Income Tax Department Fails to Rectify 59,352 Cases with Rs 6,000 cr Tax Effect: CAG Report

The Comptroller and Auditor General of India (CAG) has reported that the income tax department recovered ₹3,588.79 crore from demands raised to rectify errors in assessments. However, 59,352 cases of earlier years remained unsettled, mainly due to errors in the levy of interest, irregularities in depreciation, and incorrect allowance of business expenditure. The tax effect of these unsettled cases is ₹6,252.06 crore.

The Supreme Court of India has delivered a split verdict on whether the time taken for the Dispute Resolution Panel (DRP) process under Section 144C of the Income Tax Act, 1961 (IT Act) shall override the limitation period prescribed under Section 1531 of the IT Act. The case, Assistant Commissioner of Income Tax v Shelf Drilling Ron Tappmeyer Ltd. Etc. (SLP (Civil) Nos.20569-20572 of 2023), involved non-resident taxpayers engaged in the business of providing services or facilities in connection with prospecting for or extraction or production of mineral oils [1].

Background

Section 144C of the IT Act was introduced by the Finance Act, 2009, to streamline dispute resolution for certain non-resident taxpayers and transfer pricing cases. It introduced a two-stage mechanism: the tax officer issues a draft assessment order, and the taxpayer may accept the draft order or file objections before the DRP, which can issue binding directions to the tax officer. The tax officer then passes the final assessment order in conformity with the DRP’s directions.

The question that arose was whether the time taken for the DRP process under Section 144C of the IT Act shall override the limitation period prescribed under Section 1531 of the IT Act. The taxpayers argued that no valid final assessment order could now be passed within time, as the DRP process and final order would necessarily extend beyond the statutory limit.

Supreme Court Ruling

The Supreme Court constituted a two-judge bench to deliberate on the issue. The Hon’ble Supreme Court rendered a split decision involving the following observations:

Justice Satish Chandra Sharma held that the timelines prescribed under Section 144C of the IT Act are independent of those under Section 153 of the IT Act and operate in addition to them. He emphasized that the entire procedure under Section 144C of the IT Act must be completed within the overall time period prescribed under Section 153 of the IT Act.

Justice B.V. Nagarathna, however, interpreted Section 144C of the IT Act as providing a stricter timeline for the completion of the assessment order of an eligible taxpayer. She stressed that the non-obstante clause in Section 144C(1) of the IT Act implies that it overrides any contrary provisions, creating a special procedure for eligible taxpayers.

Impact of the Verdict

The split verdict leaves the issue unresolved. While one judge held that the DRP process operates independently of the timelines prescribed in Section 153 of the IT Act, the dissenting judgment provided that without explicit statutory exclusion in Section 153 of the IT Act, DRP timelines must fit within the prescribed limits. The verdict highlights a legislative gap and calls for further clarification.

The Supreme Court has directed the Registry to place the matter before the Hon’ble Chief Justice of India to constitute an appropriate bench to hear this matter.

References

[1] https://www.bdo.in/en-gb/insights/alerts-updates/direct-tax-alert-supreme-court-renders-split-verdict-on-whether-the-time-taken-for-the-drp-process