Assessment Order Set Aside, Costs Imposed for Non-Disclosure of DRP Pendency

Zarah Rafique Malik Vs ITO (Bombay High Court)

Bombay High Court has set aside a final assessment order against Zarah Rafique Malik for the assessment year 2022-23, while simultaneously imposing costs of ₹10,000 on the petitioner for inadvertently failing to inform the assessing officer (AO) about objections pending before the Dispute Resolution Panel (DRP). The ruling, delivered recently, emphasizes procedural adherence in tax matters but allows for reconsideration where factual objections are on record.

The case, Zarah Rafique Malik Vs ITO, arose from a scrutiny assessment of the petitioner’s income tax returns for the financial year 2022-23. Following a notice issued under Section 143(2) of the Income Tax Act, 1961 (IT Act), the first Respondent, the Income Tax Officer (ITO), issued a show cause notice on March 28, 2024, seeking justification for certain expenses and claims. The petitioner responded to this notice on March 29, 2024. Subsequently, on the very same day, March 29, 2024, the AO passed a draft assessment order under Section 144C (1) of the IT Act.

In response to the draft order, Zarah Rafique Malik lodged objections with the Dispute Resolution Panel on April 24, 2024. However, a critical procedural oversight occurred: the petitioner failed to inform the assessing officer that these objections had been filed and were pending before the DRP. Unaware of the ongoing DRP proceedings, the AO proceeded to issue the final assessment order on May 28, 2024, under Section 143(3) read with Section 144C (3) of the IT Act. Consequential notices of demand, and notices under Sections 156, 270A, and 274, were also issued based on this final order.

During the High Court proceedings, Mr. K. Gopal, counsel for the petitioner, candidly admitted the omission to inform the AO about the pending DRP objections. He attributed this lapse to a “communication gap” between the petitioner and her tax consultant. Despite this admission, Mr. Gopal sought condonation for the oversight, citing judicial precedents such as Sulzer Pumps India Private Limited Vs Dy. Commissioner of Income Tax Circle-15(3) (2) & Ors and OmniActive Health Technologies Limited Vs Assessment Unit, Income Tax Department National Faceless Assessment Centre. These precedents, he argued, supported leniency when objections were factually pending, even if the AO was not formally intimated.

Conversely, Ms. Shilpa Goel, representing the Revenue, argued that the assessing officer was not at fault in passing the final order, given the lack of intimation from the petitioner. She further contended that once a final assessment order is made, the DRP would be rendered functus officio, meaning it would lose its authority to act on the matter. To bolster her argument, Ms. Goel relied on the decision in Undercarriage and Tractor Parts (P) Ltd vs. Dispute Resolution Panel-3.

The High Court considered the rival submissions and the material presented. The bench acknowledged that the peculiar facts of Zarah Rafique Malik’s case were comparable to those in Sulzer Pumps India Private Limited. In Sulzer Pumps, a Coordinate Bench had also granted an additional opportunity to the assessee despite the assessing officer not being at fault, primarily because objections had indeed been filed with the DRP and were pending. The Court clarified that this particular relief, both in Sulzer Pumps and the current case, was based on the specific factual position of pending objections and should not be seen as a universal precedent for exercising discretion in all matters of this nature, irrespective of the facts.

Distinguishing the present case from Undercarriage and Tractor Parts (P) Ltd, the Court noted significant factual differences. In Undercarriage, the assessee had not only failed to inform the AO about DRP objections but had also challenged the AO’s final assessment order before the Commissioner of Income Tax (Appeals). While this appeal was pending, the DRP issued directions and passed a second assessment order. The Undercarriage judgment held that once a final assessment order was made and appealed, the DRP became functus officio and lacked the power to issue directions for another assessment order. This scenario, involving an existing appeal and a subsequent DRP action, was deemed distinct from Malik’s case where the core issue was the lack of intimation to the AO.

Ultimately, the High Court concurred with Ms. Goel that the assessing officer was not at fault due to the petitioner’s failure to provide timely intimation. However, given the factual similarity to the Sulzer Pumps case, the Court decided to indulge the petitioner. As a consequence of the petitioner’s lapse, the Court imposed a cost of ₹10,000, payable within two weeks of the order’s uploading, to the High Court Employees Medical Welfare Fund at Mumbai.

Subject to the payment of these costs and the filing of the necessary receipt, the impugned assessment order dated May 28, 2024, stands set aside. The matter has been remitted to the Dispute Resolution Panel for consideration in accordance with the law. All contentions on the merits of the assessment itself remain open for the DRP to address.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. Heard learned Counsel for the parties.

2. The rule is made returnable immediately at the request of and with the consent of the learned Counsel for the parties.

3. The Petitioner challenges the final assessment order dated 28 May 2024 under Section 143(3) read with Section 144C (3) of the Income Tax Act, 1961 (IT Act), along with consequential notices of demand dated 28 May 2024 and seeks remission of the matter to the Dispute Resolution Panel (DRP) for consideration following the law.

4. This Petition concerns the assessment year 2022-23.

5. The Petitioner’s returns dated 30 December 2022 were selected for scrutiny assessment, and necessary notice under Section 143(2) was issued to the Petitioner. On 28 March 2024, the first Respondent issued the Petitioner a show cause notice seeking justification of certain expenses and claims. The Petitioner responded on 29 March 2024. On 29 March 2024, the first Respondent passed a draft order in terms of Section 144C (1) of the Act.

6. The Petitioner lodged her objections to the draft order on 24 April 2024. However, the Petitioner inadvertently failed to inform the assessing officer about the objections being filed before the DRP and the pendency of such objections before the DRP. As a result, the first Respondent made the impugned final assessment order dated 28 May 2024. Based on this impugned assessment order, notices under Sections 156, 270A and 274 were also issued to the Petitioner.

7. Mr K Gopal the learned Counsel for the Petitioner fairly admitted that there was an omission on the part of the Petitioner in forming the first Respondent about the pendency of objections before the DRP. However, relying on Sulzer Pumps India Private Limited Vs Dy. Commissioner of Income Tax Circle-15(3) (2) & Ors¹ and Omni Active Health Technologies Limited Vs Assessment Unit, Income Tax Department National Faceless Assessment Centre² Mr Gopal submitted that this lapse may be condoned since, factually, the objections were pending before the DRP. He pointed out that due to some communication gap between the Petitioner and her tax consultant, this fact remained to be intimated to the first Respondent.

8. Ms Shilpa Goel, learned Counsel for the Respondent, submitted that the assessing officer was not entirely at fault in this matter. She also submitted that once the final assessment order is made, even the DRP will be rendered functus officio. To support her contentions, she relies on Undercarriage and Tractor Parts (P) Ltd vs. Dispute Resolution Panel³.

9. We have considered the rival contentions and perused the material on record.

10. In the peculiar facts of this case, we are inclined to set aside the impugned order and remit the matter to the DRP. The facts, in this case, are comparable in Sulzer Pumps India Private Limited (supra) where, a Coordinate Bench of this Court, after recording that the assessing officer was not at fault still, granted the assessee in the same matter an additional opportunity since factually, objections had been filed with DRP, and such objections were pending. The relief in Sulzer Pumps (supra) was granted based on facts like those in the present case. Therefore, it is not as if the Sulzer Pumps (supra) or this order is a precedent for exercising discretion in every matter of this nature, irrespective of the factual position.

11. The facts in Undercarriage and Tractor Parts (supra) were significantly different and not comparable to the present matter. There, apart from the failure to inform the assessing officer about the pendency of objections before the DRP, the assessee challenged the assessing officer’s final assessment order before the Commissioner of Income Tax (Appeals). While this Appeal was pending, the DRP, issued the impugned directions and passed a second assessment order dated 31 October 2019. It was this second assessment order which was under challenge. In the context of such facts, this Court held that once the final assessment order was made by the assessing officer and the same was the subject matter of Appeal before the Commissioner of Income Tax (Appeals), the DRP would become functus officio and have no powers to issue directions for making yet another assessment order.

12. At the same time, we agree with Ms Goel that the assessing officer who made the impugned assessment order in this case was not at fault because there was no intimation by the Petitioner about the pendency of objections before the DRP. Though, in the peculiar facts of the present case, which are quite similar to those in Sulzer Pumps (supra) we are indulging the Petitioner, it is only appropriate that the Petitioner, for her lapse, she pays costs of Rs.10,000/-favouring the High Court employees medical welfare fund at Mumbai.

Charitable Trust Bank Account Details:

13. paid within two weeks of uploading this order. Subject to payment of such costs, the impugned assessment order shall stand set aside, and the matter shall stand remitted to the DRP to proceed following the law. The necessary receipt must be filed in this matter, along with a return intimation to the learned Counsel for the Respondent backed with proof of payment.

14. The rule is made absolute in terms of prayer clause (a), subject to payment of the above-referred cost within two weeks from the date of uploading this order. All parties’ contentions on merits are expressly left open. All concerned to act on an authenticated copy of this order.

Note:

¹ WPL/15811/2011 decided on 27 October 2021

² WP/474/2024 decided on 4 March 2024

³ (2023) 156 taxmann.com 79 (Bombay)