Introduction

The Hon’ble Bombay High Court in its recent judgment[1] has held that the timelines for passing an assessment order specified in Section 153 of the Income Tax Act, 1961 (‘Act’) are not to be extended in cases where the assessee takes the Dispute Resolution Panel (‘DRP’) route and the final assessment order under Section 144C(13) has to be passed within the overall timeline as prescribed under Section 153 of the Act. Considering that the general practice followed by tax officers is to pass only the draft orders within the timelines provided in Section 153, the authors have highlighted the impact of the said judgment on the pending appeals and the possible arguments that may be advanced by revenue authorities in appeal before the Hon’ble Supreme Court.

Snapshot of the relevant provisions

Normally, the assessing officer (‘AO’) passes final assessment order upon completion of assessment. The period of limitation for passing the final assessment order is provided in Section 153 of the Act.

However, in case of certain eligible assessee[2], the AO is required to pass a Draft Assessment Order (‘Draft Order’). Thereafter the eligible assessee has the option of seeking review of Draft Order from Dispute Resolution Panel (‘DRP’).

Section 144C deals with provisions relating to DRP. It is a self-contained code which provides for mechanism of the DRP proceedings and the timelines available at various stages of such proceedings. Section 144C(13) of the Act provides that notwithstanding anything to the contrary in Section 153, the AO will pass the final assessment order within 1 month from the end of the month in which direction is received from the DRP. 

Further, it should be noted that the overall timeline for completing assessment and passing assessment orders as provided under Section 153 of the Act states as under:

1. Any order of assessment under Section 143 or 144 of the Act shall be passed within 12 months from the end of the relevant assessment year (‘AY’).[3]
2. Further, in case where a reference is made to the TPO, the time limit for passing the assessment order is extended by 12 months. Accordingly, the order has to be passed within 24 months from the end of the relevant AY[4].
3. In case where the Income Tax Appellate Tribunal (‘ITAT’) has remanded the matter back to the AO for fresh consideration, the same has to be passed within 12 months from the end of the financial year in which the order of the ITAT is received by the specified authority under the Act[5].

Issue for consideration

Based on the timelines provided for passing an assessment order under Section 144C and Section 153 of the Act, the issue which arises is whether the non-obstante clause in Section 144C will have the effect of extending the overall timelines for passing the final assessment order?

If the answer to this is found to be affirmative, the AO can pass only draft orders within the timelines provided in Section 153 and the final order can thereafter be passed after completion of DRP proceedings under Section 144C. 

Interpretation by Tribunal and Courts

View in favour of revenue

The ITAT had in various cases has held that the non-obstante clause in Section 144C will effectively alter the timelines provided in Section 153 of the Act.

The Delhi[6] and Bangalore[7] Benches of ITAT have held that the non-obstante clause in Section 144C of the Act excludes applicability of Section 153 of the Act and as long as the final assessment orders are passed within the timelines as prescribed under Section 144C, compliance of Section 153 of the Act will not be required.

In Religare Capital Markets Limited v. DCIT, ITA No. 1881 (Delhi) of 2014 the assessee challenged the assessment order under Section 144C(13) of the Act on account of it being barred as per the timelines prescribed under Section 153 of the Act. The Hon’ble ITAT, Delhi while favoring the revenue held that Section 144C of the Act provides a special scheme of assessment for an assessee engaged in international transaction involving transfer pricing adjustments. The ITAT held that Section 144C of the Act is a special code in itself and therefore the provisions contained therein will only determine the timelines for passing of the final assessment order under Section 144C(13) of the Act and not as provided under Section 153 of the Act.

View in favour of Assessee

Pursuant to the ITAT order, the aforementioned issue has been answered by some of the Hon’ble High Courts in favour of the assessee in the following cases:

1. In the case of Nokia India (P.) Ltd. DCIT [2018] 407 ITR 20 (Delhi), the ITAT had remanded the matter to the AO for fresh consideration and subsequently the AO made reference to the TPO. The assessee filed a writ petition before the Hon’ble Delhi High Court challenging the proceedings on the account of it being time barred. The Hon’ble High Court held that the time limit for passing assessment order pursuant to remand back by the ITAT was governed by Section 153(2A)[8] and that the assessment proceedings had to necessarily be completed by the AO within the time limit specified in erstwhile Section 153(2A) of the Act.

2. In case of Roca Bathroom Products (P.) Ltd. DRP, [2021] 432 ITR 192 (Madras), the Hon’ble High Court of Madras - Single Judge Bench while answering the question whether the proceedings before the DRP are circumscribed by the limits of time imposed by Section 153 of the Act, held that the overall time limits have not been eschewed in the process and the argument that DRP proceedings are unfettered by limitation would run counter to the object of setting up of the DRP.

Further, when the aforesaid judgement was appealed before the division bench of the Hon’ble Madras High Court[9], upheld the view of the single bench.

3. Similarly, the Hon’ble Bombay High Court, in Shelf Drilling Ron Tappmeyer Ltd. ACIT [2023] 153 taxmann.com 162 (Bombay), held that Section 153 of the Act is not excluded by the operation of Section 144C of the Act and the period of limitation under the Section 153 of the Act will be applicable in remand proceedings involving Section 144C. The Hon’ble High Court also rejected the revenue’s plea that the ruling of Madras High Court (supra) is per incuriam. Further, it was held that specific timelines have been drawn within the framework of Section 144C of the Act to ensure prompt and expeditious finalization of the assessment but it can’t mean that overall time limits provided under Section 153 of the Act have been given a go by in the process. The Hon’ble court further stated that the process to pass assessment order under Section 144C(13) of the Act has to be taken immediately and the object is to conclude the proceedings as expeditiously as possible and thus the AO will have no authority to pass the order after the due date as prescribed under Section 153 of the Act. With regard to the non-obstante clause, the Court stated that Section 144C(13) is for limited purpose to ensure that dehors over time limit, final order based on the directions of the DRP has to be passed within 30 days from the end of the receipt of such directions.

It may be noted here that the Income Tax Department (‘ITD’) has appealed against the judgement of Roca Bathroom Products Pvt. Ltd. (Supra) before the Hon’ble Supreme Court vide SLP No. 34673/2022.

Generally, as a matter of convention, the tax officers have been passing only the draft order within the time limits provided in Section 153 of the Act under the assumption that the proceedings thereafter can be completed within the timelines provided in Section 144C of the Act. The practice followed by tax officers was also supported by the order of ITAT. However, the subsequent High Court judgments have the effect of unsettling a catena of assessment orders which were passed outside the limits prescribed in Section 153 of the IT Act.

Considering the magnitude effect of these judgments on the pending appeals, the PCCIT (International Taxation) vide letter dated 11 May 2023 has requested all the PCCITs to apprise the CIT(DRs) of the SLP preferred by the Department against the judgement of Hon’ble High Court of Madras in Roca Bathroom (supra) so as to enable them to request stay before the concerned ITAT benches till disposal of the same by Supreme Court.

Further, pursuant to decision of Bombay High Court in Shelf Drilling (supra) the Department is in the process of seeking stay on operation of the said order from the Hon’ble Supreme Court. Till the time the stay petition is decided, the CCIT(West Zone) has requested the Vice President, ITAT Mumbai vide letter dated 8 August 2023 to grant stay to the department representatives in such matters.

Our comments

The recent High Court judgments may be used by the taxpayers to challenge the assessment order as barred by limitation. The taxpayers may cite these judgments in the pending appeals to claim relief from the appellate forums. However, considering the department appeals against the said judgements before the Supreme Court, the final word is yet to be spoken. 

In the meanwhile, the tax authorities may act out of abundant caution and pass the final orders within the overall period provided in Section 153 of the Act. In such a case, the taxpayers are likely to see a lot of alterations in the overall assessment process. This can be explained with the help of an example:

Time Period for passing assessment order for AY 2022-23 (assuming matter has been referred to TPO)

Now, in case the TPO passes order on the last day i.e., 30 January 2025 then the final assessment order will be required to be passed by 31 March 2025 (within 2 months).  Meaning thereby that the passing of Draft Order, filing of objections of the Assessee, issuing of directions by DRP and passing of final assessment order by the AO will be required to be done within 2 months. This will effectively render the timelines for issuance of direction of DRP provided u/s 144C(12) and timelines for issuance of final order pursuant to the direction provided under Section 144C(13) otiose. Thus, owing to the aforementioned judgements of the High Courts, if final assessment order has to be passed within the overall timelines prescribed in Section 153, the time available with each of the authorities i.e. the TPO, AO and DRP for passing their respective orders/directions would be considerably reduced.

Similarly, in case of foreign companies, where reference to TPO has not been made, the time available with AO and DRP would be shortened. In light of the above, the taxpayers must, as soon as the assessment proceedings are initiated, keep the relevant information ready for submission before the income tax authorities so that they don’t have to face any negative consequence due to the paucity of time available with each authority.

[The authors are Associate, Senior Associate and Principal Associate, respectively, in Direct Tax Team at Lakshmikumaran and Sridharan Attorneys, New Delhi]

1. [1] Shelf Drilling Ron Tappmeyer Limited v. Assistant Commissioner of Income Tax & Others, [2023] 153 taxmann.com 162 (Bombay).
2. [2] Defined in Section 144C(15)(b) of the Act and means any person in respect of whom transfer pricing adjustment has been made or a non-resident.
3. [3] Section 153(1) of the Act as amended by Finance Act 2022.
4. [4] Section 153(4) of the Act.
5. [5] Section 153(3) of the Act.
6. [6] Honda Trading Corp Japan v. DCIT, ITA No. 1132 (Delhi) of 2015 & Religare Capital Markets Ltd. v. DCIT, ITA No. 1881 (Delhi) of 2014
7. [7] Volvo India (P.) Ltd. v. ACIT (TP), Appeal No. 1537 (Bang) of 2012
8. [8] Currently Section 153(3) of the Act.
9. [9] Commissioner of Income-tax v. Roca Bathroom Products (P.) Ltd, [2022] 445 ITR 537 (Madras)