2017 (9) TMI 1298 - HC - Income Tax

Validity of Assessment Order - time limit specified in Section 153(2A) - period of limitation where entire order was not set aside but matter was remanded back for for limited aspects with directions - Held that - The Kerala High Court in Patel R.P. v. ACIT 2015 (3) TMI 609 - ITAT COCHIN held that Section 153 (2A) of the Act would apply even where more than one issue is involved i.e. even where one of the issues has been remanded to the AO for a fresh determination. The analysis of the terms finding and directions by the Supreme Court in Rajinder Nath (1979 (8) TMI 3 - SUPREME Court) was in the context of Section 153 (3) (ii) at a time when Section 153 (2A) of the Act had not been introduced since the relevant AY in that case was 1956-57. The said decision is, therefore, not of help to the Revenue. For all the aforementioned reasons, the Court holds that, in the present case, the assessment proceedings had to necessarily be completed by the AO within the time limit specified in Section 153 (2A) of the Act. Inasmuch as the AO failed to do so, the impugned notice dated 14th September 2015 issued by the AO and all proceedings consequential thereto including the order dated 2nd December 2015 passed by the AO are hereby set aside. - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice dated 14th September 2015 issued by the Deputy Commissioner of Income Tax under Section 254 read with Sections 144-C and 143 (3) of the Income Tax Act, 1961 for Assessment Year 2007-08.
2. Applicability of Section 153 (2A) of the Income Tax Act regarding the time-barred nature of the proceedings.

Detailed Analysis:

1. Validity of the Notice and Consequential Order:
The Assessee challenged the notice dated 14th September 2015 and the consequential order dated 2nd December 2015, arguing that the proceedings were time-barred under Section 153 (2A) of the Income Tax Act. The Assessee contended that the fresh assessment order should have been passed within two years from the end of the financial year in which the ITAT's order was received by the Commissioner.

2. Applicability of Section 153 (2A):
The core issue was whether Section 153 (2A) or Section 153 (3) (ii) of the Act was applicable. The Assessee argued that Section 153 (2A) applied, which prescribes a time limit for completing the assessment proceedings upon the original assessment being set aside or canceled in appeal. The Revenue contended that Section 153 (3) (ii) was applicable, which does not prescribe a specific time limit for completing the assessment.

Background Facts:
The Assessee, engaged in the manufacture and sale of mobile handsets, filed its return for AY 2007-08. The AO made several additions and disallowances to the Assessee's income based on the Transfer Pricing Officer's (TPO) report. The Assessee appealed to the ITAT, which set aside the assessment order on several issues and remanded the matter to the AO for fresh consideration.

Order of the ITAT:
The ITAT remanded the matter to the AO on several issues, including:
- Disallowance of marketing expenses.
- Depreciation on computer peripherals.
- Price protection expenses.
- Transfer pricing adjustments related to software development services and AMP expenses.
- Working capital adjustment for computing the arm's length price (ALP).

Proceedings on Remand:
The AO referred the TP issues to the TPO. The Assessee argued that the fresh assessment order should be passed within the time limit specified in Section 153 (2A). The TPO and AO disagreed, stating that Section 153 (3) (ii) applied, which does not prescribe a specific time limit.

Submissions of Counsel:
The Assessee's counsel argued that Section 153 (2A) applied to cases where the assessment order was set aside for a fresh assessment. The Revenue's counsel argued that Section 153 (2A) applied only when the entire assessment was set aside, and since the ITAT had remanded the matter on specific issues, Section 153 (3) (ii) was applicable.

Legislative History:
The Court reviewed the legislative history of Section 153, noting that sub-section (2A) was introduced to prescribe a time limit for completing fresh assessments where the original assessment was set aside or canceled in appeal. The Court emphasized that the intention was not to restrict the applicability of sub-section (2A) only to cases where the entire original assessment order was set aside.

Analysis and Reasons:
The Court concluded that the ITAT's order constituted a complete setting aside of the assessment with directions to the AO to pass a fresh order. Therefore, the time limit specified in Section 153 (2A) was applicable. The Court rejected the Revenue's argument that Section 153 (3) (ii) applied, noting that Section 153 (3) was subject to the provisions of sub-section (2A).

Judicial Precedents:
The Court discussed the decision in Basu Distributors (P) Ltd. v. Income Tax Officer, where it was held that Section 153 (2A) did not apply when the remand was on a specific issue. However, the Court distinguished the present case, noting that the ITAT had set aside the assessment on multiple issues, requiring a fresh assessment order.

The Court also referred to the decision in Commissioner of Income-tax v. Bhan Textile (P) Ltd, where it was held that Section 153 (2A) applied when the assessment order was set aside for a fresh determination.

Conclusion:
The Court held that the assessment proceedings had to be completed by the AO within the time limit specified in Section 153 (2A). Since the AO failed to do so, the impugned notice dated 14th September 2015 and all consequential proceedings, including the order dated 2nd December 2015, were set aside. The writ petition was allowed with no orders as to costs.

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