2017 (4) TMI 660 - HC - Income Tax

Disallowance of claim u/s 10AA - Reference to Dispute Resolution Panel - Held that - Considering the entire scheme of Section 144C of the Act it appears that in conformity with the principles of natural justice the assessee is required to be given an opportunity to submit objections with respect to the variation proposed in the income or loss returned. Therefore while passing the final assessment order the Assessing Officer cannot go beyond what is proposed in the draft assessment order. If the submissions made on behalf of the Revenue are accepted that the Assessing Officer while passing the final assessment order can also go beyond the variation proposed in the draft assessment order then in that case it can be said that the assessee shall not given any opportunity to raise objections against such additions or disallowances which were not even proposed in the draft assessment order. Therefore the same can be considered to be in breach of the principles of natural justice. At this stage it is required to be noted that even while passing the regular assessment order if the officer proposes to make any further addition and/or disallowances in that case also the Assessing Officer is required to issue required notice under Section 142 of the Act and the assessee is required to be given an opportunity to raise objection against such addition and/or disallowance. Under the circumstances considering the entire scheme of Section 144C of the Act the Assessing Officer cannot make any addition and/or disallowance then what is proposed in the draft assessment order. The contention raised on behalf of the Revenue that the aforesaid lapse can be said to be a procedural lapse has also no substance. Such additions/disallowances other than those proposed in the draft assessment order cannot be said to be a mere procedural lapse. Under the circumstances we are of the opinion that the learned Tribunal has not committed any error in deleting the disallowance made by the Assessing Officer with respect to the claim of the assessee under Section 10AA of the Act as the same was not proposed by the Assessing Officer in the draft assessment order and for which no opportunity was given to the assessee to submit the objections against such disallowance. - Decided in favour of assessee

Summary

Issues Involved:
1. Upward adjustment to the arm's length price adjustment of ?1,48,43,000/-.
2. 50% disallowance of deduction under Section 10AA amounting to ?7,64,15,421/-.
3. Non-compliance with the scheme of Section 144C.
4. Whether issues not raised in the draft assessment order can be raised in the final assessment order.

Detailed Analysis:

Issue 1: Upward Adjustment to the Arm's Length Price Adjustment of ?1,48,43,000/-
The High Court admitted the Tax Appeal to consider whether the ITAT erred in law by deleting the addition made by the Assessing Officer (AO) on account of an upward adjustment to the arm's length price adjustment of ?1,48,43,000/- for the payment of technical services paid by the assessee to its associated enterprise. This issue was considered substantial and thus warranted further examination.

Issue 2: 50% Disallowance of Deduction under Section 10AA Amounting to ?7,64,15,421/-
The Tribunal had set aside the AO's disallowance of ?7,64,15,421/- under Section 10AA, which was not proposed in the draft assessment order. The High Court found that the AO could not make such disallowances in the final assessment order if they were not proposed in the draft assessment order. This is in line with the principles of natural justice, as the assessee must be given an opportunity to raise objections against any proposed variations. The High Court held this issue against the Revenue, stating that the Tribunal did not err in deleting the disallowance.

Issue 3: Non-Compliance with the Scheme of Section 144C
The High Court examined the scope and ambit of Section 144C in detail. It concluded that the AO must adhere strictly to the scheme of Section 144C, which mandates forwarding a draft assessment order to the assessee if any variations are proposed. Any additions or disallowances not mentioned in the draft assessment order cannot be included in the final assessment order, as this would breach the principles of natural justice. The Tribunal's decision to delete the disallowance made under Section 10AA was upheld, as it was not proposed in the draft assessment order.

Issue 4: Whether Issues Not Raised in the Draft Assessment Order Can Be Raised in the Final Assessment Order
The High Court reiterated that the AO cannot go beyond the variations proposed in the draft assessment order while passing the final assessment order. Allowing the AO to make additional disallowances or additions not mentioned in the draft assessment order would deprive the assessee of the opportunity to raise objections, thus violating the principles of natural justice. The High Court found no merit in the Revenue's argument that such lapses are procedural and could be corrected by remanding the matter back to the AO.

Conclusion:
The High Court admitted the Tax Appeal only for the issue related to the upward adjustment to the arm's length price adjustment of ?1,48,43,000/-. The other issues concerning the disallowance under Section 10AA, non-compliance with Section 144C, and raising new issues in the final assessment order were dismissed, holding that the Tribunal's decision to delete the disallowance was justified and in accordance with the law.