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2025 Supreme(Ker) 1732
IN THE HIGH COURT OF KERALA AT ERNAKULAM
S. MANU, J.
IBS Software Services Private Limited - Appellant
Versus
Commissioner of Income Tax, Thiruvananthapuram - Respondent
W.P. (C) Nos. 1694, 2689 of 2011
Decided On : 15-07-2025
Important Points
Failure to comply with mandatory assessment procedures under Section 144C renders the assessment orders void ab initio.
Subject
Taxation - Income Tax Assessment
Act Referred
Headnote
(A) Income Tax Act, 1961 - Sections 143(2), 143(3), 92CA, 144C - Assessment procedure - Petitioners contended that the mandatory procedure under Section 144C was not followed, rendering assessment orders void ab initio. The court found that failure to forward draft assessment order to the petitioners was a jurisdictional error. (Paras 4 , 13 , 14 )
(B) Circular No.5/2010 - Misinterpretation by the Central Board of Direct Taxes regarding applicability of Section 144C - The court ruled that the Board's explanation was inconsistent with the Act and thus illegal. (Paras 10 , 17 )
Facts of the case:
Petitioners, engaged in software development, challenged the assessment orders for the assessment year 2007-08, arguing procedural violations under Section 144C.
Findings of Court:
The assessing officer's failure to follow the mandatory procedure under Section 144C resulted in the assessment orders being declared void ab initio.
Issues: Whether the assessment orders were valid given the procedural violations under Section 144C.
Ratio Decidendi: The court held that the procedure under Section 144C is mandatory and non-compliance constitutes a jurisdictional error, invalidating the assessment order.
Result: Writ petitions allowed; assessment orders quashed.
Advocate Appeared:
For the Appellants : E.K. Nandakumar, Benny P. Thomas, K. John Mathai, Raja Kannan
For the Respondent: P.G. Jayashankar, P.K.R. Menon, Jose Joseph, G. Keerthivas, Navaneeth N. Nath
| Table of Content |
|---|
| 1. petitioners challenged assessment orders on procedural grounds. (Para 2 , 4) |
| 2. petitioners argued lack of compliance with mandatory procedures. (Para 5 , 6 , 7 , 8) |
| 3. court found procedural non-compliance invalidates assessment orders. (Para 10 , 11 , 12 , 13 , 17) |
| 4. mandatory nature of section 144c established. (Para 14 , 15) |
| 5. writ petitions allowed; assessment orders quashed. (Para 16) |
JUDGMENT :
1. The legal issue raised in these writ petitions being common, they are disposed of by this common judgment.
2. Petitioners, two companies incorporated under the Companies Act, 1956 are engaged in the business of software development. They are assessees on the rolls of the 2nd respondent for the purposes of the Income Tax Act, 1961. For the assessment year 2007-08 they filed returns of income. Their cases were selected for scrutiny and pursuant to notices issued under Section 143(2) of the Act, the assessment was sought to be completed under Section 143(3).
3. Second respondent noticed that the petitioners had entered into international transactions with associated enterprises and hence the cases were transferred to the Transfer Pricing Officer under Section 92CA of the Act to determine the arm's length price. Thereafter, the Transfer Pricing Officer issued orders under Section 92CA(3) of the Act. The 2nd respondent, after receiving the orders from the Transfer Pricing Officer, proceeded to compute total income of the petitioners and finalised the assessment under Section 143(3) of the Act on the basis of those orders.
4. Petitioners' prime contention is that though they were eligible assessees as per Section 144C(15)(b), the mandatory procedure under Section 144C was not followed and therefore the assessment orders are non est and void ab initio. According to the petitioners, the 2nd respondent, after receiving the orders from the Transfer Pricing Officer ought to have forwarded drafts of proposed orders of assessment to them.
5. Sri.Raja Kannan, learned counsel appearing for the petitioners invited my attention to Section 144C of the Act. The learned counsel submitted that under Section 144C(1), the assessing officer was bound to forward a draft of the proposed order of assessment to the petitioners if he proposed to make any variation prejudicial to the interest of the petitioners. The learned counsel pointed out that the language of the said provision is very clear and in case the assessing officer proposed to make any variation on or after the first day of October 2009, the procedure provided therein should have been followed. The learned counsel submitted that in the cases at hand reference was made after Section 144C came to force. The learned counsel argued that Section 144C(1) doesn't make any reference to any assessment years and in view of the mandate of the provision that in case of any variation intended by the assessing officer, it was necessary to forward draft of the proposed order of assessment to the assessee from first day of October, 2009. He further submitted that references in these cases were made only on 23.12.2009. He hence submitted that undoubtedly the 2nd respondent breached the mandate of Section 144C(1). The learned counsel referred to Circular No.9/2013 dated 19.11.2013 issued by the Central Board of Direct Taxes. He pointed out that by the said Circular, paragraph 45.5 of the Circular No.5/2010 dated 3.6.2010 was replaced clarifying that Section 144C was applicable to any order which proposed to make variation in the income or loss returned by an eligible assessee on or after first October 2009 irrespective of the assessment year to which it pertained. He therefore submitted that in view of the said Circular also the procedure adopted by the respondents was obviously illegal. The learned counsel submitted that the said mistake committed by the respondents has made Exts.P1 and P2 vitiated by an incurable jurisdictional error. He hence submitted that the impugned orders were liable to be
