Section 144C of the Income Tax Act

Source: Supreme Court 

Why in News? 

The bench of Justices BV Nagarathna and SC Sharma in the case of Assistant Commissioner of Income Tax & Ors. v. Shelf Drilling Ron Tappmeyer Limited (2025) delivered a split verdict on whether the twelve-month outer time limit under Section 153 of the Income Tax Act, 1961 (IT Act) applies to proceedings under Section 144C involving eligible assesses. 

What was the Background of Assistant Commissioner of Income Tax & Ors. v. Shelf Drilling Ron Tappmeyer Limited. (2025) Case? 

• The case arose from appeals filed by the Income Tax Department challenging a Bombay High Court decision that held final assessment orders passed after Section 153(3) limitation period were time-barred. 
• The Respondent-Shelf Drilling Ron Tappmeyer Limited was a foreign entity providing offshore drilling services in India for AY 2014-15. 
• The company filed its return declaring a loss and opted out of the presumptive taxation regime under Section 44BB. 
• The Assessing Officer rejected the books and computed income at 10% of gross receipts under Section 44BB (1). 
• The Dispute Resolution Panel upheld this decision, but the ITAT set aside the order on 4th October 2019 and remanded the case to the AO for fresh adjudication. 
• Under Section 153(3), the AO had 12 months from the end of the financial year to pass a fresh assessment order, i.e., by 31st March 2021. 
• Due to COVID-19, the deadline was extended to 30th September 2021 under the Taxation and other laws (Relaxation and Amendment of Certain Provisions) Act, 2020. 
• On remand, the AO issued a draft assessment order on 28th September 2021, just before the extended deadline, but no final assessment order was passed before 30th September 2021. 

What were the Court's Observations? 

Justice SC Sharma's Judgment (Allowing IT Department's Appeals): 

• The Court held that specific timelines under Section 144C operate independently of Section 153(3), and the High Court erred in quashing assessments on limitation grounds. 
• Justice Sharma reasoned that Parliament, through non-obstante clauses in sub-sections (4) and (13) of Section 144C, intended to exclude Section 153's outer limit for DRP cases. 
• "If I take the view that the entire procedure prescribed and contemplated in terms of Section 144C of the Income Tax Act must be subsumed within the overall time period prescribed under Section 153 of the Income Tax Act, I am of the opinion that it would result in a complete catastrophe for recovering lost tax." 
• The Court emphasized that timelines under Section 144C are independent and operate in addition to Section 153 timelines, with final assessment orders required within one month of draft orders or within 11 months if objections are filed before the DRP. 

Justice BV Nagarathna's Judgment (Disagreeing with Justice Sharma): 

• Justice Nagarathna held that while Section 144C prescribes self-contained procedures for eligible assessees, the overall limitation period under Section 153(3) continues to apply, including in remand situations. 
• She concluded that the assessments were time-barred and directed acceptance of originally filed returns, without prejudice to Revenue's right to take other permissible legal steps. 
• "In my view, even in such a case, the assessment has to be concluded within twelve months as stipulated in Section 153(3) of the Act where there has been remand by the Tribunal to the Assessing Officer under Section 254 of the Act." 
• The Court noted that narrower limitation periods in Section 144C subsections (4) and (13) ensure compliance with Section 153(3)'s overall twelve-month limitation. 

Due to divergent opinions, the Court directed the Registry to place matters before the Chief Justice of India for constituting an appropriate bench to reconsider the issues. 

What is Section 144C of the Income Tax Act? 

Purpose & Scope: 

• Establishes a dispute resolution mechanism for eligible assesses (foreign companies and transfer pricing cases). 
• Requires draft assessment orders before final orders for variations prejudicial to assesses interest. 

Draft Order Process: 

• Assessing Officer must forward draft order to eligible assessee for proposed variations (effective from October 1, 2009). 
• Assessee has 30 days to either accept variations or file objections with both DRP and Assessing Officer. 

Assessment Completion: 

• If assessee accepts or files no objections, Assessing Officer completes assessment based on draft order. 
• Final assessment order must be passed within one month of acceptance/expiry of objection period (overrides Section 153 timelines). 

Dispute Resolution Panel (DRP) Process: 

• DRP comprises three Commissioners of Income Tax constituted by the Board. 
• DRP issues directions to Assessing Officer after considering draft order, objections, evidence, and reports. 
• DRP can confirm, reduce, or enhance proposed variations but cannot set aside variations or order further enquiry. 
• The majority opinion prevails if DRP members differ. 

Timeline Requirements: 

• DRP must issue directions within 9 months from end of month when draft order was forwarded. 
• Assessing Officer must complete assessment within one month of receiving DRP directions (overrides Section 153). 
• No further hearing opportunity provided to assessee after DRP directions. 

Key Features: 

• DRP directions are binding on Assessing Officer. 
• Both assessee and Assessing Officer must be given hearing opportunity on prejudicial directions. 
• DRP may conduct further enquiries or cause enquiries to be made by income-tax authorities. 
• Board empowered to make rules for efficient DRP functioning and expeditious disposal.