2020 (2) TMI 734 - HC - Income Tax

Allowable expenditure under Section 37(1) - protective demand based on the assessment of the person who paid the amount - HELD THAT - The question of making protective demand based on the assessment of the person who paid the amount the petitioner appears to be incorrect as assessment cannot be made subject to outcome of collateral proceedings of another person. Assessment has to be completed based on the accounts of the petitioner. It cannot be left open ended as has been done in the case of the petitioner. Since the assessment procedure adopted by the assessing officer for the petitioner was not proper order and had left it open ended,it is of the view, it was also unsustainable and is therefore liable to be quashed. Therefore, the consequential orders passed by the respondents against the petitioner based on collateral proceedings in the case of M/s. Eastman Exports Global Clothing Private Limited are also liable to be quashed and the case should be remitted back to the Assessing Officer to pass a fresh order of assessment on merits in accordance with law taking note of the facts. The impugned recovery proceedings dated 03.02.2016 and 28.03.2016 are quashed and the case is remitted back to the concerned assessing officer to pass a fresh order of assessment on merits in accordance with law taking note of all the facts. The concerned Assessing Officer is therefore requested to pass a fresh assessment order for the Assessment Year 2010-11 in the case of the petitioner within a period of three months from the date of receipt a copy of this order.

Summary

Issues:
Impugned assessment orders based on protective assessment, treatment of advance amount, validity of demand for tax, challenge to assessment procedure, quashing of recovery proceedings, remittance of case for fresh assessment.

Analysis:
The petitioner challenged the order dated 03.02.2016 and consequential order dated 28.03.2016 passed by the respondent, which concluded that a protective assessment order for the Assessment Year 2010-11 had become substantive, making the petitioner liable to pay a significant sum as tax. The petitioner, a hosiery manufacturer, had received an advance from another company to improve infrastructure. Disagreement arose as to the treatment of this amount in the books of accounts between the petitioner and the other company, leading to a dispute regarding allowable expenditure under Section 37(1) of the Income Tax Act, 1961.

The Assessing Officer initially disallowed the expenditure claimed by the other company, leading to appeals and counter-appeals. The Tribunal eventually allowed the expenditure, but the respondent continued to demand tax from the petitioner based on the protective assessment order. The High Court found fault with the assessment procedure, stating that assessments cannot be subject to the outcomes of collateral proceedings of another entity. The court emphasized that assessments must be based on the petitioner's accounts and cannot be left open-ended.

The court held that the impugned demands were unsustainable, as the petitioner had successfully challenged the assessment order before the Commissioner of Income Tax (Appeals). Consequently, the recovery proceedings and consequential orders based on collateral proceedings were quashed. The case was remitted back to the Assessing Officer for a fresh assessment on merits in accordance with the law and all relevant facts.

In conclusion, the High Court quashed the recovery proceedings and remitted the case for a fresh assessment, directing the Assessing Officer to pass a new assessment order within three months. The court also allowed the Assessing Officer to await the outcome of any pending appeal by the revenue before finalizing the assessment. The petitioner was to be given a hearing before the new assessment order was passed. The writ petition was allowed with the above observations, with no costs imposed.