The Uttarakhand High Court has affirmed that procedural compliance under Section 144(C) of the Income Tax Act, 1961 is mandatory for eligible assessees. The court quashed a final assessment and penalty notice issued without a prior draft order, reinforcing that statutory safeguards cannot be bypassed even in cases of undisputed eligibility.
Background & Facts
The Dispute
The petitioner, Ceragem India Private Limited, a company engaged in the sale and distribution of therapeutic devices, faced a final assessment order dated 10.02.2026 issued by the Income Tax Department’s Assessment Unit. The order assessed additional income and imposed a penalty under Section 270A read with Section 274, resulting in a total demand of Rs. 2,65,36,180. The petitioner challenged the legality of the assessment, demand notice, and penalty show cause notice, all dated 10.02.2026, on the ground that it was an "eligible assessee" under Section 144(C)(15)(b)(i) of the Income Tax Act, 1961, and therefore entitled to a draft assessment order before the final order was passed.
Key Facts
- The petitioner is a private limited company registered under the Companies Act, 2013
- The assessment pertains to the financial year 2022-23
- The petitioner had filed its return of income on 30.11.2022
- The Income Tax Department initiated scrutiny assessment under Section 143(3)
- The petitioner was classified as an "eligible assessee" under Section 144(C)(15)(b)(i) based on its turnover and compliance history
- No draft assessment order was issued prior to the final assessment order dated 10.02.2026
- The demand notice under Section 156 and penalty show cause notice under Section 274 were issued on the same date as the final assessment
Procedural History
- 30.11.2022: Petitioner filed income tax return for AY 2023-24
- 10.02.2026: Final assessment order issued under Section 144(C) without prior draft
- 10.02.2026: Demand notice issued under Section 156
- 10.02.2026: Show cause notice for penalty issued under Section 274 read with Section 270A
- 18.03.2026: Writ Petition Misc. No. 582 of 2026 filed before the Uttarakhand High Court
The Parties' Positions
For the Petitioner
The petitioner contended that Section 144(C)(1) mandates the issuance of a draft assessment order for eligible assessees before the final order is passed. It argued that the failure to issue such a draft order rendered the final assessment void ab initio, as it violated a mandatory procedural safeguard designed to ensure fairness and opportunity of hearing. The petitioner emphasized that it did not dispute the assessment outcome and was willing to remit the demand if the procedure was followed.
For the Respondent
The respondent accepted notice and conceded that the petitioner was an eligible assessee under Section 144(C)(15)(b)(i). No substantive defense was offered against the procedural violation. The counsel for the respondent did not dispute the legal obligation under Section 144(C)(1) nor contested the petitioner’s eligibility.
Relief Sought
The petitioner sought quashing of the final assessment order, demand notice, and penalty show cause notice dated 10.02.2026, and a direction to the Assessing Officer to issue a draft assessment order and proceed afresh in accordance with Section 144(C).
The Legal Issue
The central question was whether the Income Tax Department is legally obligated to issue a draft assessment order under Section 144(C)(1) of the Income Tax Act, 1961, before passing a final assessment order against an eligible assessee, and whether failure to do so renders the final order illegal.
Arguments Presented
For the Petitioner
The petitioner relied on the plain language of Section 144(C)(1), which states that the Assessing Officer "shall" issue a draft assessment order to an eligible assessee. It argued that the use of the word "shall" makes the provision mandatory, not directory. The petitioner cited CIT v. M/s. S. S. Enterprises (2021) to establish that procedural mandates under the Act are to be strictly followed, especially when they confer substantive rights to the assessee. It further submitted that the absence of a draft order deprived the petitioner of the opportunity to examine the proposed additions, submit objections, and provide clarifications, thereby violating the principles of natural justice.
For the Respondent
The respondent did not contest the petitioner’s eligibility or the applicability of Section 144(C)(1). The counsel accepted notice and acknowledged the petitioner’s status as an eligible assessee. No counter-arguments were presented to challenge the legal obligation under the provision.
The Court's Analysis
The Court observed that the petitioner’s eligibility under Section 144(C)(15)(b)(i) was not disputed by either party. It emphasized that Section 144(C)(1) uses the word "shall", which denotes a mandatory obligation. The Court held that the draft assessment order is not a mere formality but a statutory safeguard designed to ensure transparency and fairness in the assessment process.
"The statutory mandate under Section 144(C)(1) is not a procedural formality but a substantive right conferred upon eligible assessees to examine the proposed additions and to make representations before the final order is passed. Failure to comply with this requirement vitiates the entire assessment proceeding."
The Court noted that the respondent had not only omitted the draft order but also proceeded directly to issue a final assessment, demand notice, and penalty notice - all on the same date. This sequence, the Court held, demonstrated a complete disregard for the statutory framework. The Court further observed that the petitioner had not objected to the quantum of tax proposed and was willing to cooperate, making the procedural violation even more unjustifiable.
The Court rejected any notion that the absence of prejudice or the petitioner’s willingness to pay negated the violation. It held that statutory compliance is not contingent on the assessee’s acquiescence.
The Verdict
The writ petition was allowed. The final assessment order dated 10.02.2026, the demand notice under Section 156, and the penalty show cause notice under Section 274 read with Section 270A - all dated 10.02.2026 - were quashed. The matter was remanded to the Assessing Officer to issue a draft assessment order to the petitioner within three months from the date of judgment. The petitioner was to be given a reasonable opportunity to file objections, and the final order was to be passed only after considering such objections. All pending proceedings arising from the impugned orders stood abated.
What This Means For Similar Cases
Draft Assessment Is Not Optional for Eligible Assessees
- Practitioners must verify whether a client qualifies as an "eligible assessee" under Section 144(C)(15)(b)(i) based on turnover and compliance history
- If eligibility is established, the absence of a draft order is a fatal procedural defect warranting quashing of the final assessment
- No court will uphold a final assessment order passed without a draft, even if the taxpayer does not dispute the quantum
Procedural Compliance Trumps Substantive Agreement
- A taxpayer’s willingness to pay or not contest the assessment does not cure a violation of mandatory statutory procedure
- The law presumes that procedural safeguards protect the right to be heard, regardless of outcome
- Tax authorities cannot bypass Section 144(C) on grounds of administrative convenience or presumed cooperation
Remedies Are Available Even Without Filing Objections
- A writ petition under Article 226 is maintainable to challenge procedural violations in tax assessments
- The High Court may quash orders even if the taxpayer has not exhausted departmental remedies, where the violation is patent and jurisdictional
- Practitioners should raise procedural non-compliance as a primary ground in tax litigation, not merely as a secondary argument
