2022 (1) TMI 1243 - AT - Income Tax

Revision u/s 263 - CIT jurisdiction u/s. 263 of the act on an order passed by the AO pursuant to the direction of DRP - assessment order was passed after transfer pricing adjustment were made by the TPO - Whether CIT has erred in initiating proceedings under section 263 of the Act when the original assessment order has been passed under section 143(3) r.w.s. 144C(13) of the Act on the basis of the direction of the DRP? - HELD THAT - Admittedly, this is not a case, where draft assessment order is being revised. This is a case where final assessment order passed pursuant to the direction of DRP u/s. 144(3) is being revised by Ld.CIT. Ld. Counsel of the assessee in this regard submits that from the Finance Act, 2009, memorandum explaining the rationale behind the insertion of section 144C of the Act by the Finance Bill, 2009 as also the CBDT Circular No. 5 of 2010 dated 3 June 2010 issued explaining the said insertion, the notes on clauses, etc., it can be seen that consequential amendments have been made to various provisions of the Act as a result of insertion of section 144C in the Act. Such consequential amendments have been made to section 13 1, section 246A and section 253 of the Act. That however, no amendment is made in section 263 of the Act as a consequence of insertion of section 144C of the Act to deem such orders being capable of being revised. That therefore, the memorandum, circular, etc. support the Assessee's stand that once the Assessing Officer passes an order in accordance with the Directions issued by a superior authority (being DRP) the same cannot be revised by the CIT under section 263 of the Act Scheme of the Act itself does not provide any interference in the direction of the DRP as the law containing section 144C(13) directs that the AO shall pass an order inconformity with the directions of the DRP without providing any further opportunity of being heard to the assessee. When the Act itself provide, that order has to be passed by the AO without providing any opportunity to the assessee pursuant to the direction of the DRP, the direction given in this order u/s. 263 by the Ld.CIT to the AO to call for the details of allowability of various deductions claimed by the assessee, in light of the observations discussed by him is quiet contrary to the sanguine provisions of law. Even otherwise, the order passed by the Ld.CIT is an exercise in futility inasmuch as, if the AO proceeds to pass an order by giving the assessee an opportunity of being heard, the same will be against the mandate of section 144C(13). Furthermore, it is also settled law that in assessment u/s. 144C, AO has to invariably pass a draft assessment order and give the same to the assessee for filing objection before DRP. Hence, the direction by the Ld.CIT to the AO to pass an order by-passing the provisions of passing the draft assessment order is also not sustainable in law. Now, we examine the constitution of DRP. As evident from the above, the DRP constitutes a collegium comprising of three Principal Commissioners or Commissioners of Income-tax, the directions given by them is binding upon by the AO. Members of the DRP are three in numbers and are individually equivalent in rank to the CIT, who is initiating proceedings u/s. 263 against the order passed by the AO pursuant to their direction. Now as far as equivalence of single CIT to a colliguem of 3 CIT is concerned, it is settled law that bench comprising single persons is not higher/superior than a collegiums of three persons. Hence, it is abundantly clear that the DRP stands at a higher pedestal than the CIT passing an order alone. We set aside the orders of Ld.CIT and hold that he cannot legally assume jurisdiction u/s. 263 of the act on an order passed by the AO pursuant to the direction of DRP. This is over and above our other observations in para 14 of this order, where we have noted that Ld.CIT has passed this order without properly appreciating the assessment order. Since, we have quashed assessment order on jurisdiction itself, we are not dealing with the merits of the case.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Loss on transfer of retail loan portfolio.
3. Loss on sale of loan portfolios to asset reconstruction company.
4. Service tax credit written off.
5. Disallowance related to Derivative Sales Credit (DSC).

Detailed Analysis:

Jurisdiction under Section 263 of the Income Tax Act:
The primary issue was whether the Commissioner of Income Tax (CIT) could initiate proceedings under Section 263 when the original assessment order was passed under Section 143(3) read with Section 144C(13) based on the directions of the Dispute Resolution Panel (DRP). The tribunal noted that the CIT's power under Section 263 does not extend to orders passed under Section 144C(13). The tribunal emphasized that the DRP's directions are binding on the Assessing Officer (AO), and the AO must complete the assessment in conformity with these directions without providing any further opportunity of being heard to the assessee. The tribunal concluded that the CIT could not legally assume jurisdiction under Section 263 for an order passed by the AO pursuant to the directions of the DRP.

Loss on Transfer of Retail Loan Portfolio:
The CIT observed that the AO had not made any inquiry regarding the loss of INR 65,51,06,135 claimed by the assessee on the transfer of the retail loan portfolio. The CIT noted that the loans were sold to unrelated third-party banks, indicating they were live and recoverable. The CIT also raised the issue of whether the sale should be classified as a "slump sale" under Section 50B of the Act. The tribunal found that the AO had not examined the valuation of these loans on the date of sale and had allowed the claim without adequate examination, making the assessment order erroneous and prejudicial to the interests of Revenue.

Loss on Sale of Loan Portfolios to Asset Reconstruction Company:
The CIT noted that the AO had not verified whether the deduction of INR 5,62,20,992 claimed by the assessee for the loss on the sale of loan portfolios to Asset Reconstruction Companies (ARC) was in accordance with the RBI guidelines. The CIT observed that the loss should have been transferred to provisions/reserve accounts and not debited to the profit and loss account. The tribunal agreed that the AO had not verified this aspect, making the assessment order erroneous and prejudicial to the interests of Revenue.

Service Tax Credit Written Off:
The CIT observed that the AO had not verified whether the deduction of INR 13,88,97,251 claimed by the assessee for the service tax credit written off was allowable under Section 37 of the Act. The CIT noted that the AO had not examined whether only the unavailed credits of the year under consideration had been allowed or cumulative credits of various years had also been allowed. The tribunal found that the AO had not verified this aspect, making the assessment order erroneous and prejudicial to the interests of Revenue.

Disallowance Related to Derivative Sales Credit (DSC):
The CIT noted that the AO had not complied with the directions of the Joint Commissioner of Income Tax (JCIT) to verify the DSC claim of the assessee. The CIT observed that the AO had not verified whether the transactions in respect of Indian clients actually originated from the UK and whether Barclays UK performed any services other than merely referring the clients to the assessee. The tribunal found that the AO had not verified the claim with cogent evidence, making the assessment order erroneous and prejudicial to the interests of Revenue.

Conclusion:
The tribunal quashed the CIT's order under Section 263, holding that the CIT could not legally assume jurisdiction for an order passed by the AO pursuant to the directions of the DRP. The tribunal noted that the CIT had passed the order without properly appreciating the assessment order and without considering the provisions of Section 144C(13), which mandates that the AO must pass an order in accordance with the directions of the DRP without providing any further opportunity of being heard to the assessee. The tribunal also emphasized that the DRP's directions are binding on the AO and that the CIT's revisionary powers under Section 263 do not extend to such orders.