Bombay High Court Quashes Assessment Proceedings | Draft Order Under Section 144C(1) IT Act Invalid When TPO Makes No Variation
Sanchayita Lahkar
The High Court of Bombay, Division Bench of Justice B. P. Colabawalla and Justice Amit S. Jamsandekar set aside a draft assessment order, final order, demand notice, and penalty proceedings issued against Classic Legends Pvt. Ltd. under the Income Tax Act, 1961. The Court held that under Section 144C(1), a draft order can only be issued when the Assessing Officer proposes variations adverse to the assessee, and that no such variation existed as the Transfer Pricing Officer had accepted the international transactions. Therefore it was concluded that the impugned assessment and penalty notices lacked jurisdiction and were invalid.
The writ petition was filed by Classic Legends Pvt. Ltd. seeking to quash the Draft Assessment Order dated 8 March 2025 and the Final Assessment Order dated 7 April 2025 passed under Section 143(3) read with Sections 144C and 144B of the Income Tax Act, 1961. The petitioner also challenged the Demand Notice under Section 156 and Show Cause Notices for penalty under Sections 270A and 271AAC.
The central issue revolved around whether the Assessing Officer was correct in invoking Section 144C. The petitioner argued that the Transfer Pricing Officer (TPO), after examining the international transactions with associated enterprises under Section 92CA, had passed an order under Section 92CA(3) accepting the transactions at arm’s length price. Since no variation was made, the petitioner asserted it could not be treated as an “eligible assessee” under Section 144C(15).
The Revenue, in its reply filed on 14 August 2025, contended that the absence of variation did not render the Assessing Officer powerless to issue a Draft Assessment Order. According to the Revenue, the petitioner’s interpretation was too restrictive, and a broader meaning of “eligible assessee” should apply to all cases where a reference was made to the TPO. The Revenue argued that “variation” should include “no variation,” as income includes both profit and loss.
The Bench considered the rival submissions and examined the relevant statutory provisions. Section 144C(1) stipulates that the Assessing Officer must forward a draft order to the “eligible assessee” if he proposes any variation prejudicial to the assessee. Section 144C(15)(b) defines “eligible assessee” as either a person in whose case variation arises as a consequence of a TPO order under Section 92CA(3) or any foreign company. The Court noted that the petitioner was neither a non-resident nor a foreign company.
The petitioner relied on the absence of variation in the TPO’s order to argue that it fell outside the statutory definition. The Revenue maintained that the reference itself triggered the eligibility.
The Court examined Section 144C in detail. It recorded: “The short question that falls for consideration in the present Petition is really whether the Petitioner is an ‘eligible assessee’.” The Bench stated that the provision applies where a variation in income or loss, prejudicial to the assessee, occurs on account of a TPO reference.
It stated: “On a plain reading of the said provision, the Petitioner can be stated to be an ‘eligible assessee’ only if there is a case of variation referred to in the said sub-section 1 and which arises as a consequence of the order passed by the TPO under sub-section 3 of Section 92CA. In the facts of the present case, it is an admitted position that there was no variation in the income of the Petitioner by virtue of the order of the TPO.”
The Bench rejected the Revenue’s contention that “variation” includes “no variation.” It observed: “When there is no variation, there is no question of any prejudice being caused to the Assessee which would then entail him to file any objections to the Draft Order as contemplated under sub-section 2 of Section 144C.”
Supporting its view, the Court cited Pankaj Extrusion Ltd. v. Assistant Commissioner of Income-tax (Gujarat High Court, 2011) where it was held that in the absence of variation, the assessee is not an “eligible assessee.” It also referred to Honda Cars India Ltd. v. Deputy Commissioner of Income-tax (Delhi High Court, 2016), where it was observed: “In Section 144C(15)(b) of the Act, the term ‘eligible assessee’ is followed by an expression ‘means’ only and there are two categories referred therein … The use of the word ‘means’ indicates that the definition ‘eligible assessee’ for the purposes of Section 144C(15)(b) is a hard and fast definition and can only be applicable in the above two categories.”
The Bombay High Court noted that neither condition applied to the petitioner: “The Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The consequence of this is that the Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner.”
The Court directed: “In view of the above discussion, it is clear that the Petitioner in the present case, not being an ‘eligible assessee’ in terms of Section 144C15(b) of the I. T. Act, the Assessing Officer was not competent to pass the Draft Assessment Order under Section 144C(1) of the I. T. Act. Consequently, there was no occasion for him to thereafter pass a Final Assessment Order under Section 143 (3) read with Section 144C (3) read with Section 144B of the I. T. Act.”
“Accordingly, the Draft Assessment Order dated 8th March 2025; the Final Assessment Order dated 7th April 2025 and the Demand Notice dated 7th April 2025 as well as the Show Cause Notices dated 7th April 2025 seeking to impose penalty, are all hereby quashed and set aside.”
“Rule is made absolute in the aforesaid terms and the Writ Petition is also disposed of in terms thereof. However, there shall be no order as to costs.”
Advocates Representing the Parties
For the Petitioner: Mr. Jehangir D. Mistry, Senior Advocate, with Mr. Devendra Jain and Mr. Shashank Mehta i/b Mr. Kashyap Chothani, Advocates
For the Respondents: Mr. Akhileshwar Sharma, Advocate
Case Title: Classic Legends Pvt. Ltd. v. Assessment Unit & Ors.
Neutral Citation: 2025: BHC-OS:15225-DB
Case Number: Writ Petition (L) No. 14748 of 2025
Bench: Justice B. P. Colabawalla, Justice Amit S. Jamsandekar
