2017 (12) TMI 1719 - AT - Income Tax

Reference u/s 92CA to TPO - Cognizance taken by the AO under section 92B(i) and reference made to TPO u/s 92CA - expenditures in respect of which payment has been made or is to be made to person referred to in clause (b) of sub section 2 of section 40A - Whether on account of omission of clause (i) from the statute, the proceedings already initiated or action taken under clause (i) becomes redundant or otiose ? - HELD THAT - Once the clause is omitted by subsequent amendment, it would be deemed that clause (i) was never been on the statute. While omitting the clause (i) of section 928A, nothing was specified whether the proceeding initiated or action taken on this continue. Therefore, the proceeding initiated or action taken under that clause would not survive at all. In this legal position, the cognizance taken by the AO under section 92B(i) and reference made to TPO under section 92CA is invalid and bad in law. Therefore, the consequential order passed by the TPO and DRP is also not sustainable in the eyes of law. Where this clause (i) is omitted from the statute since its inception, the AO ought have required to frame the assessment in normal course after making necessary enquiries of particular claim of expenditure in accordance with law. But this exercise could not have been done on account of provisions of section 92BA Clause (i) of the Act. Now when this clause (i) has been omitted from the statute by virtue of the aforesaid amendments, the AO is required to adjudicate the issue of claim of expenditures in accordance with law after affording opportunity of being heard to the assessee. We therefore set aside the orders of the AO and the DRP and restore the matter to the AO with the direction to readjudicate the issue of claim of expenditure incurred in respect of which payment has been made or is to be made to person referred to in clause (b) of sub section 2 of section 40A of the Act. Accordingly, since we have restored the matter to the AO, we find no justification to deal with the other issues on merit. Accordingly, appeal of the assessee stand allowed for statistical purposes.

Summary

Issues:
1. Disallowance of expenditure by Deputy Commissioner of Income Tax.
2. Admission of additional grounds by the assessee.
3. Validity of reference made under section 92CA.
4. Impact of omission of clause (i) of section 92BA by Finance Act, 2017.
5. Legality of orders passed by the authorities in light of the omission.

Analysis:

Issue 1: Disallowance of expenditure
The appellant challenged the Deputy Commissioner's order, contending it was against the law and facts of the case. The Dispute Resolution Panel (DRP) was criticized for not allowing the appellant to present arguments before enhancing disallowances. The appellant argued that the remuneration paid to directors was reasonable and fully allowed in previous assessments. They also highlighted the applicability of Companies Act provisions to private limited companies. The shareholders' approval of remuneration was emphasized as justifying the expenditure.

Issue 2: Admission of additional grounds
The counsel for the assessee requested the admission of additional grounds crucial to the case, which were objected to by the DR. The contention was that these grounds were fundamental to the case and should be considered, despite not being raised earlier.

Issue 3: Validity of reference under section 92CA
The AO's reference under section 92CA regarding specified domestic transactions was challenged by the assessee due to subsequent amendments. The argument was made that the transaction no longer fell under the specified domestic transaction category post the Finance Act, 2017 amendment.

Issue 4: Impact of omission of clause (i) of section 92BA
The omission of clause (i) of section 92BA by the Finance Act, 2017 was a critical point of contention. The assessee argued that the omission rendered the proceedings initiated under the clause invalid and no longer sustainable in law. Judicial precedents and interpretations were cited to support this position.

Issue 5: Legality of orders post-omission
The Tribunal analyzed the impact of the omission of clause (i) of section 92BA on the legality of actions taken by the authorities. It was concluded that the proceedings initiated and orders passed based on the omitted clause were invalid. The matter was remanded to the AO for reassessment in accordance with the law, emphasizing the need for due process and opportunity for the assessee to be heard.

In conclusion, the appeal of the assessee was allowed for statistical purposes, highlighting the significant implications of legislative amendments on ongoing proceedings and the necessity for adherence to legal provisions and principles.