2021 (5) TMI 765 - AT - Income Tax

Revision u/s 263 - assessment order as contrary to the draft assessment order - disallowances proposed in the draft assessment order have been dropped by the Assessing Officer suo motu and without any interference on those points by the Dispute Resolution Panel - whether an assessment order, contrary to the draft assessment order, could be subjected to revision or not? - HELD THAT - The expression used in Section 144C(3) undoubtedly is that the Assessing Officer shall complete the assessment on the basis of the draft assessment order but in a situation in which the final assessment drops certain proposed disallowances, can it really be said that the Assessing Officer has completed the assessment on the basis of the draft assessment order- more so when there is no further hearing, no further directions and no occasion for further application of mind. The answer has to be, in our humble understanding, emphatically in negative. When a draft order is finalized by the Assessing Officer, no further hearings take place on the issues raised therein, no directions are received by the Assessing Officer to make any variations from the stand so taken, there is no occasion for making any variations from such a draft assessment order. When the Assessing Officer does not have an obligation to hear the assessee to review the draft orders or any specific powers enabling such a review, it is a natural corollary thereto that the Assessing Officer does not have the discretion, that too in such an unfettered and most opaque manner, to review the draft order nevertheless. The change of heart on the part of the Assessing Officer, howsoever well meaning and justified as it may be, is not permissible at the stage of passing the final assessment order. We disapprove and deprecate the same. Right now the limited question before us is whether an assessment order, contrary to the draft assessment order, could be subjected to revision or not, and, on that point, we uphold the action of the PCIT. Whether these disallowances were covered in favour of the assessee or not is immaterial because it is a conscious decision to keep the matters alive or not, and, in any case, all this was relevant before finalizing the draft assessment order. The remedy against unjust disallowances, on merits, lies in the appellate process and not in review by the Assessing Officer on his own. In our considered view, an Assessing Officer cannot revisit his conclusions at the stage of passing the final order under section 144C(3). In addition to these points, the assessee has also raised several other facets of this controversy in grounds of appeal before us, but arguments of the learned counsel were restricted to these points. We see no legally sustainable merits in the arguments of the learned counsel on these points. The order of the Assessing Officer was thus clearly erroneous as also prejudicial to the interest of the assessee, and the learned PCIT was indeed justified in assuming the powers under section 263 on the facts of this case, and direct the Assessing Officer to pass the assessment order on the basis of draft assessment order issued by the Assessing Officer. No interference is called for. - Decided against assessee.

Issues Involved:
1. Justification of PCIT's invocation of revisionary powers under Section 263.
2. Assessing Officer's authority to deviate from the draft assessment order without DRP's directions.
3. Merits of the disallowances proposed in the draft assessment order.

Detailed Analysis:

1. Justification of PCIT's Invocation of Revisionary Powers under Section 263:

The assessee appellant challenged the correctness of the order dated 16th March 2018, passed by the Principal Commissioner of Income Tax (PCIT) under section 263 r.w.s. 143(3) and 144C(4) of the Income Tax Act, 1961, for the assessment year 2011-12. The PCIT invoked his revisionary powers under section 263, issuing a show cause notice to the assessee on 22nd August 2017. The PCIT noted that the final assessment order deviated significantly from the draft assessment order, reducing the proposed disallowances without any directions from the Dispute Resolution Panel (DRP). The PCIT concluded that the Assessing Officer's actions were erroneous and prejudicial to the interest of revenue, thus justifying the invocation of section 263 to revise the assessment order.

2. Assessing Officer's Authority to Deviate from the Draft Assessment Order without DRP's Directions:

The core issue was whether the Assessing Officer was justified in dropping the disallowances proposed in the draft assessment order suo motu, without any interference by the DRP. The assessee argued that the Assessing Officer conducted a full inquiry and was convinced by the assessee's explanations, leading to the omission of certain disallowances in the final order. However, the tribunal held that once a draft assessment order is prepared, the Assessing Officer does not have the authority to revisit it except to give effect to the DRP's directions. The tribunal emphasized that the final assessment order must be based on the draft assessment order, and any deviation without DRP's directions is not permissible. The tribunal upheld the PCIT's stance that the Assessing Officer's actions were erroneous and prejudicial to the revenue's interest.

3. Merits of the Disallowances Proposed in the Draft Assessment Order:

The assessee contended that the disallowances proposed in the draft assessment order were unjustified on merits and were covered in favor of the assessee by previous decisions of the ITAT in the assessee's own case for earlier years. The tribunal, however, clarified that the merits of the disallowances were not relevant at this stage. The primary issue was whether the Assessing Officer could deviate from the draft assessment order without DRP's directions. The tribunal noted that the remedy against unjust disallowances lies in the appellate process, not in the review by the Assessing Officer at the final assessment stage. The tribunal concluded that the Assessing Officer's final order, deviating from the draft assessment order, was erroneous and prejudicial to the revenue's interest, thus justifying the PCIT's revisionary action under section 263.

Conclusion:

In conclusion, the tribunal dismissed the assessee's appeal, upholding the PCIT's invocation of revisionary powers under section 263. The tribunal emphasized that the Assessing Officer does not have the authority to deviate from the draft assessment order without DRP's directions, and any such deviation is erroneous and prejudicial to the revenue's interest. The tribunal also highlighted that the merits of the disallowances were not relevant at this stage, and the appropriate remedy lies in the appellate process. The tribunal's decision was pronounced in the open court on 24th May 2021.

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