2021 (2) TMI 1140 - AT - Income Tax

Limited Finality - Proper and reasonable opportunity at the first stage (at the stage of Assessing Officer) - Disallowance being reimbursement of expenses by the appellant to its wholly owned subsidiary in United states for development of its business in United States of America - addition made by assessing officer for claiming double deduction of expenses as well as non deduction of tax at source on payment made to non residents - assessee was unable to produce evidences to show that the expenditure has been incurred by the assessee wholly and exclusively for the purpose of business; and further that no evidence was adduced to show that the EII made concerted effects to locate any business arrangements in USA - grounds for making the disallowance was not adjudicated by the Ld. CIT(A); and instead the Ld. CIT(A) followed a entirely different reasoning, as aforesaid, for confirming the disallowance - HELD THAT - Assessee has the right to explain his case first to the Assessing Officer; before he is forced to explain his case to appellate authorities. If an assessee explains his case at the first stage, i.e. at the stage of the Assessing Officer to the satisfaction of the Assessing Officer; the matter, in a way, attains Limited Finality because Revenue has no right of appeal against the order of the Assessing Officer. Though the matter can be revisited by Revenue under exceptional circumstances, such as, for example, in the circumstances prescribed under sections 147, 263, 264, 154, 153A 153C, etc. of I.T.Act; the fact that Revenue has no right of appeal against the order of Assessing Officer implies that the matter attains Limited Finality , barring the exceptional circumstances as aforementioned, if the assessee is able to satisfactorily explain the matter to the Assessing Officer. That is why it is of utmost importance that the assessee gets proper and reasonable opportunity at the first stage (i.e. at the stage of Assessing Officer), so that the assessee has a chance to avail of Limited Finality which is an assessee s statutory right. In the present case reasoning adopted by the Ld. CIT(A) for dismissing the assessee s appeal was not considered at the stage of assessment proceedings before the Assessing Officer; which has resulted in violation of the assessee s right of Limited Finality . In view of the foregoing, and as both sides have agreed to this, we set aside the issue of disallowance of the aforesaid ₹ 86,41,053/- to the file of the Assessing Officer for fresh order as per law after providing reasonable opportunity to the assessee to produce relevant materials and to make necessary submissions. All the grounds in the present appeal are disposed of in accordance with aforesaid directions and are treated as partly allowed for statistical purposes

Summary

Issues Involved:
1. Disallowance of expenses claimed by the assessee.
2. Non-deduction of tax at source on payments made to non-residents.
3. Grounds of appeal not disposed off by CIT(A).
4. Confirmation of disallowance by CIT(A) on a new basis or in a mechanical manner.

Detailed Analysis:

1. Disallowance of Expenses Claimed by the Assessee:
The primary issue revolves around the disallowance of expenses claimed by the assessee for the assessment years (AY) 2010-11, 2011-12, and 2012-13. The assessee claimed deductions for expenses incurred by its wholly-owned subsidiary in the USA, Energy Infratech Inc. These expenses were disallowed by the Assessing Officer (AO) on the grounds that the expenses were already claimed by the subsidiary in its tax returns in the USA, leading to a double deduction. Additionally, the AO disallowed the expenses under Section 40(a) of the Income Tax Act due to non-deduction of tax at source.

2. Non-Deduction of Tax at Source on Payments Made to Non-Residents:
The AO noted that the assessee did not deduct tax at source on the payments made to its subsidiary in the USA, which was a separate legal entity. The AO argued that the payments were covered under Sections 9(1)(i) and 9(1)(vii) of the Income Tax Act, making them taxable in India. Consequently, the AO disallowed the expenses under Section 40(a) for non-compliance with TDS provisions.

3. Grounds of Appeal Not Disposed Off by CIT(A):
The assessee contended that the CIT(A) did not dispose off the grounds of appeal raised, which primarily related to the addition made by the AO for claiming double deduction of expenses and non-deduction of tax at source. The CIT(A) confirmed the disallowance on a new basis, stating that the expenses were not incurred wholly and exclusively for business purposes and were made by a separate legal entity in the USA.

4. Confirmation of Disallowance by CIT(A) on a New Basis or in a Mechanical Manner:
The CIT(A) confirmed the disallowance for AY 2010-11 on the grounds that the assessee failed to produce evidence showing that the expenses were incurred wholly and exclusively for business purposes. The CIT(A) also noted that the expenses were made by the subsidiary, a separate legal entity, and thus not deductible by the parent company. For AY 2011-12 and 2012-13, the CIT(A) confirmed the disallowance in a mechanical manner based on the previous year's order without providing the assessee an opportunity to file details of expenses.

Judgment and Directions:
The Income Tax Appellate Tribunal (ITAT) noted that the reasoning adopted by the CIT(A) for disallowance was different from that of the AO. The ITAT emphasized the assessee's right to explain its case to the AO first, as it could lead to a 'Limited Finality' if the AO is satisfied. The ITAT found that the assessee was not given a proper opportunity to present its case regarding the new reasoning adopted by the CIT(A).

Consequently, the ITAT set aside the disallowance of expenses for all three assessment years to the file of the AO for a fresh order as per law. The AO was directed to provide a reasonable opportunity to the assessee to produce relevant materials and make necessary submissions. The appeals were partly allowed for statistical purposes.

Conclusion:
The ITAT's judgment highlights the importance of providing the assessee a fair opportunity to present its case at the assessment stage. The disallowances were set aside for re-examination by the AO, ensuring that the assessee can address the new reasoning adopted by the CIT(A). The appeals for AY 2010-11, 2011-12, and 2012-13 were partly allowed for statistical purposes.