2022 (6) TMI 242 - HC - Income Tax

Assessment u/s 144A - Power of Joint Commissioner to issue directions in certain cases - Expenditure incurred towards procurement of raw materials - Addition under either section 40A(2) or Section 37 of the Income Tax Act - HELD THAT - Section 144-A does not empower to the Joint Commissioner to give a direction to an Assessing Officer to complete the assessment in a particular manner. Directions to be exercised by the Joint Commissioner under Section 144(A) is merely intended to guide the Assessing Officer to complete the assessment and only such directions are binding on an Assessing Officer. Since directions contained in the impugned order passed by the Joint Commissioner was prejudicial to the petitioner and to complete the assessment in a particular manner, petitioner should have been called for hearing by the second respondent Joint Commissioner. As there is a violation of Section 144(A) of the Income Tax Act, 1961, the consequential the Assessment Order dated 27.12.2018 passed by the first respondent also has to go. It would have different, if the 1st respondent independently had decided to proceed with the proposal in the Show Cause Notice. Therefore, the impugned direction of the second respondent impugned in W.P is hereby quashed. However, there is no necessity to remit the cases back to the second respondent to re-do exercise under Section 144 A of the Income tax Act, 1961.

Summary

Issues:
Challenging direction under Section 144-A of the Income Tax Act, 1961, assessment order challenge, writ of prohibition against additions in Income Tax Assessment for expenditure, violation of Section 144-A, binding nature of directions, completion of assessment within time limit.

Analysis:
1. The petitioner challenged the direction of the second respondent dated 21.12.2018 under Section 144-A of the Income Tax Act, 1961, and the consequential Assessment Order dated 27.12.2018 by the first respondent. The dispute involved the assessment year 2016-17, focusing on payments made to the Singapore Subsidiary to potentially reduce profit and tax liability.

2. The first respondent issued a notice to show cause regarding a possible reference to a Transfer Pricing Officer under Section 92(1)(A) of the IT Act, 1961. However, no decision was made on the referral, leading to a reference to the second respondent under Section 144(A) who directed the disallowance of a percentage of the transacted amount, contested by the petitioner.

3. The petitioner argued that proper notice and hearing were not provided before passing prejudicial orders under Section 144-A. The petitioner contended that the directions were not in accordance with the law, citing relevant legal provisions and precedents.

4. The impugned Assessment Order mechanically followed the directions of the second respondent, leading to challenges based on procedural irregularities and violation of natural justice principles. The petitioner emphasized the need for adherence to legal provisions and fair procedures in the assessment process.

5. The court analyzed Section 144-A of the Income Tax Act, emphasizing the binding nature of directions issued by the Joint Commissioner. However, it noted that directions prejudicial to the assessee must be preceded by an opportunity to be heard, which was lacking in this case, leading to the quashing of the impugned direction and Assessment Order.

6. Consequently, the court quashed the impugned direction and Assessment Order, remitting the case back to the first respondent for a fresh assessment order after considering the petitioner's submissions. The court directed completion of the exercise within a specified timeframe, ensuring due process and compliance with legal requirements.

7. The judgment highlighted the importance of procedural fairness, adherence to legal provisions, and the necessity for proper opportunity to be heard before passing prejudicial orders. The decision aimed to uphold principles of natural justice and ensure a fair and transparent assessment process in line with the Income Tax Act, 1961.