In absence of a valid final assessment order passed within statutory time frame, draft assessment order cannot give rise to any enforceable demand
In a recent judgment, Calcutta High Court has held that in the absence of a valid final assessment order passed within the statutory time frame of section 144C(13), the draft assessment order cannot give rise to any enforceable demand
ABCAUS Case Law Citation:
5082 (2026) (03) abcaus.in ITAT
In The instant case, the assessee had filed a Writ Petition challenging a notice of demand issued under Section 156 of the Income Tax Act, 1961 (the Act) along with a draft assessment order under Section 144C(1). The grievance of the petitioner was that although a draft order was issued and objections were duly filed before the Dispute Resolution Panel (DRP), final assessment order was not passed within the statutory time limit prescribed under Section 144C(13). It was contended that no enforceable demand existed in law and the attempt of the Income Tax Department to recover the alleged tax liability was wholly without jurisdiction.
During the relevant financial year, the petitioner had entered into certain international transactions with its associated enterprises. Consequently, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for determination of the arm’s length price in relation to such transactions.
The Transfer Pricing Officer proposed an adjustment to the income of the petitioner. Since the proposed adjustment resulted in a variation prejudicial to the assessee, the special procedure contained in Section 144C became applicable.
In terms of Section 144C(1), the National e-Assessment Centre forwarded to the petitioner a draft of the proposed assessment order incorporating the variation determined by the TPO. Along with the draft order, a notice of demand under Section 156 and a notice initiating penalty proceedings under Section 274 read with Section 270A were also issued.
Aggrieved by the proposed variation, the petitioner filed objections before the Dispute Resolution Panel within the time prescribed under Section 144C(2). The Assessing Officer as well as the National e-Assessment Centre were duly informed about the filing of such objections.
The Dispute Resolution Panel thereafter issued its directions under Section 144C(5).. Pursuant thereto, the TPO passed an order giving effect to the directions of the Dispute Resolution Panel and reducing the transfer pricing adjustment. However, despite the issuance of such directions, the Assessing Officer did not pass any final assessment order completing the assessment in conformity with the directions of the DRP.
Since, a reference had been made to the TPO under Section 92CA, the limitation period for completing assessment stood extended by twelve months which was further extended by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.
Section 144C(13) mandates that upon receipt of the directions of the DRP under Section 144C(5), the Assessing Officer shall complete the assessment in conformity with such directions within one month from the end of the month in which the directions are received, notwithstanding anything contained in Section 153 or Section 153B.
Before the Hon’ble High Court, the main contention advanced on behalf of the petitioner was that in the absence of a final assessment order passed within the period prescribed under Section 144C(13), the jurisdiction of the Assessing Officer to complete the assessment stood extinguished. It was submitted that the draft assessment order cannot by itself give rise to any enforceable tax liability and that the notice of demand issued along with such draft order was a nullity in law.
On the other hand, the Department sought to explain the failure to complete the assessment on the ground that certain technical glitches occurred in the ITBA system. It was stated that because of this technical error the assessment proceedings were shown as closed in the system and consequently the final order could not be passed.
The Hon’ble High Court rejected the above explanation and observed that the statutory provisions governing limitation for completion of assessment are clear and unambiguous. Section 144C(13) expressly requires the Assessing Officer to complete the assessment within one month from the end of the month in which the directions of the Dispute Resolution Panel are received. The language employed in the statute is mandatory and leaves no scope for extension of time on administrative or technical grounds.
The Hon’ble High Court held that in the absence of a valid final assessment order passed within the statutory time frame, the draft assessment order cannot give rise to any enforceable demand. A notice of demand issued along with the draft order was without legal basis since the liability to pay tax crystallizes only upon completion of the assessment.
Consequently, the Hon’ble High Court quashed and set aside the impugned notice of demand u/s 156 and the penalty notice issued under Section 274 read with Section 270A of the Act.
