2024 (12) TMI 548 - AT - Income Tax

Validity of assessment order u/s 144C w/o passing draft order - HELD THAT - In our considered view, the provisions of Section 144C of the Act triggers a series of steps prescribed in sub-Section (2) to Section 12 of the Act and as can be seen from the most relevant sub-Sections (3) and (13) the assessment is completed either under sub- Section (3) or (13). A perusal of Section 144C of the Act shows that the AO shall, at the first instance forward the draft order of the proposed assessment and on receiving the said order, the assessee may approach the Dispute Resolution Panel (DRP), by raising objections. If the assesse accepts the variations, then the AO shall proceed by framing the final assessment order and if the objections are raised by the DRP, then, upon receipt of the directions issued by the DPR, the AO shall complete the assessment. However, we find that while drafting the said draft assessment order, the AO not only issued and served demand notice but has also initiated the penalty proceedings. In our considered view, the assessment order dt. 28/12/2019 when once become invalid and non-est, we do not find any provision to rectify a non-existing order. Therefore, the aforementioned effort of the AO would do no good to the revenue. Whether demand notice is an integral part of the assessment orde r in concerned, the same has been answered in the case of CIT Vs. Purshottam Das T Patel 1993 (8) TMI 21 - GUJARAT HIGH COURT held when an order in writing in respect of both these things is passed, it can be said that there is a complete order of assessment. These two steps may be taken simultaneously or separately, but it cannot be gainsaid that both of them will have to be taken within the time prescribed by the Act. Admittedly, in this case the second step was not taken within the prescribed time. After determining the total income, the Income-tax Officer possibly left the matter to his subordinates for the purpose of calculating the tax payable by the assessee on the basis of the assessed total income. Even if we assume in favour of the Assessing Officer that he approved the said calculation when the papers were put before him for signing the demand notice, and that he signed the same, the fact remains that that step was taken by him after the prescribed period was over. The Tribunal was, therefore, right in holding that the assessment in this respect was time-barred. We, therefore, answer the question in the affirmative, i.e., against the Revenue and in favour of the assessee. Thus, we are of the considered opinion that by issuing the demand notice on 28/12/2019 itself the Assessing Officer has by passed all the mandatory sub-sections of section 144C. Whether participation in subsequent proceedings would estop the assessee from challenging the validity of the order has been answered by the Hon'ble Supreme Court in the case of V Mr. T.P. Firm MUAR 1964 (10) TMI 13 - SUPREME COURT held that Approbate and Reprobate is only species of estoppel. It applies only to conduct of parties as in the case of estoppel, it cannot operate against the provisions of a statute. IF particular income is taxable under the I.T. Act, it cannot be taxed on the basis of estoppel or any other equal document. Equity is out of placed in tax place. A particular income is either exigible under the Income tax under taxing statute or not. If it is not, the ITO Has no power to tax the said income. We have no hesitation to hold that the proceedings culminated on 28/12/2019, when the demand notice was issued and served upon the assessee along with the penalty notice u/s 274 of the Act and, therefore, all the subsequent proceedings and orders become non-est. Ground No. 1 is accordingly allowed.

Issues Involved:

1. Validity of Final Assessment Order
2. Validity of Transfer Pricing Order
3. Transfer Pricing Grounds - Adjustment under Section 92CA
4. Corporate Tax Grounds
5. Initiation of Penalty Proceedings

Detailed Analysis:

1. Validity of Final Assessment Order:

The primary issue was the validity of the final assessment order passed under section 143(3) of the Income Tax Act without first issuing a draft assessment order as required for an 'eligible assessee' under section 144C(1). The tribunal found that the Assessing Officer (AO) issued a demand notice and initiated penalty proceedings on the same day as the purported draft order, indicating it was treated as a final order. The tribunal held that this action concluded the proceedings, making subsequent orders non-est. The tribunal emphasized that the statutory process under section 144C was bypassed, rendering the assessment invalid.

2. Validity of Transfer Pricing Order:

The tribunal examined whether the transfer pricing order was barred by limitation. The order under Section 92CA(3) was passed beyond the prescribed time limit, thus affecting the validity of the final assessment order. The tribunal concluded that the order was null and void due to this procedural lapse.

3. Transfer Pricing Grounds - Adjustment under Section 92CA:

The tribunal addressed the upward adjustment of Rs 19,80,000 in transfer pricing by re-computing the Arm's Length Price (ALP) for services provided. The rejection of the appellant's transfer pricing documentation and inclusion of carried interest in the cost base were key points of contention. The tribunal noted that the appellant's categorization as a knowledge process outsourcing (KPO) service provider instead of an IT-enabled services (ITes) provider led to significant adjustments. However, due to the signing of an Advance Pricing Agreement (APA), the appellant withdrew these grounds.

4. Corporate Tax Grounds:

The tribunal considered the disallowance of amortization costs for employee stock option plans (ESOP) amounting to INR 8,95,03,698, which had been allowed in previous years. The tribunal also reviewed the disallowance of payments to stock exchanges, which were deemed penalties. The tribunal highlighted the disregard for past tribunal and High Court decisions where such expenses were allowed as deductions. Additionally, the tribunal addressed the non-allowance of education cess as a deduction and the failure to credit taxes withheld at source.

5. Initiation of Penalty Proceedings:

The initiation of penalty proceedings under section 271(1)(c) was challenged. The tribunal found that the issuance of a penalty notice along with the demand notice on the same day as the purported draft order indicated the AO's intent to finalize the assessment, which was procedurally incorrect.

Conclusion:

The tribunal allowed the appeal, declaring the assessment proceedings and subsequent orders non-est due to procedural irregularities. The tribunal's decision emphasized adherence to statutory procedures and the invalidity of actions taken beyond prescribed limits. The appellant's withdrawal of certain grounds due to an APA agreement further influenced the tribunal's handling of the case.

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