ITAT Holds Failure to Issue Draft Assessment Order Under Section 144B Invalidates Assessment Procedure:

The ITAT Hyderabad Bench has set aside the assessment order passed against CDG Petchem Limited for Assessment Year 2018-19 after finding that the Assessing Officer (AO) failed to issue a draft assessment order before passing the final order, as required under Section 144B of the Income-tax Act, 1961.

The present appeal was filed with a delay of 165 days. Consequently, the assessee had submitted an affidavit seeking condonation of delay along with filing a writ petition. In the affidavit, the assessee explained the reason for the delay. The assessee claimed that during the tax proceedings, there was a change in the authorised representative. Hence, it was unaware of the impugned order passed by the first appellate authority, i.e., the CIT(A). This was the reason why it could not promptly file an appeal before the ITAT, resulting in delayed appeal filing. The assessee claimed the delay was neither intentional nor deliberate.

The tribunal found the reason explained by the assessee for the delayed appeal filing to be genuine and hence condoned the delay of 165 days.

The assessee’s case was selected for complete scrutiny, and the AO completed the assessment on April 5, 2021, under Section 143(3) read with Sections 143(3A) and 143(3B). The AO made a disallowance of Rs. 42,000 under Section 40(a)(ia) and additions of Rs 17.25 lakh and Rs 24,144 towards unexplained expenditure. The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), who partly allowed the appeal. Subsequently, the assessee approached the ITAT.

Before the Tribunal, the assessee argued that the AO had passed the final assessment order without issuing a draft assessment order or providing an opportunity to respond to the proposed additions. It contended that this violated the mandatory procedure prescribed under Section 144B and the principles of natural justice.

The ITAT relied on the Delhi High Court’s decision in Javin Construction Private Limited v. National Faceless Assessment Centre. The High Court had emphasised the requirement to issue a show-cause notice along with a draft assessment order before finalising an assessment involving variations prejudicial to the assessee.

It was noted by the tribunal that despite making additions and disallowances against the assessee, the AO had not issued any draft assessment order. It held that the failure violated the prescribed faceless assessment procedure and denied the assessee the required opportunity to respond to the proposed variations.

Accordingly, the ITAT set aside the assessment order and the consequential order of the CIT(A), directing the AO to issue a show-cause notice along with the draft assessment order, consider the assessee’s objections, and pass a reasoned order in accordance with law. The remaining grounds were left open, and the appeal was allowed for statistical purposes.