CIT (A) Patna-1 upheld the AO’s omission, deeming the final assessment order null and void. The assessee appealed, but the ITAT upheld the CIT (A)'s position, dismissing the revenue's appeal and allowing the assessee's appeal.

Analysis

Precedents Cited

The judgment extensively references key judicial precedents that reinforce the necessity of adhering to procedural mandates under section 144C:

M/s. Vijay Television Vs. DRP (2014) 225 Taxman 35 (Mad): Held that failure to issue a draft assessment order under section 144C renders the final assessment order null and void.
M/s. Zuari Cements Ltd. Vs. ACIT: The Madras High Court and subsequently the Supreme Court upheld that non-compliance with section 144C procedures invalidates the assessment order.
Supreme Court in ACIT Vs. Zuari Cements Ltd.: Affirmed the High Courts' stance, reinforcing that procedural lapses under section 144C cannot be rectified post-facto.

Legal Reasoning

The Tribunal's legal reasoning centers on the non-compliance with section 144C's mandatory procedures. Under section 144C(1), when an AO proposes a variation prejudicial to the assessee's income or loss, a draft assessment order must first be issued. The assessee is then given 30 days to accept or object via the Dispute Resolution Panel (DRP). Only after this process can the AO finalize the assessment order under section 143(3).

In this case, the AO bypassed the issuance of the draft order, directly passing the final assessment order with the addition based on the TPO’s order. The Tribunal highlighted that such an omission is not a curable defect and violates the provisions of section 144C, making the assessment order void ab initio.

Moreover, the Tribunal emphasized that the Principal Commissioner (Pr. CIT) cannot revise an assessment order that has already been deemed void by the CIT (A), further nullifying any subsequent attempts to alter the void order.

Impact

This judgment underscores the indispensability of strictly following procedural mandates under the Income Tax Act. It sets a clear precedent that any deviation, particularly the omission of mandatory steps like issuing a draft assessment order under section 144C, renders the final assessment invalid. Consequently, it compels tax authorities to adhere meticulously to procedural norms, thereby safeguarding taxpayers' rights and ensuring procedural fairness.

Future cases involving similar procedural oversights will likely reference this judgment, reinforcing the doctrine that procedural lapses cannot be overlooked or rectified after the fact.

Complex Concepts Simplified

Section 144C of the Income Tax Act: This section mandates that when the tax authority proposes any change in the declared income of a taxpayer that adversely affects them, a draft assessment must be sent to the taxpayer. The taxpayer then has the opportunity to accept the change or object to it within 30 days.

Draft Assessment Order: A preliminary version of the final tax assessment, outlining the proposed changes to the taxpayer's income, which allows the taxpayer to respond before the final assessment is made.

Dispute Resolution Panel (DRP): A body that addresses disputes between taxpayers and the tax authorities, providing directions for resolving objections raised by the taxpayer.

Assessment Year (AY): The year following the financial year in which income is assessed and taxed.

Conclusion

The ITAT Patna Bench's decision in DCIT v. Dina Mahabir Re-Rollers Pvt Ltd serves as a definitive stance on the necessity of adhering to procedural requirements under section 144C of the Income Tax Act. By invalidating the AO's final assessment order for non-compliance, the Tribunal reinforces the rule of law and emphasizes procedural fairness in tax assessments. This judgment not only protects taxpayers from arbitrary assessments but also mandates tax authorities to meticulously follow prescribed legal procedures, thereby enhancing the integrity of the tax administration system.