2017 (8) TMI 663 - HC - Income Tax

AO jurisdiction to set off the losses prior to computation of deduction 10A - validity of order passed u/s.143(3) r/w.144C - Held that - Sub-section (13) of s.144C is specific and mandates that the Assessing Officer shall issue the order of final assessment in conformity with the directions of the DRP without provision of any further opportunity of being heard to the assessee within one month from the end of the month in which the directions are received. There is thus a vital distinction in the scheme of assessment as provided under s.144 B vis-a-vis that which is set out in s.144C. While the Assessing Officer in terms of s.144 B is bound by the directions issued by the IAC the Statute is silent as regards any fetter to his powers otherwise. Contrast this with sub-section (13) of s.144C the elements of which have been set out in detail above. It reveals a conscious decision by Legislature to limit the independent participation of the Assessing Officer in the process of assessment only to the stage of proposal of variations in terms of s.144C(1) and not thereafter. The express language of sub-section (13) thereof would admit of no other interpretation. Acceptance of the proposition advanced by the Department would tantamount to giving leave to the Assessing Officer to pass more than one order of assessment in the course of a single proceeding which is not envisaged in the scheme of the Act. Subsequent assessments either rectifying revising or reopening the original assessment are permitted by exercising specified powers under different statutory provisions. The order of draft assessment under section 144C(1) is for all intents and purposes an order of original assessment though in draft form. In this light of the matter the order of the Tribunal to this effect is right in law and calls for no interference. The variation in the order of final assessment dated 22.2.2014 relating to the priority of set off of losses is purely misconceived and an excess of jurisdiction by the Assessing Officer in terms of s.144C(13) of the Act. The questions of law are thus answered in favour of the Assessee and against the Department.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer to set off losses prior to computation of deduction under Section 10A.
2. Compliance with the provisions of Section 144C(13) in the context of the draft and final assessment orders.

Detailed Analysis:

Jurisdiction of the Assessing Officer to Set Off Losses Prior to Computation of Deduction under Section 10A

The primary issue was whether the Assessing Officer (AO) had the jurisdiction to set off losses before computing the deduction under Section 10A in the final assessment order, which was not proposed in the draft assessment order. The Tribunal held that the AO lacked jurisdiction to introduce new disallowances not contemplated in the draft order of assessment, as this was in violation of Section 144C(13) of the Income Tax Act. The AO's action of aggregating income/loss from various sources under the same head of income before allowing relief under Section 10A was deemed illegal since it was not part of the draft assessment order or the directions of the Dispute Resolution Panel (DRP).

Compliance with the Provisions of Section 144C(13)

The court examined the scheme of Section 144C, which provides a self-contained code for the assessment of entities engaged in international transactions. The sequence of events under Section 144C includes the issuance of a draft assessment order, the filing of objections by the assessee, and the issuance of directions by the DRP. The final assessment order must conform to these directions without introducing new issues not previously proposed.

The court emphasized that the AO is bound to follow the directions of the DRP and cannot introduce new variations in the final assessment order that were not part of the draft assessment order. This ensures that the assessee is not prejudiced by any new disallowances or adjustments that were not previously communicated and objected to. The court highlighted that the statutory mandate of Section 144C(13) limits the AO's role to giving effect to the DRP's directions without any further opportunity for the assessee to be heard.

The court also compared the provisions of Section 144C with the erstwhile Section 144B, noting that while both sections have procedural similarities, Section 144C(13) explicitly restricts the AO from making any new variations in the final assessment order. This distinction underscores the legislative intent to limit the AO's powers and protect the assessee's rights.

Conclusion

The court concluded that the AO exceeded his jurisdiction by introducing a new disallowance in the final assessment order, which was not part of the draft assessment order or the DRP's directions. The Tribunal's decision to set aside the AO's adjustment and direct the department to grant the deduction under Section 10A prior to the set-off of brought forward losses was upheld. The court dismissed the tax case appeal, affirming that the AO's actions were contrary to the statutory mandate of Section 144C(13) and prejudicial to the assessee.