Failure Of Passing Of Draft Order Not Curable Defect, Says ITAT
Pranav B Prem
In a significant ruling, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that the failure to issue a draft assessment order under Section 144C(1) of the Income Tax Act, 1961 is not a curable defect. The Tribunal quashed the final assessment order passed by the Assessing Officer (AO), emphasizing that the procedural requirement of issuing a draft order is mandatory for eligible assessees, including foreign companies.
Background of the Case
The case involved Feedertech Pte. Ltd., a company registered under the domestic laws of Singapore, engaged in the business of operating ships in international traffic. The company earned freight income from vessel voyages performed in international waters. For the Assessment Year 2018-19, the assessee filed its return of income on September 10, 2018, declaring freight income of Rs. 45,57,04,930. It claimed relief under Article 8 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore, which exempts shipping income from taxation in India. While filing the return, the assessee disclosed Rs. 3,41,77,870 (7.5% of the total freight income) as deemed income under Section 44B of the Income Tax Act, 1961, despite claiming the amount was not taxable under the DTAA.
Proceedings Before the Assessing Officer and CIT(A)
The case was selected for scrutiny, and statutory notices were duly issued. The assessee argued before the AO that its freight income was exempt under Article 8 of the India-Singapore DTAA. However, the AO made an addition of Rs. 3,41,77,870 to the assessee’s income, stating that the assessee had voluntarily declared the amount under Section 44B and that the AO did not have the authority to reduce the declared income.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, relying on the Supreme Court ruling in Goetz (India) Ltd. vs. CIT [(2006) 284 ITR 323 (SC)], which restricts the AO from entertaining fresh claims that are not part of the original return.
Contentions of the Appellant
Before the Tribunal, the assessee contended that:
It is a non-resident foreign company and falls within the definition of an eligible assessee under Section 144C(15) of the Income Tax Act.
The AO was mandatorily required to issue a draft assessment order under Section 144C(1) before finalizing the assessment.
The failure to issue the draft assessment order violated a statutory right to object to the proposed additions before the Dispute Resolution Panel (DRP).
The assessee inadvertently computed 7.5% of its freight income under Section 44B instead of directly claiming exemption under Article 8 of the DTAA.
This procedural lapse renders the final assessment order void.
Tribunal's Observations and Ruling
The ITAT bench, comprising Ms. Padmavathy S (Accountant Member) and Shri Raj Kumar Chauhan (Judicial Member), examined the statutory framework under Section 144C and the facts of the case. The Tribunal reaffirmed that the AO must mandatorily issue a draft assessment order before finalizing the assessment for an eligible assessee.
The Tribunal relied on the Bombay High Court’s ruling in International Air Transport Association vs. DCIT [(2016) 68 taxmann.com 246 (Bom)], which held: "...a draft assessment order under Section 144C(1) of the Act is mandated before the Assessing Officer passes a final order under Section 143(3) of the Act in case of an eligible assessee. Such an order grants the assessee the statutory right to approach the DRP and have their grievances addressed before the final assessment order is passed."
The Tribunal further emphasized: "Failure of passing of a Draft Order under Sec 144C (1) is not a curable defect since this is a violation of a statutory right of the assessee to raise grievance that can be addressed before a final assessment order is passed and appellate proceedings invoked." Given that the assessee’s non-resident status was undisputed and recorded in both the AO and CIT(A) orders, the Tribunal held that the final assessment order was null and void due to the absence of a draft assessment order.
The ITAT quashed the final assessment order and partly allowed the appeal in favor of Feedertech Pte. Ltd.
Appearance
Appellant /Assessee by: Shri M.P. Lohia
AR Revenue / Respondent by: Shri Krishna Kumar, Sr. DR
Cause Title: Feedertech Pte. Ltd. Versus ACIT (International Tax)
Case No: I.T.A. No. 4206/Mum/2023
Coram: Raj Kumar Chauhan [Judicial Member], Padmavathy S [Accountant Member]
[Read/Download order]
