, " "
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
BEFORE HON'BLE S/SHRI D. MANMOHAN , VICE-PRESIDENT
AND B.R.BASKARAN (AM)
, . , .. ,
./I.T.A. No.6078 and 7160/Mum/2011
( / Assessment Years: 2004-05 and 2006-07)
M/s Perstorp Chemicals India / Income Tax Officer,
Pvt.Ltd, Vs. 10(2)(3),
501,5th Floor, Kesar Solitaire, Aayakar Bhavan,
Plot No.5, Sector-19, M K Road,
Sanpada, Mumbai-400020
Navi Mumbai-400705
( /Appellant) .. ( / Respondent)
./I.T.A. No.6079/Mum/2011
( / Assessment Year : 2005-06)
M/s Perstorp Chemicals India / Dy. Commissioner of Income Tax-
Pvt.Ltd, Vs. 10(2),
501,5th Floor, Kesar Solitaire, Aayakar Bhavan,
Plot No.5, Sector-19, M K Road,
Sanpada, Mumbai-400020
Navi Mumbai-400705
( /Appellant) .. ( / Respondent)
. / . / PAN/G IRNo.:AAACP9450G
/ Appellant by : Shri Mayur Kisnadwala
/Respondent by : Shri N Padmanaban
/ Date of Hearing
:09.4.2015
/Date of Pronouncement :24.6.2014
/ O R D E R
Per B.R.BASKARAN, Accountant Member:
All these appeals have been filed by the assessee challenging the
orders passed by Ld CIT(A)-15, Mumbai and they relate to the assessment
2 I.T.A. No.6078,6979 and 7160/Mum/2011
years 2004-05 to 2006-07. All these appeals were heard together and
hence they are being disposed of by this common order, for the sake of
convenience.
2. We shall take up the appeal filed for AY 2004-05. The assessee
company is engaged in the business of manufacture and sale of chemicals.
Along with the return of income filed for AY 2004-05, the assessee also
filed Transfer pricing study report in Form 3CEB, wherein it was reported
that the assessee has entered into international transaction in the form of
payment of Royalty amount of Rs.5.76 crores and technical knowhow
amount of Rs.0.79 crores. Hence the AO referred the matter of
determination of Arms Length Price (ALP) to the Transfer Pricing Officer
(TPO).
3. Before TPO, the assessee relied upon Technical Assistance
Agreement entered by the assessee with its AE Perstorp AB Sweden
entered on 03-02-1998 and further submitted that the impugned
payments have been approved by RBI. The TPO asked the assessee to
furnish details like, Basis of the royalty payment, working of royalty, cost
incurred by the owner towards the royalty and whether any other AE is
paying royalty. However, the assessee did not furnish any of the details
that were called for. On the contrary, it was submitted that the royalty
payments pertain to the period from September 1998 to March 2002 and
the assessee had disallowed the same in the relevant years u/s 40(a)(i) of
the Act for non-deduction of TDS. Since the assessee has remitted the
TDS during the year under consideration, it has claimed deduction u/s
40(a)(i) of the Act. It was further submitted that the royalty payment
pertaining to the year under consideration was not claimed as deduction
since the TDS was not deducted from the said payment. With regard to
the ALP of the payment, the assessee simply relied upon the Technical
Service Agreement.
3 I.T.A. No.6078,6979 and 7160/Mum/2011
4. Since the assessee did not furnish the details that were called for,
the TPO determined the ALP of Royalty and Technical knowhow fee as
NIL. Accordingly, he proposed enhancement of Rs.6.55 crores (5.76 +
0.79) to the total income of the assessee. Accordingly the assessing
officer disallowed the claim of the above said amount. The Ld CIT(A) also
confirmed the addition.
5. We have heard the parties and perused the record. There is no
dispute with regard to the fact that the royalty payment of Rs.5.76 crores
pertain to the period from September, 1998 to March, 2002. The present
assessment year is AY 2004-05. It is stated that the assessee has
disallowed the royalty expenses of Rs.5.76 crores in the relevant years as
per the provisions of sec/ 40(a)(i), since the assessee did not deduct and
remit tax at source in those years. However, the assessee has deducted
and remitted the TDS amount during the year under consideration and
accordingly it has claimed the same as deduction u/s 40(a)(i) of the Act.
The Ld A.R further submitted that the assessee, ultimately, did not pay the
royalty amount and hence the entire expenses claimed by it has been
reversed and offered as income in AY 2006-07. Accordingly it was
contended that there is no requirement to determine ALP, since it has
become fiscal nullity.
6. On the contrary, the Ld D.R submitted that the assessee itself has
reported the royalty payment as International transaction and further
failed to furnish the details that were called for by the TPO. Hence the
TPO was constrained to determine the ALP of royalty payment as NIL.
7. As noticed earlier, the royalty payment of Rs.5.76 crores has been
claimed by the assessee u/s 40(a)(i) of the Act on the basis of remittance
of TDS during the year under consideration. There should not be any
dispute that the reference to the Transfer Pricing Officer is part of
assessment proceedings and as per the provisions of sec. 92CA of the Act,
4 I.T.A. No.6078,6979 and 7160/Mum/2011
the AO may refer the matter of determination of ALP of international
transaction to the Transfer pricing officer, with the previous approval of
Commissioner, if he considers it necessary or expedient so to do. Since
the provisions of sec. 92CA are part of assessment procedure, we are of
the view that the international transaction referred to in sec. 92CA shall
refer only to the international transaction, which was entered during the
year relevant to the assessment year which is before the AO. Accordingly,
we are of the view that the AO cannot refer the international transactions
that were carried on in any of the past years, whose assessments have
already been completed.
8. Further, there is no dispute with regard to the fact that the above
said royalty amount of Rs.5.76 crores pertained to the period from Sep.
1998 to March, 2002. Hence the said payment does not pertain to the
international transaction entered during the year under consideration.
Accordingly, we are of the view that there was no requirement for the AO
to refer the matter of determination of ALP to the TPO, since the
impugned transactions do not pertain to the year under consideration and
hence there was no requirement of determination of ALP.
9. We notice that the TPO as well as Ld CIT(A) have expressed the
view that the assessee itself has furnished the Transfer Pricing Study in
Form No. 3CEB. In our view, the action of the assessee in furnishing the
report cannot override the provisions of the Act and further it is an
established principle of law that there is no estoppels against the law.
Accordingly, we are not in agreement with the view expressed by the tax
authorities on this issue. Accordingly, we set aside the decision rendered
by Ld CIT(A) in respect of Royalty payment and direct the AO to allow the
deduction of Rs.5.76 crores u/s 40(a)(i) of the Act after making due
verification thereof. Accordingly, the alternative contention of the assessee
with regard to fiscal nullity does not require any adjudication in this year.
5 I.T.A. No.6078,6979 and 7160/Mum/2011
10. With regard to the technical knowhow payment of Rs.0.76 crores,
we notice that the assessee has argued that the same has been capitalized
and hence it falls outside the scope of the Transfer Pricing
study/adjustment. However, the TPO has not accepted the same and
since the assessee has failed to furnish the details, he determined the ALP
as NIL. In our view, the contention of the assessee is not acceptable. The
expression "International Transaction" has been defined in sec. 92B of the
Act in a wide manner and it includes every kind of transaction having a
bearing on the profits. A careful perusal of the definition would show that
the same does not make any difference in the line of revenue transaction
and capital transaction. Hence, the contention of the assessee is not
acceptable.
11. At the same time, the decision of the TPO to determine the ALP as
NIL is also not in accordance with the provisions of sec.92C of the Act on
the reasoning that the assessee did not furnish relevant details that were
called for by him. We notice that the assessee had contended before the
TPO/AO that it had capitalized the technical knowhow fee and hence the
Transfer pricing provisions are not applicable to it. Under these set of
facts, it appears that the assessee did not furnish the relevant details. In
the preceding paragraph, we have rejected the contentions of the
assessee and hence the ALP of the technical knowhow payment is required
to be determined as per the provisions of the Act. Accordingly, we are of
the view that the issue relating to the determination of ALP of Technical
knowhow payment requires fresh examination. Accordingly, we set aside
the decision rendered by the Ld CIT(A) in respect of the issue relating to
Technical knowhow payment and restore the same to the file of the
AO/TPO for fresh consideration.
12. We shall now take up the appeal filed for AY 2005-06, wherein
following issues arise for our consideration:-
6 I.T.A. No.6078,6979 and 7160/Mum/2011
(a) Addition made u/s 145A of the Act on account of adjustment of
closing stock value with Excise duty amount.
(b) T.P. adjustment of Royalty amount.
13. The first issue relates to the addition made by the AO u/s 145A of
the Act. The assessee has followed Exclusive method of accounting for
Excise duty and hence the closing stock value declared in the Profit and
loss account did not include the value of Excise duty. Hence the AO
enhanced the value of closing stock by the amount of duty related to it.
The Ld CIT(A) also confirmed the same, but gave a partial relief with
regard to some computational error.
14. We heard the parties on this issue. According to the assessee, it
has followed Exclusive method for accounting the Excise duty, which
means that the "Excise duty account" shall be maintained as a Balance
Sheet item, wherein the collection and remittance shall be accounted for
and the remaining balance shall be taken to the Balance sheet as an item
of Payable/Receivable. Under inclusive method, the Excise duty shall be
included in the value of purchases, sales and inventory and hence the
same is accounted for through the Profit and loss account. As per the
accounting principles, both the methods for accounting for the Excise duty
collection and remittance are accepted, since both the methods shall not
have any impact on the Net profit. It is only two different forms of
preparing the financial statements.
15. However, the provisions of sec. 145A mandates that the value of
purchase and sale of goods and inventory shall be adjusted to include the
amount of tax, duty, cess or fee actually paid or incurred by the assessee
to bring the goods to the place of its location and condition as on the date
of valuation. Hence, for the purposes of Income tax, an assessee is
required to follow only inclusive method of accounting the tax, duty etc.
In the instant case, we notice that the AO has adjusted the value of
7 I.T.A. No.6078,6979 and 7160/Mum/2011
closing stock only, to include the amount of tax, duty etc., where as the
provisions of sec. 145A requires that the value of purchases and sales
should also be adjusted to include the amount of tax, duty etc. Thus, the
action of the AO, which was approved by Ld CIT(A), was not in accordance
with the mandate of the provisions of sec. 145A of the Act. Compliance of
provisions of sec. 145A in part only, would give misleading result.
Accordingly, we are not able to approve the order of Ld CIT(A) on this
issue.
16. Since the provisions of sec. 145A of the Act have not been applied in
entirety, we are of the view that this issue requires fresh examination at
the end of the AO. Accordingly, we set aside the order of Ld CIT(A) on
this issue and restore the same to the file of the AO with the direction to
apply the provisions of sec. 145A of the Act to purchases, sales and
inventory and make addition, if any, is found to be made. The assessee is
also directed to prove to the satisfaction of the AO that both the inclusive
method and exclusive method give same financial result.
17. The next issue relates to the T.P adjustment of Royalty payment.
Since the assessee failed to furnish the details that were called for by the
TPO, he determined the ALP of royalty payment as NIL.
18. The Ld A.R submitted that the assessee ultimately did not pay the
royalty amount and accordingly reversed the same in the financial year
relevant to AY 2006-07. Accordingly it was submitted that the international
transaction has resulted into a fiscal nullity and accordingly it was
contended that there was no requirement of determining ALP. In our
view, any future event should not influence the current transaction. Even
the accounting standards provide that the contingencies and events taking
place in the subsequent period could be recognized only if it is ascertained
before the finalization of accounts and further the controversy relating to
the said contingency or event should be subsisting as on the date of
8 I.T.A. No.6078,6979 and 7160/Mum/2011
preparation of the financial statements. In the instant case, it was not
shown to us that both the conditions have been fulfilled. In fact, had it
known to the assessee that it need not pay the royalty amount before the
finalization of the financial statements, then there would not have been
any requirement to provide for royalty payment in the current year's
financial statements. Hence, in our view, the reversal of the royalty
transaction made in the financial year relevant to the AY 2006-07 would
not impact the determination of ALP in the current year.
19. The Ld A.R also has taken a stand that it has disallowed the royalty
payment u/s 40(a)(i) of the Act and hence the T.P adjustment would result
in double addition. We notice that the Ld CIT(A) has given relief to the
assessee with regard to the addition made u/s 40(a)(i) of the Act. Since,
we are restoring the issue relating to T.P adjustment to the file of the
AO/TPO, the issue relating to sec. 40(a)(i) disallowance would also
resurrect. However, we may clarify here that, in our view, the
determination of ALP of international transaction would precede the
application of the provisions of sec. 40(a)(i) of the Act, since the former
relates to the validation of Net profit declared by the assessee and the
latter is only a technical disallowance rather deferment of allowance
prescribed under a legal fiction introduced into the Income tax Act. The
technical disallowance would have to be considered only after validation of
Net profit. We may explain the same with an example. Let us assume
that a company has made royalty payment of say Rs.10.00 lakhs and did
not deduct tax at source thereon. Let us assume that the TPO determines
the ALP of the same at Rs.3.00 lakhs. The AO would automatically
disallow Rs.7.00 lakhs. Hence the disallowance to be made u/s 40(a)(i) of
the Act would be restricted to Rs.3.00 lakhs only. This example would
make it clear that the disallowance to be made u/s 40(a)(i) is influenced
by the T.P adjustments and not vice versa. Accordingly, in our view, the
disallowance made/to be made u/s 40(a)(i) would not debar the AO/TPO
9 I.T.A. No.6078,6979 and 7160/Mum/2011
from determining the ALP of international transactions. In view of the
above said contentions, it appears that the assessee did not furnish the
relevant details. Since we have rejected the contentions of the assessee,
the ALP of the royalty amount is required to be determined as per the
provisions of the Act. Accordingly, we are of the view that the issue
relating to the determination of ALP requires fresh examination.
Accordingly, we set aside the decision rendered by the Ld CIT(A) in
respect of this issue and restore the same to the file of the AO/TPO for
fresh consideration in accordance with the law.
20. We shall now take up the appeal filed for AY 2006-07, where in
following issues are urged by the assessee:-
(a) Validity of assessment order passed by the AO.
(b) T.P. adjustment made u/s 92CA(3) of the Act.
(c) Additions made u/s 145A of the Act.
(d) Interest charged u/s 234B and 234C of the Act.
(e) Validity of initiation of penalty proceedings u/s 271(1)(c) of the
Act.
21. The first issue relates to the validity of the assessment order passed
by the assessing officer. The assessment order for AY 2006-07 has been
passed by the AO on 30-12-2009 and in that order; the AO has made
addition proposed by the TPO. The Ld A.R submitted that the provisions
of sec. 144C (1) is attracted in the case of "eligible assesses", if the
assessing officer, after 1st day of October 2009, proposes to make any
variation in the income or loss returned by the eligible assessee. The Ld
A.R submitted that the expression "Eligible assessee" is defined in sec.
144C(15)(b) of the Act, according to which it means any person in whose
case the variation referred to in sec. 144C(1) arises as a consequence of
the order of the Transfer Pricing Officer passed u/s 92CA(3) of the Act.
The Ld A.R submitted that the assessing officer has passed the final order
for the year under consideration on 30-12-2009, wherein he has made the
10 I.T.A. No.6078,6979 and 7160/Mum/2011
addition proposed by the TPO. Since the assessee has become an "eligible
assessee" and since the AO has added the variation proposed by the TPO,
the AO should have forwarded draft assessment order first to the assessee
in terms of sec. 144C(1) of the Act. Accordingly, the Ld A.R submitted
that, since the AO has failed to follow the mandate of the provisions of
sec. 144C(1), the impugned assessment order is liable to quashed. In
support of this proposition, the AO placed reliance on the decision of
Hon'ble Madras High Court rendered in the case of Vijay Television (P) Ltd
Vs. Dispute Resolution Panel (2014)(270 CTR 505), wherein it was held
that the assessment order passed in violation of statutory provisions
prescribed by the statute is liable to be quashed. He further submitted
that the Hon'ble High Court of Andhra Pradesh has also taken identical
view in the case of Zuari Cement Ltd Vs. ACIT (Writ petition No.5557 of
2012 dated 21-02-2013). The Ld A.R submitted that the Delhi bench of
ITAT has also taken identical view in the case of Capsugel Healthcare Ltd
Vs. ACIT (2014)(50 taxmann.com 324).
22. On the contrary, the Ld D.R submitted that the Finance (No.2) Act,
2009 has inserted the provisions relating to "Dispuste Resolution Panel"
and accordingly the provisions of sec. 144C of the Act were introduced into
the Act. The sub-sec. (1) of sec. 144C reads as under:-
"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 1st day of October, 2009, any variation in the
income or loss returned which is prejudicial to the interest of such
assessee".
The CBDT issued a Circular No.5 of 2010 dated s3.6.2010 (2010)(324 ITR
(St.) 293 @ 340), wherein it expressed the view that the new amendments
will apply in relation to the assessment year 2010-11 and subsequent
years. He submitted that the assessing officer's action in not following the
11 I.T.A. No.6078,6979 and 7160/Mum/2011
procedures prescribed in sec. 144C of the Act cannot be found fault with,
since the same is in accordance with the view expressed by the CBDT,
whose circulars and instructions are binding upon the AO. The Ld D.R
further submitted that the AO has assumed the jurisdiction for the
assessment year under consideration in a valid manner and hence non-
compliance with the procedure prescribed in sec. 144C would not make
the assessment order a nullity. In this regard, he placed reliance on the
decisions rendered by the Hon'ble Supreme Court in the cases of Guduthur
Bros Vs. ITO (1960)(40 ITR 298)(SC) and Kapurchand Shrimal Vs. CIT
(131 ITR 451).
23. We heard the parties on this legal issue. The year under
consideration is AY 2006-07 and the assessee filed its return of income o
30-11-2006. Hence the AO should have initiated assessment proceedings
by 30-11-2007 by issuing notice u/s 143(2) of the Act. The AO made a
reference to the T.P.O on 7.7.2008 and the T.P.O passed the order u/s
92CA(3) of the Act on 21.10.2009, i.e. after expiry of 15 months from the
date of reference.
24. In the mean time, the Finance (No.2) Act, 2009 received the assent
of the Hon'ble President of India on 19-08-2009, in which the provisions of
sec. 144C of the Act came to be introduced in the Act. The said provisions
mandate that the assessing officer should forward draft assessment order
to the assessee, if he proposes, on or after 1st October, 2009, to make any
variation to the income as suggested by the TPO. However, the CBDT
has taken the view that the new provisions of sec. 144C shall have
application in relation to AY 2010-11 and subsequent assessment years
and it has been so expressed by the CBDT in its Circular No.5/2010
(supra). In the said Circular, it is also stated that the Dispute Resolution
Panel Rules have been notified by S.O. No. 2958(E) dated 20th November,
2009.
12 I.T.A. No.6078,6979 and 7160/Mum/2011
25. We have earlier noticed that the order of TPO was passed on
21.10.2009 and the Dispute Resolution Panel Rules (to comply with the
provisions of sec. 144C) itself was notified subsequently on 20-11-2009.
Further, the view of the revenue is that the provisions of sec. 144C shall
have application in relation to AY 2010-11 and subsequent years. Under
these circumstances, it appears that the assessing officer has proceeded to
pass the order, in accordance with old procedures, on 30-12-2009, since
the applicability and impact of new provisions of sec. 144C were unclear.
Further, the view of the CBDT/Circular of CBDT is binding on the assessing
officer. The Ld A.R brought to our notice that the CBDT has issued another
Circular on November 19, 2013 (2013)(350 ITR (St.) 0007), where in the
CBDT has modified its earlier Circular No.5 of 2010 (supra) and stated that
the provisions of 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. However, it can be noticed that the clarification was issued only
on 19-11-2013, by which time the impugned assessment order had already
been passed by the AO and in fact, the Ld CIT(A) has also disposed of the
appeal by that time.
26. The facts prevailing in the case of Vijay Television (P) Ltd (supra),
on which the assessee had placed reliance, are different. In the above
said case, the assessment year involved was AY 2009-10 and the TPO
order was passed on 30th Jan., 2013 and the assessing officer passed the
assessment order on 26-03-2013. The AO, subsequently, realized his
mistake and accordingly issued a Corrigendum on 15th April, 2013
modifying the assessment order passed on 26-03-2013 and stated that the
assessment order passed on 26-03-2013 should be read as Draft
assessment order purported to have been passed u/s 144C of the Act. It
is also pertinent to note that the Corrigendum was issued after the expiry
13 I.T.A. No.6078,6979 and 7160/Mum/2011
of limitation period prescribed in sec. 153 of the Act. Thus, it is seen that
the assessing officer was very much sure about the applicability of
provisions of sec. 144C and hence he issued a Corrigendum, which the
Hon'ble High Court of Madras has held that the mistake committed by the
AO is not curable. Even otherwise, it can be seen that the AO has issued
corrigendum after the expiry of limitation period prescribed u/s 153 of the
Act for completion of the assessment. Once the assessment order is
passed, the assessing officer shall become functus officio and hence he
could not have issued Corrigendum.
27. On the contrary, in the instant case, the AO has passed the final
assessment order on 30-12-2009 on a bonafide belief that the provisions
of sec. 144C shall apply from AY 2010-11 onwards and hence there was no
attempt on his part to correct the same by issuing a corrigendum. Hence,
we are of the view that the assessing officer has committed only a
procedural irregularity.
28. In this regard, we derive support from the decision rendered by
Hon'ble Supreme Court in the case of Guduthur Bros (supra). The facts
prevailing in the case of Guduthur Bros are that the assessee therein failed
to file return of income within the prescribed time limit and hence the ITO
issued a penalty notice u/s 28(1)(a) of 1922 Act (corresponding to sec.
271(1)(a) of 1963 Act. The assessee furnished a written reply and there
after the ITO proceeded to levy penalty without affording a hearing to the
assessee. The penalty order of the ITO was set aside by Appellate
Assistant Commissioner, since no opportunity of being heard was given to
the assessee. Thereupon, the ITO issued notice calling upon the assessee
to appear before him so that it might get an opportunity of being heard.
Before the ITO could decide the case, the assessee filed a petition under
article 226 of the Constitution for the issuance of the writs against the
ITO, but the said petition was dismissed in limine by the High Court
14 I.T.A. No.6078,6979 and 7160/Mum/2011
holding that the contentions raised by the assessee might perhaps be
raised before the Income tax authorities. On appeal filed before Hon'ble
Supreme Court, the Hon'ble Apex Court held as under:-
"There is no question here that the requirements of section 28(1)(a) of
the Income-tax Act were not completely fulfilled. If the appellants had
not filed their return, as they were required by law to do, the omission
would attract clause (a) of sub-section (1) of section 28. We say nothing
as to that. Sub-section (3) of section 28, however, requires that the
penalty shall not be imposed without affording to the assessee a
reasonable opportunity of being heard. This opportunity was denied to
the appellants and, therefore, the order of the Income-tax officer
was vitiated by an illegality which supervened, not at the initial
stage of the proceedings, but during the course of it. The order
of the learned Appellate Assistant Commissioner pointed out the ground
on which the illegality proceeded and his order directing the refund of
the penalty, if recovered, cannot but be interpreted as correcting the
error and leaving it open to the Income-tax Officer to continue his
proceedings from the stage at which the illegality occurred. No express
remand for this purpose, as is contended, was necessary.
Our attention was drawn to a decision of a learned single judge of the
Kerala High Court reported in Jos Chacko Poothokaran v. Income-tax
Officer, Ernakulam Circle, in which, in similar circumstances, it has been
held that since an appeal was not taken by the Commissioner of
Income-tax to the Appellate Tribunal under sub-section (2) of section
33, the order of the Appellate Assistant Commissioner became final and
the Income-tax Officer could no longer proceed to reassess the penalty.
The reason given is, in our opinion, beside the point. What the Appellate
Assistant Commissioner did was to vacate the order and direct refund of
the penalty in view of an illegality which had occurred during the course
of the assessment proceedings. On receipt of the record it was open to
the Income-tax officer to take up the matter from the point at which the
illegality supervened and to correct his proceedings. It was pointed out
in the course of the statement of the case by the appellants that such
proceedings could only be taken during the course of assessment
proceedings and those proceedings are concluded. In our opinion,
the notice issued to the appellants to show cause why penalty
should not be imposed on them did not cease to be operative
because the Appellate Assistant Commissioner pointed out an
illegality which vitiated the proceeding after it was lawfully
initiated. That notice having remained still to be disposed of,
the proceedings now started can be described as during the
15 I.T.A. No.6078,6979 and 7160/Mum/2011
course of the assessment proceedings, because the action will
relate back to the time when the first notice was issued.
In our opinion, the Income-tax Officer is well within his
jurisdiction to continue the proceedings from the stage at
which the illegality has occurred and to assess the appellants
to a penalty, if any, which the circumstances of the case may
require."
29. We may also gainfully refer to another land mark decision rendered
by Hon'ble Supreme Court in the case of Kapurchand Shrimal Vs. CIT
(supra). The assessee there in was a Hindu Undivided family. The kartha
of the assessee claimed partition and accordingly requested for an order
u/s 25A of 1922 Act (corresponding 171 of the 1963 Act). However, the
ITO passed assessment order on the HUF without holding an enquiry as
contemplated u/s 25A of the Act. In the appeal filed before the AAC, the
Appellate Assistant Commissioner held that the partition has taken place
on a particular date. However he did not agree with the contentions of
the assessee that the assessment order should be quashed. The Tribunal
held that the assessments made without conducting an enquiry into the
claim of partition as required by sec. 25A was illegal and void.
Accordingly, it cancelled the assessment, but did not issue any further
direction to the ITO to make fresh assessments. The Tribunal observed
that it was open to the ITO to do so if the law otherwise so permitted.
The High Court, however, held that the assessment was valid but only
required modification and accordingly directed the Tribunal to direct, while
giving effect to the order of the High Court, the ITO to modify the
assessments in the light of sec. 25A(2). The assessee preferred further
appeal before the Hon'ble Supreme Court. The Hon'ble Apex Court held as
under:-
"From a fair reading of s. 25A of the Act it appears that the ITO is
bound to hold an inquiry into the claim of partition if it is made by or on
behalf of any member of the HUF which is being assessed hitherto as
such and record a finding thereon. If no such finding is recorded, sub-s.
16 I.T.A. No.6078,6979 and 7160/Mum/2011
(3) of s. 25A of the Act becomes clearly attracted. When a claim is
made in time and the assessment is made on the HUF without
holding an inquiry as contemplated by s.25A(1), the
assessment is, liable to be set aside in appeal as it is in clear
violation of the procedure prescribed for that purpose. The
Tribunal was, therefore, right in holding that the assessments in
question were liable to be set aside as there was no compliance with s.
25A(1) of the Act. It is, however, difficult to agree with the submission
made on behalf of the assessee that the duty of the Tribunal ends with
making a declaration that the assessments are illegal and it has no duty
to issue any further direction. It is well known that an appellate
authority has the jurisdiction as well as the duty to correct all errors in
the proceedings under appeal and to issue, if necessary, appropriate
directions to the authority against whose decision the appeal is
preferred to dispose of the whole or any part of the matter afresh
unless forbidden from doing so by the statute. The statute does not say
that such a direction cannot be issued by the appellate authority in a
case of this nature. In interpreting s. 25A(1), we cannot also be
oblivious to cases where there is a possibility of claims of
partition being made almost at the end of the period within
which assessments can be completed making it impossible for
the ITO to hold an inquiry as required by s. 25A(1) of the Act
by following the procedure prescribed there for. We, however,
do not propose to express any opinion on the consequence that may
ensue in case where the claim of partition is made at a very late stage
where it may not be reasonably possible at all to complete the inquiry
before the last date before which the assessment must be completed.
In the instant case, however, since it is not established that
the claim was a belated one the proper order to be passed is to
set aside the assessments and to direct the ITO to make fresh
assessments in accordance with the procedure prescribed by
law. The Tribunal, therefore, erred in merely cancelling the assessment
orders and in not issuing further directions as stated above.
We do not, however, agree with the orders made by the High Court by
which it upheld the assessments and directed the ITO to make
appropriate modifications. Such an order is clearly unwarranted in the
circumstances of this case. The order of the High Court is, therefore,
set aside. The question referred by the Tribunal to the High Court does
not appear to be comprehensive enough to decide the matter
satisfactorily. The question may have to be read as including a further
question regarding the nature of the orders to be passed by the
Tribunal if the orders of assessments are held to be contrary to law. In
the light of the above, we hold that the orders of assessments are liable
17 I.T.A. No.6078,6979 and 7160/Mum/2011
to, be set aside but the Tribunal should direct the ITO to make fresh
assessments in accordance with law."
30. In both the decisions discussed above, the Hon'ble Supreme Court
has made it clear that the illegality which has occurred after proper
initiation of proceedings vitiates the order and hence the proceedings
should be restored back to the stage at which the illegality has occurred.
In any case, in the instant case, we have noticed earlier that the revenue
was under the impression that the provisions of sec. 144C shall have
application from AY 2010-11 and subsequent years and the AO has also
acted in a bona fide manner in accordance with the view entertained by
the revenue. Under these set of facts, we are of the view that the
impugned assessment order suffers from illegality in not following the
procedures prescribed under sec. 144C of the Act and hence the said
illegality needs to be corrected by restoring the matter to the file of the
assessing officer at the stage at which the illegality has occurred.
31 Accordingly, we set aside the order of Ld CIT(A) and restore all the
to the file of the assessing officer with the direction to follow the
procedure prescribed under sec. 144C of the Act, i.e., the assessing officer
is directed to furnish a draft of the proposed assessment order to the
assessee as provided u/s 144C(1) of the Act and proceed thereafter in
accordance with the law.
32. Since we have restored all the issues to the file of the assessing
officer, the issues contested by the assessee on merits have become
infructuous.
18 I.T.A. No.6078,6979 and 7160/Mum/2011
33. In the result, all the appeals of the assessee are allowed for
statistical purpose.
The above order was pronounced in the open court on 24th June, 2015.
24th June, 2015
Sd sd
(. /D. MANMOHAN) (.. ,/ B.R. BASKARAN)
/VICE- PRESIDENT /ACCOUNTANT MEMBER
Mumbai:24th June, 2015.
. ../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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