The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that an assessment framed in violation of the mandatory procedure prescribed under Section 144C of the Income Tax Act, 1961 is without jurisdiction and liable to be quashed. A Bench comprising Vice President Saktijit Dey and Accountant Member Prabhash Shankar set aside the assessments made against Marriott International Inc. for AYs 2013-14 and 2014-15 after finding that the Assessing Officer had effectively passed final assessment orders in the guise of draft assessment orders.

Marriott International Inc., a tax resident of the United States, had filed its returns of income declaring nil taxable income and claiming refund of taxes deducted at source. During scrutiny proceedings, the Assessing Officer held that receipts earned by the assessee from International Service Marketing Agreements and related reimbursements were taxable in India as royalty under the Income Tax Act as well as the India–USA Double Taxation Avoidance Agreement.

The Assessing Officer purportedly issued draft assessment orders under Section 144C(1). However, along with the draft orders, he also issued demand notices under Section 156, computation sheets determining tax liability, and initiated penalty proceedings under Section 271(1)(c). Since no objections were filed before the Dispute Resolution Panel (DRP), final assessment orders were subsequently passed.

Before the Tribunal, the assessee raised an additional legal ground contending that the assessments were void ab initio as the Assessing Officer had bypassed the statutory procedure under Section 144C by issuing demand notices and initiating penalty proceedings at the draft assessment stage itself.

“While framing draft assessment order, there is no question of computing the tax liability and issuing demand notice or initiating proceedings for imposition of penalty under section 271(1)(c) of the Act when the assessment has not become final.”

The Tribunal observed that the Assessing Officer had not merely proposed variations in income but had also directed charging of tax, adjustment of prepaid taxes, levy of interest, issuance of demand notices and initiation of penalty proceedings. Such actions clearly indicated that the assessment proceedings had attained finality at the stage of the so-called draft assessment orders.

The Bench noted that an identical issue had arisen in the assessee’s own case for earlier assessment years, where the Tribunal had already quashed similar assessments. It further relied upon several judicial precedents holding that issuance of a demand notice along with a draft assessment order defeats the very purpose of Section 144C, which grants an eligible assessee a valuable statutory right to approach the Dispute Resolution Panel before a final assessment is made.

“The Assessing Officer has exceeded his jurisdiction by not following the mandate of Section 144C(1) of the Act as he failed to frame draft assessment order at the first instance.”

The Tribunal held that the requirement of first issuing a valid draft assessment order under Section 144C is mandatory and not a mere procedural formality. Once the Assessing Officer issued demand notices and commenced penalty proceedings, the assessments effectively became final, rendering all subsequent proceedings unsustainable in law.

Thus, the ITAT quashed the impugned assessment orders for both assessment years as being wholly without jurisdiction. Since the appeals were allowed on the jurisdictional ground, the Tribunal kept all other grounds raised by the assessee open without adjudicating them on merits.

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