Section 144C vs Section 153: Supreme Court's Divergent Views on Limitation Period

Section 144C vs Section 153: Supreme Court's Divergent Views on Limitation Period

Introduction

The Supreme Court has delivered a split verdict on the interpretation of the limitation period under Section 144C of the Income Tax Act, 1961, governing the timeline for passing assessment orders by the Assessing Officer in cases involving eligible assessees, such as foreign companies and transfer pricing matters.

Factual Background

The case arose from a batch of appeals filed by the Income Tax Department challenging a Bombay High Court's decision, which held that final assessment orders passed after the expiry of the Section 153(3) limitation period were time-barred, even in cases involving eligible assessees subject to the Section 144C process.

The respondent, Shelf Drilling Ron Tappmeyer Limited, a foreign entity providing offshore drilling services in India, had filed its return for AY 2014–15, declaring a loss and opting out of the presumptive taxation regime under Section 44BB.

Procedural Background

The Assessing Officer (AO) rejected the books and computed income at 10% of gross receipts under Section 44BB(1). The Dispute Resolution Panel (DRP) upheld this, but the ITAT set aside the order and remanded the case to the AO on October 4, 2019, for fresh adjudication.

As per Section 153(3), the AO had 12 months to pass a fresh assessment order, which was extended to September 30, 2021, due to COVID-19.

Contentions of the Parties

Assessee's Contentions:

• The final assessment order must be passed within the limitation period (September 30, 2021).
• Since only a draft order was issued and the final order was not passed in time, the proceedings were time-barred.

Revenue's Contentions:

• Section 144C is a self-contained code and overrides Section 153, as there is no time limit for issuing a draft order under Section 144C(1).
• The final order can be passed later, as long as the draft order is issued within the limitation period.

Split Verdict

Justice SC Sharma's View:

• The timelines in Section 144C operate independently of Section 153(3) and exclude its outer limit for DRP cases.
• Applying Section 153 could impact tax recovery.
• The specific timelines prescribed under Section 144C must be adhered to, including one month after a draft order (if no DRP objection) or 11 months after a draft order (if DRP objections are filed).

Justice BV Nagarathna's View:

• Section 153(3)'s twelve-month cap still governs even in Section 144C proceedings.
• The assessments in question were time-barred.
• Directed that the returns originally filed by the assessees be accepted, without prejudice to the Revenue’s rights under law.

Reasoning & Analysis

The Court's split verdict highlights the complexity of the issue and the need for clarity on the interpretation of Sections 144C and 153.

The divergent opinions of Justices BV Nagarathna and SC Sharma underscore the importance of ensuring fairness and transparency in the assessment process.

Implications

The decision has significant implications for tax authorities and eligible assessees, particularly foreign companies and transfer pricing cases.

The outcome will determine whether Section 153(3) applies to Section 144C proceedings, directly affecting assessment timelines.

Outcome

Due to the divergent opinions, the matter will be placed before a larger bench.

The Registry was directed to place the matter before the Chief Justice of India for constituting an appropriate bench for fresh consideration.

In this case, the petitioner was represented by Mr. N Venkatraman, A.S.G., Ms. Swarupama Chaturvedi, Sr. Adv., Mr. Raj Bahadur Yadav, AOR, Mr. H R Rao, Mr. Udai Khanna, Mr. V Chandrashekhara Bharathi, Mr. Ashok Panigrahi, Mr. Sachin Sharma, Mrs. A Deepa and Advocates.

The respondent was represented by Mr. Jehangir D. Mistry, Sr. Adv., Ms. Rubal Bansal Maini, Mr. Prakhar Pandey, Mr. Satvik Sareen, Mr. Faisal Sherwani, AOR, and Mr. Kunal Cheema, AOR.