India – Draft Order – Whether In Limitation?

22 December 2021
 

The legal position is well settled that adherence to the statutory limitation for framing an assessment goes to the root of the matter and non adherence to statutory limitation results in the consequential orders & proceedings being void.

 

Section 153(1) of the IT Act deals with the limitation for completion of assessment under Section 143 or 144 of the IT Act. Further, in computing the period of limitation provided under Section 153 of the IT Act, the period during which the assessment proceeding is stayed by an order or injunction of any court must be excluded[1] and where after such exclusion the remaining period of limitation is less than 60 days, then the AO has been granted 60 days to complete the proceedings.

 

The IT Act envisages a special regime for completion of assessment in case of an ‘eligible assessee’[2] and provides that in the first instance a Draft Order would be forwarded to such assessee.[3] The ‘eligible assessee’ has a vested right to challenge the Draft Order by filing his objections before the DRP to the variation made by the AO. Thereupon, the DRP is required to issue directions within a period of nine months from the end of the month in which the Draft Order is forwarded to the ‘eligible assessee’.[4] Further, by way of a non-obstante clause, applicability of the period of limitation provided under Section 153 of the IT Act has been excluded for completion of such assessment and separate limitations have been prescribed.[5]

 

In an ongoing litigation before the Delhi High Court (‘High Court’),[6] the original Draft Order was set aside by the High Court with directions to the AO to pass a fresh order in accordance with law. Owing to the pandemic, the period of limitation for passing an assessment order stood extended to September 30, 2021. However, the fresh Draft Order was not passed within such extended period and the AO sought to invoke the extended period of 60 days for passing the Draft Order. This was challenged before the High Court on the ground that Section 153(1) of the IT Act does not specifically provide for any time limit to pass a Draft Order, and, therefore, upon a harmonious reading of the provisions, a reasonable limitation (synonymous to passing of assessment order) has to be read into such provision. It was further argued that in such case where a reasonable limit is being read into the law, the explanation to Section 153 of the IT Act will not automatically become applicable and, therefore, the extended period of limitation would not be available for the passing of a fresh Draft Order.

 

It was also submitted that the exclusion clause would operate where any proceedings including the passing of an order are stayed by the Court. In the given case, a Draft Order has already been passed and there were no pending proceedings. It was also pleaded that if the interpretation taken by the Department with respect to applicability of limitation provisions for completing of assessment was to be taken on its face value, it would lead to an absurd situation, given that the entire process and procedure of Section 144C read with Section 153 of the IT Act would also have to be completed within the 60 day period, which will result in  incongruous and unintended consequences. The aforesaid position is yet untested and pending judicial consideration.