2011 (2) TMI 247 - AT - Income Tax

Set off and carry forward of unabsorbed depreciation - Scrutiny - Arm s length price - no show-cause notice was issued by the TPO prior to making adjustments - assessee was made aware of the TPO s stand by way of this show cause letter and several opportunities of hearing - assessee should have been given a show cause notice and also copy of material gathered by TPO prior to making adjustments - In the interest of justice and equity, the assessee should have been given a show cause notice prior to making adjustments - Appeal is allowed by way of remand

Summary

Issues:
Violation of principles of natural justice by failing to provide a show cause notice and adequate opportunity to the appellant.

Analysis:
The appeal was filed against the order of the Assessing Officer under sections 143(3) and 144C of the Income-tax Act, 1961. The appellant, a company engaged in various business activities, claimed a carry forward of loss on account of unabsorbed depreciation. The dispute primarily revolved around the adjustment of Rs. 1,75,11,207 in the income of the appellant concerning international transactions and the arm's length principle. The appellant contended that the Assessing Officer erred in various aspects, including disregarding prior year data, not considering start-up costs, and failing to appreciate the company's positive results at gross levels. The appellant also raised concerns about the denial of working capital adjustment and the violation of natural justice principles by not providing a show cause notice or adequate opportunity to rebut the adjustments made.

The appellant argued that there was a gross violation of principles of natural justice as no show cause notice was issued, and no material gathered by the Transfer Pricing Officer (TPO) was made available to the appellant for a response. The appellant cited legal precedents emphasizing the importance of providing a real and reasonable opportunity to be heard in such matters. The appellant relied on cases where the absence of proper opportunity for the assessee led to remanding the issue back to the Assessing Officer for a fair hearing. The appellant highlighted that the lack of a show cause notice and an opportunity to respond before making adjustments constituted a violation of natural justice principles.

After hearing both parties, it was established that no show cause notice was issued by the TPO before making adjustments, and the appellant was not provided with a meaningful opportunity to respond adequately. The Dispute Resolution Panel (DRP) also considered the order sheet notings as a show cause notice, but the appellate tribunal disagreed, emphasizing the necessity of a formal notice. Consequently, the tribunal remanded the matter back to the Assessing Officer to comply with legal provisions and provide the appellant with a proper opportunity to be heard. As the issue of inadequate opportunity was addressed by remanding the case, the tribunal did not delve into the other grounds raised by the appellant. Ultimately, the appeal was allowed for statistical purposes, emphasizing the importance of adhering to natural justice principles in tax assessments.