The Income Tax Appellate Tribunal (ITAT), Mumbai Bench ruled that the PCIT was justified to assume revisionary power when AO drops disallowances proposed in the draft assessment without recording reasons.
The assessee, Galaxy Surfactants Limited had filed an income tax return disclosing a taxable income of Rs 42,43,47,423, on 25th November 2011. This appeal was subjected to a scrutiny assessment under section 143(3). In addition to the arm’s length price adjustment of Rs 4,04,566, as determined by the TPO, the Assessing Officer proposed disallowances by rejecting deduction claims, as made by the assessee, to the extent of Rs2,97,83,922 as inadmissible under section 36(1)(iii), to the extent of Rs. 6,19,20,626 as inadmissible claim under section 37(1), to the extent of Rs 3,13,50,440 as inadmissible claim under section 10B, and to the extent of Rs 3,01,01,049 as an inadmissible claim under section 14A.
The draft assessment order was, accordingly, served upon the assessee. The Assessing Officer was informed that the assessee does not wish to file any objections before the Dispute Resolution Panel. The Assessing Officer thus proceeded to frame the assessment under section 143(3) read with section 144C(3), but what he did was that he suo motu dropped the disallowances of 2,97,83,922 under section 36(1)(iii), of Rs 6,19,20,626 as inadmissible claim under section 37(1), and of Rs 3,13,50,440 as inadmissible claim under section 10B.
So far as disallowance under section 14 A was concerned, as against the proposed disallowance of Rs 3,09,01,049 was concerned, he scaled it down to Rs 6,197. The assessment under section 143(3) was thus completed at Rs 42,47,58,190, as against an assessed income of Rs 56,24,27,870 in the draft assessment order.
The assessee successfully challenged the additions made by the Assessing Officer in appeal before the CIT(A). The matter, however, did not end at that. On 22nd August 2017, the Principal Commissioner sought to invoke his revisionary powers under section 263 by issuing a show cause notice.
The assessee contended that the expression used in section 144C (3) is “on the basis of” inasmuch as it requires the Assessing Officer “to complete the assessment on the basis of draft assessment order” but then this expression is quite distinct and broader in approach vis-à-vis the expression “in conformity with” used in Section 92CA(4) and the specific command of Section 144C(10) that “every direction issued by the Dispute Resolution Panel will be binding on the Assessing Officer”.
The coram headed by Vice President Pramod Kumar and Saktijit Dey held that once the Assessing Officer has prepared a draft assessment order, and served the same upon the assessee, it is not open to him to revisit the draft assessment order so prepared except to give effect to the directions of the Dispute Resolution Panel. The expression used in Section 92CA(4) is indeed different inasmuch as, upon receipt of order under section 92CA(3), the “Assessing Officer shall proceed to compute total income of the assessee under section 92C(4) ‘in conformity with’ the arm’s length price so determined by the Transfer Pricing Officer”, but then context is also different. It provides a mechanism to give effect to the scheme of Section 92C(4) which requires that when a reference for ALP determination is made the Assessing Officer shall compute the total income of the assessee having regard to the ALP so determined.
The ITAT ruled that 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.
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