Kerala High Court
Ibs Software Services Private Limited vs Commissioner Of Income Tax on 15 July, 2025
2025:KER:52030
W.P.(C).Nos.1694 & 2689 of 2011
1
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR. JUSTICE S.MANU
TUESDAY, THE 15TH DAY OF JULY 2025 / 24TH ASHADHA, 1947
WP(C) NO. 1694 OF 2011
PETITIONER:
IBS SOFTWARE SERVICES PRIVATE LIMITED,
521-524, NILA, TECHNOPARK CAMPUS,
TRIVANDRUM-695581, REPRESENTED BY ITS
CHAIRMAN & MANAGING DIRECTOR MR.V.K.MATHEWS.
BY ADVS.
SRI.E.K.NANDAKUMAR (SR.)
SRI.BENNY P. THOMAS (SR.)
SRI.K.JOHN MATHAI
ADV.RAJA KANNAN
RESPONDENTS:
1 COMMISSIONER OF INCOME TAX
THIRUVANANTHAPURAM, AAYAKAR BHAVAN, KOWDIAR,
TRIVANDRUM-695003.
2 ASSISTANT COMMISSIONER OF INCOME TAX,
CIRCLE-1(1), THIRUVANANTHAPURAM, AAYAKAR BHAVAN,
KOWDIAR, TRIVANDRUM-695003.
BY ADVS.SRI.P.G.JAYASHANKAR
SRI.P.K.R.MENON-SR.COUNSEL GOI TAXES
SRI.JOSE JOSEPH, SC, INCOME TAX DEPARTMENT, KERALA
SRI.G.KEERTHIVAS
SRI.NAVANEETH.N.NATH, CGC
THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD
ON 15.07.2025, ALONG WITH WP(C).2689/2011, THE COURT ON THE
SAME DAY DELIVERED THE FOLLOWING:
2025:KER:52030
W.P.(C).Nos.1694 & 2689 of 2011
2
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR. JUSTICE S.MANU
TUESDAY, THE 15TH DAY OF JULY 2025 / 24TH ASHADHA, 1947
WP(C) NO. 2689 OF 2011
PETITIONER:
SUNTEC BUSINESS SOLUTIONS PRIVATE LIMITED,
321-NILA, TECHNOPARK CAMPUS, THIRUVANANTHAPURAM-
695581, REPRESENTED BY ITS MANAGER LEGAL.
BY ADVS.
SRI.E.K.NANDAKUMAR (SR.)
SHRI.BENNY P. THOMAS (SR.)
SHRI.K.JOHN MATHAI
ADV.RAJA KANNAN
RESPONDENTS:
1 COMMISSIONER OF INCOME TAX,
THIRUVANANTHAPURAM, AAYAKAR BHAVAN,
KOWDIAR, THIRUVANANTHAPURAM-695003.
2 ASSISTANT COMMISSIONER OF INCOME TAX,
CIRCLE-1(1), THIRUVANANTHAPURAM,
AAYAKAR BHAVAN, KOWDIAR, THIRUVANANTHAPURAM-695003.
3 THE TRANSFER PRICING OFFICER-II,
INCOME TAX DEPARTMENT, CENTRAL REVENUE BUILDING,
I.S.PRESS ROAD, KOCHI-682018.
BY ADVS.
SRI.P.G.JAYASHANKAR
SRI.JOSE JOSEPH, SC, INCOME TAX DEPARTMENT, KERALA
SRI.G.KEERTHIVAS
SRI.NAVANEETH.N.NATH, CGC
THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON
15.07.2025, ALONG WITH WP(C).1694/2011, THE COURT ON THE SAME
DAY DELIVERED THE FOLLOWING:
2025:KER:52030
W.P.(C).Nos.1694 & 2689 of 2011
3
[CR]
S.MANU, J.
----------------------------------------------
W.P.(C).Nos.1694 & 2689 of 2011
-----------------------------------------------
Dated this the 15th day of July, 2025
JUDGMENT
The legal issue raised in these writ petitions being
common, they are disposed of by this common judgment.
2. Petitioners, two companies incorporated under the
Companies Act, 1956 are engaged in the business of software
development. They are assessees on the rolls of the 2 nd
respondent for the purposes of the Income Tax Act, 1961. For
the assessment year 2007-08 they filed returns of income.
Their cases were selected for scrutiny and pursuant to notices
issued under Section 143(2) of the Act, the assessment was
sought to be completed under Section 143(3).
3. Second respondent noticed that the petitioners had
entered into international transactions with associated
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W.P.(C).Nos.1694 & 2689 of 2011
enterprises and hence the cases were transferred to the Transfer
Pricing Officer under Section 92CA of the Act to determine the
arm's length price. Thereafter, the Transfer Pricing Officer
issued orders under Section 92CA(3) of the Act. The 2 nd
respondent, after receiving the orders from the Transfer Pricing
Officer, proceeded to compute total income of the petitioners
and finalised the assessment under Section 143(3) of the Act on
the basis of those orders.
4. Petitioners' prime contention is that though they were
eligible assessees as per Section 144C(15)(b), the mandatory
procedure under Section 144C was not followed and therefore
the assessment orders are non est and void ab initio. According
to the petitioners, the 2nd respondent, after receiving the orders
from the Transfer Pricing Officer ought to have forwarded drafts
of proposed orders of assessment to them.
5. Sri.Raja Kannan, learned counsel appearing for the
petitioners invited my attention to Section 144C of the Act. The
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learned counsel submitted that under Section 144C(1), the
assessing officer was bound to forward a draft of the proposed
order of assessment to the petitioners if he proposed to make
any variation prejudicial to the interest of the petitioners. The
learned counsel pointed out that the language of the said
provision is very clear and in case the assessing officer proposed
to make any variation on or after the first day of October 2009,
the procedure provided therein should have been followed. The
learned counsel submitted that in the cases at hand reference
was made after Section 144C came to force. The learned
counsel argued that Section 144C(1) doesn't make any
reference to any assessment years and in view of the mandate
of the provision that in case of any variation intended by the
assessing officer, it was necessary to forward draft of the
proposed order of assessment to the assessee from first day of
October, 2009. He further submitted that references in these
cases were made only on 23.12.2009. He hence submitted that
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W.P.(C).Nos.1694 & 2689 of 2011
undoubtedly the 2nd respondent breached the mandate of
Section 144C(1). The learned counsel referred to Circular
No.9/2013 dated 19.11.2013 issued by the Central Board of
Direct Taxes. He pointed out that by the said Circular, paragraph
45.5 of the Circular No.5/2010 dated 3.6.2010 was replaced
clarifying that Section 144C was applicable to any order which
proposed to make variation in the income or loss returned by an
eligible assessee on or after first October 2009 irrespective of
the assessment year to which it pertained. He therefore
submitted that in view of the said Circular also the procedure
adopted by the respondents was obviously illegal. The learned
counsel submitted that the said mistake committed by the
respondents has made Exts.P1 and P2 vitiated by an incurable
jurisdictional error. He hence submitted that the impugned
orders were liable to be set aside.
6. The learned counsel for the petitioners relied on the
following reported judgments:-
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W.P.(C).Nos.1694 & 2689 of 2011
1. Shl(India) Private Limited v. Deputy
Commissioner of Income Tax and Ors
[2021 SCC OnLine Bom 1312]
2. Turner International India Pvt. Ltd. v.
Deputy Commissioner of Income Tax
[2017 SCC OnLine Del 12952].
3. Assistant Commissioner of Income-tax
and Another v. Vijay Television Private
Ltd and Another [2018 SCC OnLine Mad
13752]
4. Hope Textiles Ltd and Another v. Union
of India and Others [(1995 Supp (3) SCC
199 : (1994) 205 ITR 508].
7. Sri.P.G.Jayasankar, the learned Standing Counsel
appearing for the respondents submitted that the assessment
was done following Circular No.5/2010 dated 3.6.2010 in which
it was stated by the Central Board of Direct Taxes that Section
144C will apply in relation to assessment year 2010-11 and
subsequent assessment years. The learned counsel submitted
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W.P.(C).Nos.1694 & 2689 of 2011
that the respondents were bound to follow the Circular and
therefore it cannot be said that they had committed any error.
He submitted that Circular No.9/2013 was issued much later on
19.11.2013. The learned Standing Counsel further submitted
that huge amounts are involved in these cases and if the
assessments are held illegal on technical grounds it will cause
severe loss to the revenue. The learned Standing Counsel also
submitted that the purpose of assessment itself will be defeated
if the contentions of the petitioners are accepted and the
assessment is set aside. The learned Standing Counsel further
submitted that, in case the Court finds that the assessment was
vitiated for not following the provisions of Section 144C then the
matters may be remitted for fresh assessment. The learned
Standing Counsel relied on the judgment of the Hon'ble
Supreme Court in Union of India and others v. Ashish
Agarwal [(2023) 1 SCC 617]. He pointed out the observation
made by the Hon'ble Supreme Court in paragraph 23 of the
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judgment that the revenue cannot be made remediless and the
object and purpose of re-assessment proceedings cannot be
frustrated.
8. Section 144C(1) reads as follows:-
"144C.(1) The Assessing Officer shall,
notwithstanding anything to the contrary
contained in this Act, in the first instance, forward
a draft of the proposed order of assessment
(hereafter in this section referred to as the draft
order) to the eligible assessee if he proposes to
make, on or after the 1 st day of October, 2009,
any variation which is prejudicial to the interest of
such assessee."
Plain reading of the above provision shows that the procedure
stipulated thereunder was to be followed by the assessing
officer in case he proposed to make any variation in the income
or loss returned by an eligible assessee on or after the first day
of October 2009. The provision contains a non obstante clause.
Hence, the manifest intention was to provide overriding effect to
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W.P.(C).Nos.1694 & 2689 of 2011
the provision. There is no reference in the provision regarding
the assessment year. Thus what is to be understood on a plain
reading is that the provision was intended to govern all
proceedings by the assessing officers regardless of the
assessment year with respect to eligible assessees, when the
officer proposed to make variations to the prejudice of such
assessees in the income or loss returned. First day of October
2009 was stipulated as the date from which the procedure
under Section 144C(1) had to be followed. In my considered
view no other inference is possible from the unmistakable
language of the provision. To say in simple terms, the assessing
officer had to follow the procedure under Section 144C(1) in the
case of all assessments irrespective of the assessment year,
from 1.10.2009.
9. Paragraph 45.5 of Circular No.5/2010 issued by the
CBDT on 03.06.2010 reads as under:-
"45.5 Applicability - These amendments have been
made applicable with effect from 1 st October, 2009
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W.P.(C).Nos.1694 & 2689 of 2011
and will accordingly apply in relation to assessment
year 2010-11 and subsequent assessment years.
The Dispute Resolution Panel Rules have been
notified by S.O.No.2958(E), dated 20 th November,
2009".
10. The above explanation given by the Board regarding
applicability of Section 144C was beyond any doubt inconsistent
with the provision. As noticed above, there is no mention about
assessment years in Section 144C(1). The Board in fact
misinterpreted the provision by stating as above in paragraph
45.5 of the Circular No.5/2010. The Board is certainly an
authority under the Act. However, it is not open to any
authority under the Act to misconstrue the provisions of the Act
and thus defeat the legislative intention. Hence, the
explanation regarding applicability of Section 144C given by the
Board in Circular No.5/2010 was improper and illegal.
11. It is evident from Circular No.9/2013 issued on
19.11.2013 by the Board that it realised the mistake.
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W.P.(C).Nos.1694 & 2689 of 2011
Paragraph 45.5 of Circular No.5/2010 was replaced with the
following:-
"45.5. Applicability -Section 144C has been inserted
with effect from 1st April, 2009. Accordingly, the
Assessing Officer is required to forward a draft
assessment order to the eligible assessee, if he
proposes to make, on or after the 1st day of
October, 2009, any variation in the income or loss
returned which is prejudicial to the interest of such
assessee. In other words Section 144C is applicable
to any order which proposes to make variation in
income or loss returned by an eligible assessee, on
or after 1st October, 2009 irrespective of the
assessment year to which it pertains. Amendments
to other Sections of the Income-tax Act referred to
in para 45.3 of the Circular No.5 of 2010 dated 3 rd
June, 2010, shall also apply from 1 st October,
2009."
12. This Court has already analysed the nature of the
provisions of Section 144C of the Income Tax Act in the
judgments in IBS Software Services Private Limited v.
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W.P.(C).Nos.1694 & 2689 of 2011
Union of India [2025 SCC OnLine Ker 3753 ] and Allianz
Cornhill Information Services Private Limited, Rep. by its
Chief Financial Officer v. Union of India rep. by Secretary,
Ministry of Finance (Department of Revenue) and Others
[2023 SCC OnLine Ker. 11076]. This Court has held that the
provisions of Section 144C are compulsory. Legislative intention
for incorporating the provision by way of an amendment was
also adverted to by this Court in the above judgments.
13. Procedure under Section 144C(1) is also therefore
mandatory. The assessing officer ought to have in the first
instance forwarded a draft of the proposed order of assessment
to petitioner, as there was a proposed variation prejudicial to the
interest of the assessee. Failure to follow the said procedure by
the assessing officer was therefore a fatal error. I find support
for this view in various judgments of different High Courts, cited
by the learned counsel for the petitioner.
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14. In Shl (India) Private Limited v. Deputy
Commissioner of Income Tax and Ors [2021 SCC OnLine
Bom 1312] a Division Bench of the Bombay High Court
concluded as under:-
"26. In our view, the following principles
emerge from the above discussion:
(i) That the procedure prescribed under
Section 144-C of the IT Act is a mandatory
procedure and not directory.
(ii) Failure to follow the procedure under
Section 144-C(1) would be a jurisdictional
error and not merely procedural error or
irregularity.
(iii) Therefore, Section 292-B of the IT Act
cannot save an order passed in breach of the
provisions of Section 144-C(1), the same being
an incurable illegality.
27. It is important to note that Section 144-
C(1) is a non obstante provision, which
requires its compliance irrespective of the
other provisions that may be contained in the
IT Act. There is no dispute that petitioner is an
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W.P.(C).Nos.1694 & 2689 of 2011
eligible assessee and also there is no dispute
as to the applicability of Section 144-C. It is
also not in dispute that the final assessment
order has been passed without the draft
assessment order as contemplated under
Section 144-C(1) of the IT Act. The assessing
officer ought to have in the first instance
forwarded a draft of the proposed order of
assessment to petitioner, as there was a
proposed variation prejudicial to the interest of
the assessee. This important step has been
completely omitted by the respondent taking
away a very necessary right of petitioner to file
objections to the proposed variation with the
DRP and the assessing officer, which in our
view, strikes to the root of the procedure
contemplated by Section 144-C.
28. Applying the aforesaid principles to the
facts of this case, we are of the view that the
failure on the part of the assessing officer to
follow the procedure under Section 144-C(1) is
not a merely procedural or inadvertent error,
but a breach of a mandatory provision. We are
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W.P.(C).Nos.1694 & 2689 of 2011
also not impressed with the arguments of the
Revenue that the assessing officer was under
pressure of two charges, as there were
timelines to adhere to, since the said timelines
from time to time have been extended, the
most recent one being to 30-9-2021. The
Revenue ought to have appreciated that the
requirement under Section 144-C(1) to first
pass a draft assessment order and to provide a
copy thereof to the assessee is a mandatory
requirement which gave substantive right to
the assessee to object to any variation, that is
prejudicial to it. In this case, the order under
Section 92-CA(3) of the IT Act, proposed to
make an adjustment of Rs 10,74,54,337 to the
arm's length price considered as nil "by
petitioner and to that extent the said
adjustment was evidently prejudicial to the
interest of petitioner depriving petitioner of
this valuable right to raise objection before
DRP would be denial of substantive rights to
the assessee, for which, in our view, the
assessing officer has no power under the
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W.P.(C).Nos.1694 & 2689 of 2011
statute, as the provision clearly mandates the
assessing officer to pass and furnish a draft
assessment order in the first instance in such a
case. The legislature, in our view, has intended
to give an important opportunity to petitioner,
who is an eligible assessee, which in our view,
has been taken away. In our view, failure to
follow the procedure under Section 144-C(1)
would be a jurisdictional error and not merely
procedural error or a mere irregularity. The
assessment order has not been passed in
accordance with the provisions of Section
144-C of the IT Act. This is not an issue, which
involves a mistake in the said order, but it
involves the power of the assessing officer to
pass the order. By not following the procedure
laid down in Section 144-C(1) to pass and
furnish a draft assessment order to petitioner
and directly passing a final assessment order
and without giving petitioner an opportunity to
raise objections before the DRP, there is a
complete contravention of Section 144-C, the
assessing officer having wrongly assumed
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W.P.(C).Nos.1694 & 2689 of 2011
jurisdiction to straight away pass the final
order. This is not a mere irregularity but an
incurable illegality. Even the provisions of
Section 292-B of the IT Act would not protect
such an order as Section 292-B of the IT Act
cannot be read to confer jurisdiction on the
assessing officer, where none exists. The
Supreme Court decision in CIT v. M. Pirai
Choodi [(2010) 15 SCC 283] : [(2011) 334
ITR 262] referred to in the Revenue's reply is
also not applicable to the issue at hand as that
was a case where the assessee was not given
an opportunity to cross-examine the witness
concerned and which assessee also had a
statutory appellate remedy which the assessee
had failed to avail of, whereas there is no such
right available to petitioner in this case. In
fact, petitioner has lost a substantive right due
to the failure of the respondents to pass and
forward a draft assessment order in the first
instance on a variance, prejudicial to the
interest of petitioner. In our view, this is clearly
a case of jurisdictional error. The final
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W.P.(C).Nos.1694 & 2689 of 2011
assessment order passed by the assessing
officer stands vitiated on account of lack of
jurisdiction, which is incurable and deserves to
be set aside as void ab initio."
15. A Division Bench of the Madras High Court in
Assistant Commissioner of Income-tax and Another v.
Vijay Television Private Ltd and Another [2018 SCC OnLine
Mad 13752] held as follows:-
"39. From the above it is unambiguously clear
that the Assessing Officer is duty bound to
adhere to the mandatory requirement
mandated under section 144C(1) of the Act by
first passing a draft assessment order, the
failure of which would invalidate the final
assessment order and the consequent
demand notices and penalty proceedings.
..................................................................
47. The necessity for Parliament to incorporate
section 144C is not only to safeguard the
Revenue, but also the assessee and any
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W.P.(C).Nos.1694 & 2689 of 2011
mistake committed by any one of them, the
said party is supposed to face the
consequences and cannot put the hands of the
clock back and start afresh.
48. Though it is the submission of the Revenue
that it is a procedural irregularity, which can be
corrected through issuance of a corrigendum
and no prejudice would be caused to the
assessee, however, it is to be pointed out that
the act committed by the Revenue is an
incurable illegality, which cannot stand
protected by section 292B of the Act. If the
contention of the Revenue is accepted, then it
would literally render all the provisions of the
Income-tax Act subservient to section 292B. In
effect, any error or omission or mistake
committed by the Revenue at any stage of a
proceeding cannot be sought to be cured by
taking umbrage under section 292B. Allowing
such a contention would be misreading the
intention of Parliament in enacting section
292B and section 144C.
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49. The question of limitation raised by the
Revenue would in no way save the Revenue
from the non-compliance of section 144C of
the Act. The non-compliance of the mandatory
provisions of section 144C of the Act, being an
incurable illegality, renders the assessment
order null and void. Learned single judge has
taken into account all the relevant facts and
laws and has given a well considered finding
and we are of the considered opinion that no
interference is called for with the order passed
by the learned single judge."
16. A Division Bench of the Delhi High Court in Turner
International India Pvt. Ltd. v. Deputy Commissioner of
Income Tax [2017 SCC OnLine Del 12952] held thus:-
"16. The court is unable to accept the
above submission. The legal position as
explained in the above decisions is
unambiguous. The failure by the Assessing
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Officer to adhere to the mandatory
requirement of section 144C(1) of the Act
and first pass a draft assessment order
would result in invalidation of the final
assessment order and the consequent
demand notices and penalty proceedings."
17. Now I shall address the contention of the learned
Standing Counsel that the assessing officer was bound by the
explanation regarding applicability of Section 144C in Circular
No.5/2010 while he undertook the impugned assessment.
Though the said contention is factually correct, as found above,
the explanation in the said Circular issued by the Board was
contrary to the provisions of Section 144C(1). The explanation
was therefore incorrect and illegal. Even the Board has no
authority to violate the provisions of the Act. Breach of the
mandate of the provision cannot be sought to be condoned by
relying on an incorrect interpretation of the provision by the
Board. The assessee cannot be put to disadvantage by
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accepting the contention that the mistake committed by the
assessing authority was only a bonafide mistake. Hence, the
said contention of the learned Standing Counsel is rejected.
Moreover, it is to be noted that these writ petitions were filed
even before issuance of Circular No.9/2013. During the
pendency of these cases the Board realised the mistake and
replaced paragraph 45.5 of Circular No.5/2010. Another
contention of the learned Standing Counsel was that the
Revenue cannot be rendered remediless and the matter may be
remitted for fresh assessment, if the contention regarding non-
compliance with the procedure under Section 144C(1) was
found correct by this Court. This was opposed by the learned
counsel for the petitioner who argued that the period of
limitation under Section 153 of the Act being over, no fresh
assessment can be done now. In view of the judgment of the
Hon'ble Supreme Court in Hope Textiles Ltd and Another v.
Union of India and Others [(1994) 205 ITR 508], remitting
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the matter for fresh assessment would be an impermissible
course, as the period of limitation under the Act is already over.
In the result, these writ petitions are allowed. Impugned
assessment orders are quashed.
Sd/-
S.MANU
JUDGE
skj
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APPENDIX OF WP(C) 1694/2011
PETITIONER'S EXHIBITS
Exhibit P1 TRUE COPY OF THE ORDER OF THE TRANSFER
PRICING OFFICER DATED 26.10.2010.
Exhibit P2 TRUE COPY OF THE ASSESSMENT ORDER OF
THE 2ND RESPONDENT DATED 29.12.2010.
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W.P.(C).Nos.1694 & 2689 of 2011
APPENDIX OF WP(C) 2689/2011
PETITIONER'S EXHIBITS
Exhibit P1 TRUE COPY OF THE ORDER OF THE TRANSFER
PRICING OFFICER DATED 22.10.2010.
Exhibit P2 TRUE COPY OF THE ASSESSMENT ORDER OF
THE 2ND RESPONDENT DATED 30.12.2010.
