The Bombay High Court has reiterated that the Income Tax Department cannot bypass the mandatory procedure of issuing a Draft Assessment Order to an eligible assessee before passing a final assessment order. Failure to follow this statutory requirement under Section 144C of the Income Tax Act, 1961, renders the final assessment order unsustainable in law.
In an important ruling concerning the rights of taxpayers in transfer pricing assessments, the Court quashed the final assessment order passed against Orpak Systems India Private Limited, holding that the assessee was entitled to receive a draft assessment order and an opportunity to approach the Dispute Resolution Panel (DRP).
The decision reinforces the importance of procedural safeguards in income tax assessments and clarifies that a statutory requirement cannot be treated as a mere technical formality.
Background of the Case
The dispute arose when the income tax return filed by Orpak Systems India Private Limited for Assessment Year 2022-23 was selected for scrutiny assessment.
During the assessment proceedings, the Assessing Officer made a transfer pricing adjustment amounting to approximately ₹2.41 crore. Thereafter, the Assessing Officer proceeded to pass a final assessment order against the company.
However, before passing the final assessment order, the Department did not issue a Draft Assessment Order to the assessee.
The company challenged this action before the Bombay High Court, contending that the Department had failed to comply with the mandatory procedure prescribed under Section 144C of the Income Tax Act, 1961.
The assessee argued that the omission deprived it of its statutory right to raise objections before the Dispute Resolution Panel and thereby caused a serious violation of the prescribed assessment procedure.
Legal Issue Before the Bombay High Court
The principal question before the Court was whether the Assessing Officer could directly pass a final assessment order against an eligible assessee without first issuing a Draft Assessment Order under Section 144C.
The issue also involved determining whether the failure to issue a draft order could be treated as an inadvertent procedural mistake and whether the matter could subsequently be remanded to the Assessing Officer for rectification.
Revenue’s Arguments Before the Court
During the proceedings, the Revenue fairly acknowledged that no Draft Assessment Order had been issued before passing the final assessment order.
However, the Department contended that the omission was merely an inadvertent procedural lapse and that the defect was curable.
The Revenue requested the Court to set aside the final assessment order and restore the proceedings to the stage of issuing a Draft Assessment Order under Section 144C(1). According to the Department, such a course would enable the assessee to exercise its statutory right of approaching the DRP.
The assessee, on the other hand, strongly opposed the request for remand. It argued that failure to issue a draft order was not a minor procedural irregularity but a violation of a mandatory statutory requirement. Such non-compliance had deprived the company of its valuable statutory right to challenge the proposed adjustments before the DRP.
Bombay High Court’s Observations and Legal Reasoning
A Division Bench comprising Justice B.P. Colabawalla and Justice Farhan P. Dubash examined the statutory framework under Sections 144B and 144C of the Income Tax Act.
The Court observed that the provisions of Section 144C are applicable to eligible assessees in the circumstances prescribed under the Act. Where an assessment involves a proposed variation prejudicial to the interests of an eligible assessee, the Assessing Officer is required to first prepare and serve a Draft Assessment Order.
This procedure provides the assessee with an important statutory opportunity to approach the Dispute Resolution Panel and contest the proposed variations before the assessment is finalised.
The Court found that the Assessing Officer had directly passed the final assessment order without serving any draft order on the petitioner. This action was clearly contrary to the statutory mandate under Section 144C and the relevant provisions of Section 144B.
The Bench emphasised that the draft assessment procedure is not an optional formality. It is an essential statutory safeguard designed to protect the rights of eligible taxpayers.
The Court accordingly held that the final assessment order could not be sustained in law.
Reliance on Earlier Judicial Precedents
While deciding the matter, the Bombay High Court relied upon its earlier decisions in:
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Danfoss Fluid Power Private Limited v. Union of India, Writ Petition No. 10403 of 2025, decided on 29 September 2025.
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Barentz India Private Limited v. Assessment Unit, National Faceless Assessment Centre, Writ Petition No. 1460 of 2025, decided on 13 October 2025.
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SHL (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax, (2021) 438 ITR 317 (Bom.).
In particular, the decision in SHL (India) Pvt. Ltd. had recognised that failure to follow the mandatory procedure under Section 144C cannot be dismissed as a mere procedural or inadvertent error.
The earlier judicial reasoning established that bypassing the draft assessment stage deprives an eligible assessee of a substantive statutory right. Consequently, the Assessing Officer cannot directly assume jurisdiction to pass a final assessment order without following the prescribed procedure.
The present ruling reinforces this established legal position.
No Remand to the Assessing Officer
An important aspect of the judgment was the Court’s decision not to remand the matter to the Assessing Officer.
Although the Revenue requested an opportunity to rectify the procedural defect by issuing a Draft Assessment Order, the Court found no justification for restoring the proceedings to that stage.
Accordingly, the Bench refused the Revenue’s request for remand and quashed the impugned final assessment order.
However, the Court clarified that if the Assessing Officer was otherwise legally entitled to initiate fresh proceedings by issuing a Draft Assessment Order and serving it upon the assessee, the Department would remain free to do so in accordance with law.
The Court expressly left this question open and did not express any final opinion on the permissibility of such fresh proceedings.
Final Decision of the Court
Allowing the writ petition, the Bombay High Court quashed the final assessment order dated 24 March 2025 passed under Section 143(3) read with Section 144B of the Income Tax Act for Assessment Year 2022-23.
The Court disposed of Writ Petition No. 424 of 2026 without imposing any costs.
Case Details:
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Case Title: Orpak Systems India Private Limited v. The Assessment Unit (NFAC) & Others
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Court: Bombay High Court
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Case Number: Writ Petition No. 424 of 2026
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Date of Judgment: 30 October 2026
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Coram: Justice B.P. Colabawalla and Justice Farhan P. Dubash
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Citation: 2026 LLBiz HC (BOM) 629
Significance of the Judgment for Income Taxpayers
This judgment is significant for taxpayers, particularly companies involved in international transactions and transfer pricing assessments.
It reiterates that the statutory procedure under Section 144C must be strictly followed wherever applicable. The Assessing Officer cannot bypass the draft assessment stage and directly issue a final assessment order against an eligible assessee.
The ruling also highlights the importance of the Dispute Resolution Panel mechanism as a statutory remedy available to eligible assessees. Denial of this opportunity can have serious consequences for the validity of the assessment proceedings.
For tax professionals and legal practitioners, the decision provides an important ground for examining the validity of assessment orders passed without complying with the mandatory requirements of Section 144C.
The key takeaway is that statutory safeguards in tax assessment proceedings are substantive rights of taxpayers, not procedural formalities that the Department can casually overlook.
Legal Disclaimer: This article is intended for informational and educational purposes and should not be construed as legal advice. The applicability of the judgment depends on the facts and circumstances of each case.