2024 (2) TMI 1338 - AT - Income Tax

Non following Procedure laid down u/s 144C - Action of the AO/NeAC not proposing all the variation in the Draft Assessment Order - HELD THAT - AO did not complete the assessment in conformity with the directions of DRP which did not contained any variations on account of addition of PF ESI, Fees paid for Authorised Capital increase and Profit on sale of fixed assets. Action of the AO/NeAC not proposing all the variation in the Draft Assessment Order has denied the assessee of its legal right of filing objections before the DRP In the draft Assessment Order passed by the Assessing Officer has only proposed adjustment on account of the Transfer Pricing Order to the total loss as per ITR. DRP deleted the addition proposed on account of Transfer Pricing determining adjustment on account of ALP at NIL. Then the AO passed an order making addition on account of PF ESI, ROC Fess and profit on sale of fixed assets. These three items were either two were not part of the draft Assessment Order. Hence, in view of the provisions of Section 144C(13)- Upon receipt of the directions issued under sub-section(5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B , the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. , the AO was not empowered to make any other addition which was not proposed in the draft Assessment Order an hence the order of the cannot be sustained. Appeal of the assessee is allowed

Issues Involved:
1. Jurisdictional validity of the final order by AO/NeAC.
2. Disallowance of Provident Fund and ESI payments.
3. Disallowance of expenditure towards increase in capital.
4. Treatment of profit on sale of fixed assets as income from other sources.
5. Levy of interest under sections 234B, 234C, and 234D.
6. Proposal to initiate penalty proceedings under section 271(1)(c).

Summary:

1. Jurisdictional Validity of the Final Order by AO/NeAC:
The assessee argued that the final order dated 30/03/2021 by the AO/NeAC was jurisdictionally invalid as it included additions not proposed in the Draft Assessment Order dated 25/11/2019. This action prevented the assessee from filing objections before the Dispute Resolution Panel (DRP), violating the principle of natural justice. The tribunal noted that section 144C(1) mandates the AO/NeAC to forward a draft of the proposed order if any variation prejudicial to the assessee's interest is proposed. The AO/NeAC failed to include all variations in the Draft Assessment Order, thus denying the assessee the legal right to object before the DRP.

2. Disallowance of Provident Fund and ESI Payments:
The AO disallowed Rs. 19,93,460/- under section 36(1)(va), treating it as income under section 2(24)(x). The assessee contended that these payments were deposited before filing the Income Tax Return as per section 139(1). The tribunal found that the AO did not consider that Rs. 11,22,959 was the employer's contribution and Rs. 8,70,501 was the employee's share.

3. Disallowance of Expenditure Towards Increase in Capital:
The AO disallowed Rs. 4,08,267/- incurred towards an increase in capital. The tribunal found this disallowance arbitrary and erroneous.

4. Treatment of Profit on Sale of Fixed Assets as Income from Other Sources:
The AO treated Rs. 7,66,993/- as income from other sources under section 56, ignoring that the assets sold were depreciable and the sale proceeds should be reduced from the Written Down Value (WDV) as per section 43(6). The tribunal upheld the assessee's treatment of the sale proceeds.

5. Levy of Interest Under Sections 234B, 234C, and 234D:
The assessee challenged the levy of interest under sections 234B, 234C, and 234D. The tribunal found the AO/NeAC erred in charging interest under these sections.

6. Proposal to Initiate Penalty Proceedings Under Section 271(1)(c):
The assessee contested the AO's proposal to initiate penalty proceedings under section 271(1)(c). The tribunal found the AO's action unjustified.

Conclusion:
The tribunal concluded that the AO/NeAC did not conform to the DRP's directions and made unauthorized additions in the final order. Consequently, the appeal of the assessee was allowed, and the final order dated 30/03/2021 was quashed. The order was pronounced in the open court on 27/02/2024.

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