The Bombay High Court has held that where the Income Tax Department fails to pass an Order Giving Effect (OGE) to the appellate order of the Commissioner of Income Tax (Appeals) [CIT(A)] within the time prescribed under Section 153 of the Income-tax Act, 1961, the underlying assessment proceedings stand abated. Consequently, any penalty proceedings arising from the assessment also become unsustainable.

The Bench of Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla quashed the penalty order dated 30 March 2023 and the consequential demand notice, holding that the Department had lost its authority to enforce the assessment after failing to comply with the statutory limitation. 

The petitioner/assessee is a Luxembourg-based company engaged in providing centralized marketing services for the Marriott hotel group worldwide. It had acquired rights under International Marketing Program Participation Agreements (IMPPAs) with various Indian hotels.

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For Assessment Year 2009-10, the company filed its income tax return declaring nil taxable income, contending that receipts of approximately ₹1.21 crore received under the IMPPAs were not taxable in India. It also sought refund of tax deducted at source (TDS). 

However, during scrutiny assessment, the Assessing Officer rejected the company’s stand and treated the receipts as business profits, taxing them at 40% and raising a tax demand. Simultaneously, penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars and concealment of income were initiated. 

The company challenged the assessment before the Commissioner of Income Tax (Appeals).

On 31 December 2018, the CIT(A) partly allowed the appeal by holding that the receipts were in the nature of royalty rather than business profits. The appellate authority directed the Assessing Officer to compute tax at the beneficial rate applicable to royalty; verify and grant TDS credit wherever admissible; and provide the assessee an opportunity of hearing before passing the consequential order. 

Because verification and hearing were required, the Assessing Officer was obligated to pass an Order Giving Effect within the extended limitation prescribed under Sections 153(5) read with 153(3) of the Act.

The High Court noted that the statutory deadline for passing the consequential order expired on 31 December 2019.

Despite this, the Department never passed the Order Giving Effect.

Instead, several years later, it proceeded with the pending penalty proceedings and ultimately imposed a penalty of ₹12.11 lakh under Section 271(1)(c) in March 2023. The assessee challenged this action before the Bombay High Court. 

The central question before the Court was whether the failure to pass the Order Giving Effect within the statutory limitation resulted in the assessment proceedings becoming non-existent, thereby rendering the penalty proceedings invalid.

The Court held that an Order Giving Effect is not a mere administrative exercise.

Rejecting the Revenue’s argument that the order was only ministerial in nature, the Bench observed that such an order involves determination of tax liability, verification of TDS credits, computation of tax, and quantification of the final demand or refund. These are substantive adjudicatory functions having civil consequences and therefore constitute an integral part of the assessment process. 

The Court relied upon earlier decisions, including Caltex Oil Refining (India) Ltd. v. CIT and the Supreme Court’s judgment in Kalyankumar Ray v. CIT, reiterating that an assessment is a comprehensive process involving not only determination of income but also computation of the final tax liability. 

The Bench further relied upon the Supreme Court’s landmark decision in CIT v. Shelly Products and its own earlier ruling in Laqshya Media Ltd., holding that once the Department loses the power to complete assessment within the statutory period, it cannot raise any further tax demand.

Instead, the return originally filed by the assessee is deemed to have been accepted.

The Court observed that permitting the Department to recover tax despite its failure to act within limitation would violate Article 265 of the Constitution, which mandates that no tax can be levied or collected except by authority of law. 

Having held that the assessment proceedings had abated, the Court concluded that the very foundation of the penalty proceedings had disappeared.

The penalty had originally been initiated because the Assessing Officer treated the receipts as business income. However, once the assessment itself ceased to survive due to limitation and the return stood accepted, there remained no tax sought to be evaded.

Accordingly, the Court held that the penalty proceedings under Section 271(1)(c) could not independently survive after the assessment proceedings had become unenforceable. 

The Bombay High Court quashed the penalty order dated 30 March 2023; set aside the consequential demand notice; and directed that any amount recovered pursuant to the assessment or penalty proceedings be refunded in accordance with law together with applicable interest. 

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