Bombay High Court rules that time-limit for passing the final assessment order prescribed in Section

BACKGROUND

The concept of draft assessment order and final assessment order is an interesting concept. The concept of passing draft assessment orders was limited to transfer pricing matters and adjustments made in respect of non-residents. Section 144C of the Income-tax Act, 1961 (IT Act) provides that when the tax officer completes the assessment proceedings, he shall pass a draft assessment order after taking into consideration all the relevant material and giving the taxpayer an opportunity of being heard. The passed draft assessment order is then forwarded by the tax officer to the Dispute Resolution Panel (DRP) who shall in turn issue a notice to the taxpayer and provide an opportunity of being heard. The taxpayer can file objections to the draft assessment order within 30 days from the date of receipt of the notice. The DRP shall consider the objections and pass an order within 9 months from the end of the month in which the draft assessment order was forwarded to him. The taxpayer can file an appeal before the Tax Tribunal in case he is aggrieved by the order passed by the DRP. On a plain reading, it can be observed that Section 144C of the IT Act is a self-contained code of assessment and time limits are in-built at each stage of the procedure contemplated. Therefore, a question may arise whether Section 153 of the IT Act, which provides for time-limit for the completion of assessment, reassessment and recomputation will prevail over and subsume the time limits mentioned in Section 144C of the IT Act or not? In this regard, recently, the Bombay High Court1 had an occasion to analyse whether the time limits prescribed in Section 153 of the IT Act are binding on cases falling in Section 144C of the IT Act. We, at BDO in India, have summarised the ruling of the Bombay High Court and provided our comments on the impact of this decision. 

FACTS OF THE CASE

Taxpayer, a company incorporated under the relevant laws of Cayman Island and headquartered in Dubai, UAE is engaged in the business of shallow water drilling for clients engaged in the oil and gas industry. For the relevant year under consideration i.e., Fiscal Year (FY) 2013-14, the taxpayer filed its return of income declaring a loss. The loss had been arrived at by exercising its option to not be assessed on the presumptive basis as per Section 44BB(3)2 of the IT Act and computing its income in accordance with Section 44AB of the IT Act.

In the course of assessment proceedings, the tax officer issued notices under Section 142(1)3 of the IT Act along with a detailed questionnaire and passed a draft assessment order by invoking provisions of Section 1454 of the IT Act and rejecting the taxpayer’s books of account. The tax officer computed the taxpayer’s income basis Section 44BB(1) of the IT Act at 10% of its gross receipts. Aggrieved, the taxpayer filed its objection before the DRP which did not accept the taxpayer’s case and gave its direction based on which tax officer passed the final assessment order. Aggrieved, the taxpayer filed an appeal before the Mumbai Tax Tribunal which by its order dated 4 October 2019 disposing of the appeal ruled that the tax officer and the DRP erred in rejecting the books of account of the taxpayer without considering the books and other documentary evidence and remanded the matter to the tax officer for fresh adjudication. Pursuant to this, the tax officer passed a draft assessment order on 28 September 2021, against which, the taxpayer filed its objection on 27 October 2021 before the DRP. The taxpayer also filed a writ petition before the Bombay High Court challenging that the final assessment order has to be passed within the period of limitation as provided in Section 153 of the IT Act5 even if the provisions of Section 144C of the IT Act are applicable.    

HIGH COURT RULING

The question for consideration before the Bombay High Court was whether the provisions of section 153 of the IT Act are excluded from the operation of section 144C of the IT Act or not. While ruling in favour of the taxpayer, the High Court has made the following observations:

  • Section 144C(13) of the IT Act specifically excludes the provisions of Section 153 of the IT Act stating that the tax officer shall pass a final assessment order without hearing the taxpayer, in conformity with the directions issued by the DRP within 1 month from the end of the month when such directions were received by him. However, the exclusion of Section 153/153B of the IT Act is specific to and kicks in only at the stage of passing the final assessment order after directions are received from the DRP, and not at any other stage of the proceedings under Section 144C of the IT Act. Hence, the entire proceedings have to be concluded within the time limits prescribed under Section 153 of the IT Act
  • Section 153(3) of the IT Act, as applicable to the case at hand provides a non-obstante clause stating that an order of fresh assessment may be made at any time before the expiry of 12 months from the end of the FY in which the order under section 254 of the IT Act is received by the First-Appellate Authority/DRP. In this case, the order has been passed by the Tax Tribunal on 4 October 2019.
  • Accordingly, the chronology of dates and events is as under:  
    • Date of Tax Tribunal order- 4 October 2019;
    • Due date as per section 153(3) of the IT Act- 31 March 2021
    • In view of the extension granted by the notification under the Relaxation Act, the extended due date- 30 September 2021;
    • Date of passing draft assessment order- 28 September 2021;
    • No final order was passed until the filing of the petition.
  • Section 144C of the IT Act is a self-contained code of assessment and time limits are inbuilt at each stage of the procedure contemplated. The purpose is to fast-track a special type of assessment. However, this does not lead to the conclusion that the overall time limits prescribed have been given a go-by in the process.
  • Wherever the legislature intended extra time to be provided, it is expressly provided in Section 153 of the IT Act. Moreover, Explanation-1 below Section 153 of the IT Act provides for the periods which have to be excluded while computing the 12 months period mentioned in Section 153(3) of the IT Act wherein there is no mention anywhere about Section 144C of the IT Act.
  • The statute has set time limits every step of the way. Hence, there is no reason to take a stand that proceedings on remand to the tax officer may be done at leisure sans the imposition of any time limit at all.
  • Having considered the language of Section 144C and Section 153 of the IT Act, it cannot be accepted that the provisions of Section 153 of the IT Act are excluded from the operation of Section 144C of the IT Act.
  • What is contemplated under Section 144C(13) of the IT Act is the passing of the final assessment order. 12 months as provided under section 153(3) of the IT Act would start from the end of the FY in which the First-Appellate Authority received the order under section 254 of the IT Act. The tax officer should have taken steps to pass the final order under section 144C(13) of the IT Act within 12 months period.
  • The exclusion of applicability of Section 153 of the IT Act, in so far as a non-obstante clause in Section 144C(13) of the IT Act is concerned, is for the limited purpose to ensure that dehors larger time available, an order based on directions of the DRP has to be passed within 30 days from the end of the receipt of such directions. The section and sub-section have to be read as a whole with connected provisions to decipher the meaning and intentions.
  • Further, taking support from the Madras High Court ruling in the case of Roca Bathroom6, since no final assessment order can be passed in the present case as the same is time-barred, the return of income as filed by the taxpayer has to be accepted. However, this does not preclude the tax authorities from taking any other steps in accordance with the law.         
BDO IN INDIA COMMENTS

This is a welcome ruling by the Bombay High Court as it fortifies the view that Section 153 and Section 144C of the IT Act are mutually inclusive. Therefore, irrespective of the fact where the matter is remanded back to the tax officer or Transfer Pricing officer or DRP, the period of limitation prescribed under section 153(2) and 153(3) of the IT Act is applicable. Hence, the tax officer is required to pass the final assessment order as per the timelines prescribed under section 153 of the IT Act.  

 

1 Shelf Drilling Ron Tappmeyer Ltd- Writ petition No. 2340 of 2021, Shelf Drilling J.T. Angel Ltd- Writ petition No. 2661 of 2021, Shelf Drilling Trident XII Ltd- Writ petition No. 3059 of 2021, Shelf Drilling Offshore Resources Ltd II- Writ petition No. 3060 of 2021 (Bombay High Court)

2 Section 44BB of the IT Act contains special provisions for computing the taxable income of a non-resident taxpayer engaged in the business connected to the extraction or production of mineral oils. Section 44BB(3) of the IT Act provides that a taxpayer may claim lower profits and gains than 10% of his gross receipts if he keeps and maintain books of account and other documents as per section 44AA of the IT Act and also get the books audited under section 44AB of the Act.

3 Notice under section 142(1) of the IT Act is to call for further details and documents from the taxpayer after filing the return of income.

4 Section 145 of the IT Act pertains to a method of accounting by the taxpayer. In case the tax officer is not satisfied with the correctness or the completeness of the accounts of the taxpayer or where no method of accounting has been regularly employed by the taxpayer, the tax officer may make the best judgement assessment in the manner provided in section 144 of the IT Act.

5 Which was 30 September 2021 in this case basis the provisions of section 153(3) of the Act read with the provisions of Taxation and other laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (Relaxation Act) and Notification issued thereunder.

6 Roca Bathroom Products (P) Ltd. vs. Dispute Resolution Panel-2, Bangalore 2, 127 taxmann.com 332 (Madras High Court)