Income Tax Act | Draft Assessment Order Not Permissible U/S 144C(1) When TPO Makes No Variation: Bombay High Court

Section 144C(1) of the Income Tax Act, 1961, provides that the Assessing Officer should forward a draft of the proposed assessment order to the eligible assessee if any variation of the income or loss returned is proposed to be made which affects the assessee negatively.

Justices B.P. Colabawalla and Amit S. Jamsandekar stated that …..the assessee/petitioner can be stated to be an “eligible assessee” only if there is a case of variation referred to in the said sub-section 1 and which arises as a consequence of the order passed by the TPO under sub-section 3 of Section 92CA. It is an admitted position that there was no variation in the income of the assessee by virtue of the order of the TPO……

In this case, according to the Petitioner/assessee, initially, the Assessing Officer had made a reference to the Transfer Pricing Officer (“TPO”) under Section 92CA of the Income Tax Act.

The TPO issued notices to the assessee and thereafter passed an order under Section 92CA(3) accepting that the international transactions entered into by the assessee with its Associated Enterprises were at an Arm's Length Price. In other words, the TPO made no variation.

According to the assessee, by virtue of the definition of the words “eligible assessee” appearing in Section 144C(15), the assessee could never fall within the aforesaid definition because the TPO never made any variation.

Since no variation was made, there was no occasion for the Assessing Officer to pass any Draft Assessment Order and thereafter serve it upon the assessee.

The writ petition has been filed seeking to quash and set aside the Draft Assessment Order passed under Section 144C and the Final Assessment Order passed under Section 143(3) read with Section 144C and Section 144B of the Income Tax Act, 1961.

The petition has also challenged the Demand Notice issued under Section 156 as well as the Show Cause Notice issued for imposing a penalty under Section 270A and Section 271AAC.

The issue before the bench was whether the Petitioner/assessee would fall within the definition of “eligible assessee” as contemplated under Section 144C(15)(b)(i) of the Income Tax Act.

The bench observed that the assessee/petitioner cannot be stated to be an “eligible assessee” as defined in clause (b) of sub-section 15 of Section 144C of the Income Tax Act. Once this is the case, the entire procedure for issuance of a draft order calling for the assessee's objections thereon and taking further steps as laid down under Section 144C would, therefore, not apply.

The bench disagreed with the revenue that the word “variation” appearing in Section 144C(1) and 144C(15) would also include “no variation”.

This is clear from Section 144C(1) itself, which categorically states that the Assessing Officer would have to forward a draft assessment order to the “eligible assessee” if he proposes to make, on or after 1^st October 2009, any variation which is prejudicial to the interest of such Assessee. When there is no variation, there is no question of any prejudice being caused to the Assessee, which would then entail him to file any objections to the Draft Order as contemplated under sub-section 2 of Section 144C, opined the bench.

The bench held that it is clear that the assessee, not being an “eligible assessee” in terms of Section 144C15(b) of the Income Tax Act, the Assessing Officer was not competent to pass the Draft Assessment Order under Section 144C(1) of the Income Tax Act.

In view of the above, the bench allowed the petition and quashed the Draft Assessment Order, Final Assessment Order, Demand Notice, as well as the Show Cause Notices.

Case Title: Classic Legends Pvt Ltd. v. Assessment Unit & Ors.

Case Number: CIVIL JURISDICTION WRIT PETITION (L) NO. 14748 OF 2025

Counsel for Petitioner/Assessee: Mr. Jehangir D. Mistry, Senior Advocate, with Mr. Devendra Jain, Shashank Mehta i/b Kashyap Chothani

Counsel for Respondent/Department: Mr. Akhileshwar Sharma

Click Here To Read/Download The Order