Procedure under Section 144C(1) is mandatory. The assessing officer ought to have in the first instance forwarded a draft of the proposed order of assessment to petitioner as stipulated therein. Failure to follow the said procedure by the assessing officer was therefore a fatal error.

The returns of income filed for the assessment year 2007-08 were selected for scrutiny and pursuant to notices issued under Section 143(2) of the Income Tax Act 1961, the assessment was sought to be completed under Section 143(3). The Income Tax Department noticed that the petitioners had entered into international transactions with associated enterprises and hence the cases were transferred to the Transfer Pricing Officer under Section 92CA of the Act to determine the arm’s length price. Thereafter, the Transfer Pricing Officer issued orders under Section 92CA(3) of the Act. The 2^nd respondent, after receiving the orders from the Transfer Pricing Officer, proceeded to compute total income of the petitioners and finalised the assessment under Section 143(3) of the Act on the basis of those orders.

Petitioners’ prime contention is that though they were eligible assessees as per Section 144C(15)(b), the mandatory procedure under Section 144C was not followed and therefore the assessment orders are non est and void ab initio. According to the petitioners, the Assistant Commissioner of Income Tax, after receiving the orders from the Transfer Pricing Officer ought to have forwarded drafts of proposed orders of assessment to them. Under Section 144C(1), the assessing officer was bound to forward a draft of the proposed order of assessment to the petitioners if he proposed to make any variation prejudicial to the interest of the petitioners.

The language of the section 144C(1), is very clear and in case the assessing officer proposed to make any variation on or after the first day of October 2009, the procedure provided therein should have been followed. The learned counsel submitted that in the cases at hand reference was made after Section 144C came to force. The Section 144C(1) doesn’t make any reference to any assessment years and in view of the mandate of the provision that in case of any variation intended by the assessing officer, it was necessary to forward draft of the proposed order of assessment to the assessee from first day of October, 2009. The learned counsel referred to Circular No.9/2013 dated 19.11.2013 issued by the Central Board of Direct Taxes clarifying that Section 144C was applicable to any order which proposed to make variation in the income or loss returned by an eligible assessee on or after first October 2009 irrespective of the assessment year to which it pertained. He therefore submitted that in view of the said Circular also the procedure adopted by the respondents was obviously illegal.  

The learned counsel for the petitioners relied on the following reported judgments:-

1. Shl(India) Private Limited v. Deputy Commissioner of Income Tax and Ors [2021 SCC OnLine Bom 1312]

2. Turner International India Pvt. Ltd. v. Deputy Commissioner of Income Tax [2017 SCC OnLine Del 12952].

3. Assistant Commissioner of Income-tax and Another v. Vijay Television Private Ltd and Another [2018 SCC OnLine Mad 13752]

4. Hope Textiles Ltd and Another v. Union of India and Others [(1995 Supp (3) SCC 199 : (1994) 205 ITR 508].

The Income tax department submitted that the purpose of assessment itself will be defeated if the contentions of the petitioners are accepted and the assessment is set aside. The learned Standing Counsel further submitted that, in case the Court finds that the assessment was vitiated for not following the provisions of Section 144C then the matters may be remitted for fresh assessment.

Excerpts form the judgment:  

‘plain reading of the above provision shows that the procedure stipulated thereunder was to be followed by the assessing officer in case he proposed to make any variation in the income or loss returned by an eligible assessee on or after the first day of October 2009. The provision contains a non obstante clause. Hence, the manifest intention was to provide overriding effect to the provision. There is no reference in the provision regarding the assessment year. Thus what is to be understood on a plain reading is that the provision was intended to govern all proceedings by the assessing officers regardless of the assessment year with respect to eligible assessees, when the officer proposed to make variations to the prejudice of such assessees in the income or loss returned. First day of October 2009 was stipulated as the date from which the procedure under Section 144C(1) had to be followed. In my considered view no other inference is possible from the unmistakable language of the provision. To say in simple terms, the assessing officer had to follow the procedure under Section 144C(1) in the case of all assessments irrespective of the assessment year, from 1.10.2009.’

‘This Court has already analysed the nature of the provisions of Section 144C of the Income Tax Act in the judgments in IBS Software Services Private Limited v. Union of India [2025 SCC OnLine Ker 3753 ] and Allianz Cornhill Information Services Private Limited, Rep. by its Chief Financial Officer v. Union of India rep. by Secretary, Ministry of Finance (Department of Revenue) and Others [2023 SCC OnLine Ker. 11076]. This Court has held that the provisions of Section 144C are compulsory. Legislative intention for incorporating the provision by way of an amendment was also adverted to by this Court in the above judgments.

13. Procedure under Section 144C(1) is also therefore mandatory. The assessing officer ought to have in the first instance forwarded a draft of the proposed order of assessment to petitioner, as there was a proposed variation prejudicial to the interest of the assessee. Failure to follow the said procedure by the assessing officer was therefore a fatal error. I find support for this view in various judgments of different High Courts, cited by the learned counsel for the petitioner.’

‘Now I shall address the contention of the learned Standing Counsel that the assessing officer was bound by the explanation regarding applicability of Section 144C in Circular No.5/2010 while he undertook the impugned assessment.’

‘Though the said contention is factually correct, as found above, the explanation in the said Circular issued by the Board was contrary to the provisions of Section 144C(1). The explanation was therefore incorrect and illegal. Even the Board has no authority to violate the provisions of the Act. Breach of the mandate of the provision cannot be sought to be condoned by relying on an incorrect interpretation of the provision by the Board. The assessee cannot be put to disadvantage by accepting the contention that the mistake committed by the assessing authority was only a bonafide mistake. Hence, the said contention of the learned Standing Counsel is rejected.’

‘Moreover, it is to be noted that these writ petitions were filed even before issuance of Circular No.9/2013. During the pendency of these cases the Board realised the mistake and replaced paragraph 45.5 of Circular No.5/2010. Another contention of the learned Standing Counsel was that the Revenue cannot be rendered remediless and the matter may be remitted for fresh assessment, if the contention regarding noncompliance with the procedure under Section 144C(1) was found correct by this Court. This was opposed by the learned counsel for the petitioner who argued that the period of limitation under Section 153 of the Act being over, no fresh assessment can be done now. In view of the judgment of the Hon’ble Supreme Court in Hope Textiles Ltd and Another v. Union of India and Others [(1994) 205 ITR 508], remitting the matter for fresh assessment would be an impermissible course, as the period of limitation under the Act is already over.’

‘In the result, these writ petitions are allowed. Impugned assessment orders are quashed.’

Cases : (i) WP(C) 1694/2011 – IBS Software Services Private Limited V  Commissioner of Income Tax (ii) WP(C) 2689/2011-Suntec Business Solutions Private Ltd V Commissioner of Income Tax and Another decided by Kerala High Court vide common judgement on 15-07-2025