The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has quashed a final assessment order after holding that the Assessing Officer (AO) failed to give effect to the binding directions issued by the Dispute Resolution Panel (DRP) before completing the assessment. 

The bench of Vimal Kumar (Judicial Member) and S.Rifaur Rahman (Accountant Member) ruled that the non-compliance amounted to a violation of the mandatory procedure prescribed under Section 144C of the Income-tax Act, 1961.

The appeal pertained to Assessment Year (AY) 2021-22. The assessee challenged the final assessment order passed under Sections 143(3) read with Sections 144C(13) and 144B of the Income-tax Act.

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During the hearing, the assessee pressed a legal ground contending that the final assessment order had been passed without implementing the DRP’s directions. According to the assessee, although the DRP had issued its directions modifying the transfer pricing adjustments, the Assessing Officer proceeded to pass the final assessment order stating that the order giving effect (OGE) from the Transfer Pricing Officer (TPO) had not yet been received.

The assessee argued that the TPO subsequently passed the order giving effect to the DRP’s directions on 28 October 2024, well within the statutory limitation period. Therefore, the Assessing Officer had sufficient time to incorporate those directions into the final assessment order.

Instead, the AO failed to pass a fresh assessment order reflecting the revised transfer pricing adjustments despite receiving the TPO’s order. The assessee submitted that this omission rendered the assessment legally unsustainable.

To support its case, reliance was placed on the Delhi ITAT’s earlier decision in Comparex India Pvt. Ltd., where an assessment order had been quashed on similar facts.

The department defended the assessment, contending that the prescribed procedure had been followed and that there was no deviation warranting interference by the Tribunal.

The Tribunal observed that the draft assessment order had been issued under Section 144C(1), following which the DRP passed its directions on 30 September 2024 directing the Assessing Officer and the TPO to suitably modify the proposed adjustments.

The Tribunal noted that the TPO complied with the DRP’s directions by passing an order giving effect on 28 October 2024. However, the Assessing Officer had already passed the impugned final assessment order on 24 October 2024 without incorporating the DRP’s directions, merely recording that the TPO’s order had not yet been received.

The Bench further observed that after receiving the TPO’s order, the Assessing Officer still failed to pass a corrected final assessment order within the statutory time limit. This failure resulted in a final assessment order that did not reflect the binding DRP directions, contrary to the mandate of Section 144C.

The Tribunal found the facts to be identical to those considered in Comparex India Pvt. Ltd., where it had been held that an assessment order passed in violation of Section 144C deserves to be quashed.

Referring to that decision, the Tribunal reiterated that where a statutory authority acts contrary to law, the action itself becomes invalid and no separate proof of prejudice to the taxpayer is necessary. It also noted that although the Revenue characterized the lapse as a mistake, no steps had been taken to rectify the error within a reasonable period.

Following the earlier precedent, the ITAT held that the Assessing Officer’s failure to comply with the mandatory directions of the DRP constituted a clear violation of the statutory scheme under Section 144C.

Accordingly, the Tribunal quashed the final assessment order and allowed the assessee’s legal ground. Since the appeal succeeded on this legal issue, the Tribunal left the remaining grounds open without adjudicating upon them.

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