Past year international transactions could not be referred to TPO whose assessment was already completed

By | October 6, 2015

Assessing Officer cannot refer international transactions for determination of ALP that were carried on in any of past years and whose assessments had already been completed

IN THE ITAT MUMBAI BENCH ‘K’

Perstorp Chemicals India (P.) Ltd.

v.

Income-tax Officer, 10(2)(3), Mumbai

D. MANMOHAN, VICE-PRESIDENT
AND B.R. BASKARAN, ACCOUNTANT MEMBER

IT APPEAL NOS. 6078,6079 AND 7160 (MUM.) OF 2011
[ASSESSMENT YEARS 2004-05 & 2006-07]

JUNE  24, 2015

Mayur Kisnadwala for the Appellant. N. Padmanaban for the Respondent.

ORDER

B.R. Baskaran, Accountant Member – All these appeals have been filed by the assessee challenging the orders passed by Ld CIT(A)-15, Mumbai and they relate to the assessment years 2004-05 to 2006-07. All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.

2. We shall take up the appeal filed for AY 2004-05. The assessee company is engaged in the business of manufacture and sale of chemicals. Along with the return of income filed for AY 2004-05, the assessee also filed Transfer pricing study report in Form 3CEB, wherein it was reported that the assessee has entered into international transaction in the form of payment of Royalty amount of Rs.5.76 crores and technical knowhow amount of Rs.0.79 crores. Hence the AO referred the matter of determination of Arms Length Price (ALP) to the Transfer Pricing Officer (TPO).

3. Before TPO, the assessee relied upon Technical Assistance Agreement entered by the assessee with its AE Perstorp AB Sweden entered on 3-2-1998 and further submitted that the impugned payments have been approved by RBI. The TPO asked the assessee to furnish details like, Basis of the royalty payment, working of royalty, cost incurred by the owner towards the royalty and whether any other AE is paying royalty. However, the assessee did not furnish any of the details that were called for. On the contrary, it was submitted that the royalty payments pertain to the period from September 1998 to March 2002 and the assessee had disallowed the same in the relevant years u/s 40(a)(i) of the Act for non-deduction of TDS. Since the assessee has remitted the TDS during the year under consideration, it has claimed deduction u/s 40(a)(i) of the Act. It was further submitted that the royalty payment pertaining to the year under consideration was not claimed as deduction since the TDS was not deducted from the said payment. With regard to the ALP of the payment, the assessee simply relied upon the Technical Service Agreement.

4. Since the assessee did not furnish the details that were called for, the TPO determined the ALP of Royalty and Technical knowhow fee as NIL. Accordingly, he proposed enhancement of Rs.6.55 crores (5.76 + 0.79) to the total income of the assessee. Accordingly the assessing officer disallowed the claim of the above said amount. The Ld CIT(A) also confirmed the addition.

5. We have heard the parties and perused the record. There is no dispute with regard to the fact that the royalty payment of Rs.5.76 crores pertain to the period from September, 1998 to March, 2002. The present assessment year is AY 2004-05. It is stated that the assessee has disallowed the royalty expenses of Rs.5.76 crores in the relevant years as per the provisions of section 40(a)(i), since the assessee did not deduct and remit tax at source in those years. However, the assessee has deducted and remitted the TDS amount during the year under consideration and accordingly it has claimed the same as deduction u/s 40(a)(i) of the Act. The Ld A.R further submitted that the assessee, ultimately, did not pay the royalty amount and hence the entire expenses claimed by it has been reversed and offered as income in AY 2006-07. Accordingly it was contended that there is no requirement to determine ALP, since it has become fiscal nullity.

6. On the contrary, the Ld D.R submitted that the assessee itself has reported the royalty payment as International transaction and further failed to furnish the details that were called for by the TPO. Hence the TPO was constrained to determine the ALP of royalty payment as NIL.

7. As noticed earlier, the royalty payment of Rs.5.76 crores has been claimed by the assessee u/s 40(a)(i) of the Act on the basis of remittance of TDS during the year under consideration. There should not be any dispute that the reference to the Transfer Pricing Officer is part of assessment proceedings and as per the provisions of sec. 92CA of the Act, the AO may refer the matter of determination of ALP of international transaction to the Transfer pricing officer, with the previous approval of Commissioner, if he considers it necessary or expedient so to do. Since the provisions of sec. 92CA are part of assessment procedure, we are of the view that the international transaction referred to in sec. 92CA shall refer only to the international transaction, which was entered during the year relevant to the assessment year which is before the AO. Accordingly, we are of the view that the AO cannot refer the international transactions that were carried on in any of the past years, whose assessments have already been completed.

8. Further, there is no dispute with regard to the fact that the above said royalty amount of Rs.5.76 crores pertained to the period from Sep. 1998 to March, 2002. Hence the said payment does not pertain to the international transaction entered during the year under consideration. Accordingly, we are of the view that there was no requirement for the AO to refer the matter of determination of ALP to the TPO, since the impugned transactions do not pertain to the year under consideration and hence there was no requirement of determination of ALP.

9. We notice that the TPO as well as Ld CIT(A) have expressed the view that the assessee itself has furnished the Transfer Pricing Study in Form No. 3CEB. In our view, the action of the assessee in furnishing the report cannot override the provisions of the Act and further it is an established principle of law that there is no estoppels against the law. Accordingly, we are not in agreement with the view expressed by the tax authorities on this issue. Accordingly, we set aside the decision rendered by Ld CIT(A) in respect of Royalty payment and direct the AO to allow the deduction of Rs.5.76 crores u/s 40(a)(i) of the Act after making due verification thereof. Accordingly, the alternative contention of the assessee with regard to fiscal nullity does not require any adjudication in this year.

10. With regard to the technical knowhow payment of Rs.0.76 crores, we notice that the assessee has argued that the same has been capitalized and hence it falls outside the scope of the Transfer Pricing study/adjustment. However, the TPO has not accepted the same and since the assessee has failed to furnish the details, he determined the ALP as NIL. In our view, the contention of the assessee is not acceptable. The expression “International Transaction” has been defined in sec. 92B of the Act in a wide manner and it includes every kind of transaction having a bearing on the profits. A careful perusal of the definition would show that the same does not make any difference in the line of revenue transaction and capital transaction. Hence, the contention of the assessee is not acceptable.

11. At the same time, the decision of the TPO to determine the ALP as NIL is also not in accordance with the provisions of sec.92C of the Act on the reasoning that the assessee did not furnish relevant details that were called for by him. We notice that the assessee had contended before the TPO/AO that it had capitalized the technical knowhow fee and hence the Transfer pricing provisions are not applicable to it. Under these set of facts, it appears that the assessee did not furnish the relevant details. In the preceding paragraph, we have rejected the contentions of the assessee and hence the ALP of the technical knowhow payment is required to be determined as per the provisions of the Act. Accordingly, we are of the view that the issue relating to the determination of ALP of Technical knowhow payment requires fresh examination. Accordingly, we set aside the decision rendered by the Ld CIT(A) in respect of the issue relating to Technical knowhow payment and restore the same to the file of the AO/TPO for fresh consideration.

12. We shall now take up the appeal filed for AY 2005-06, wherein following issues arise for our consideration:—

(a) Addition made u/s 145A of the Act on account of adjustment of closing stock value with Excise duty amount.
(b) T.P. adjustment of Royalty amount.

13. The first issue relates to the addition made by the AO u/s 145A of the Act. The assessee has followed Exclusive method of accounting for Excise duty and hence the closing stock value declared in the Profit and loss account did not include the value of Excise duty. Hence the AO enhanced the value of closing stock by the amount of duty related to it. The Ld CIT(A) also confirmed the same, but gave a partial relief with regard to some computational error.

14. We heard the parties on this issue. According to the assessee, it has followed Exclusive method for accounting the Excise duty, which means that the “Excise duty account” shall be maintained as a Balance Sheet item, wherein the collection and remittance shall be accounted for and the remaining balance shall be taken to the Balance sheet as an item of Payable/Receivable. Under inclusive method, the Excise duty shall be included in the value of purchases, sales and inventory and hence the same is accounted for through the Profit and loss account. As per the accounting principles, both the methods for accounting for the Excise duty collection and remittance are accepted, since both the methods shall not have any impact on the Net profit. It is only two different forms of preparing the financial statements.

15. However, the provisions of sec. 145A mandates that the value of purchase and sale of goods and inventory shall be adjusted to include the amount of tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Hence, for the purposes of Income tax, an assessee is required to follow only inclusive method of accounting the tax, duty etc. In the instant case, we notice that the AO has adjusted the value of closing stock only, to include the amount of tax, duty etc., where as the provisions of sec. 145A requires that the value of purchases and sales should also be adjusted to include the amount of tax, duty etc. Thus, the action of the AO, which was approved by Ld CIT(A), was not in accordance with the mandate of the provisions of sec. 145A of the Act. Compliance of provisions of sec. 145A in part only, would give misleading result. Accordingly, we are not able to approve the order of Ld CIT(A) on this issue.

16. Since the provisions of sec. 145A of the Act have not been applied in entirety, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to apply the provisions of sec. 145A of the Act to purchases, sales and inventory and make addition, if any, is found to be made. The assessee is also directed to prove to the satisfaction of the AO that both the inclusive method and exclusive method give same financial result.

17. The next issue relates to the T.P adjustment of Royalty payment. Since the assessee failed to furnish the details that were called for by the TPO, he determined the ALP of royalty payment as NIL.

18. The Ld A.R submitted that the assessee ultimately did not pay the royalty amount and accordingly reversed the same in the financial year relevant to AY 2006-07. Accordingly it was submitted that the international transaction has resulted into a fiscal nullity and accordingly it was contended that there was no requirement of determining ALP. In our view, any future event should not influence the current transaction. Even the accounting standards provide that the contingencies and events taking place in the subsequent period could be recognized only if it is ascertained before the finalization of accounts and further the controversy relating to the said contingency or event should be subsisting as on the date of preparation of the financial statements. In the instant case, it was not shown to us that both the conditions have been fulfilled. In fact, had it known to the assessee that it need not pay the royalty amount before the finalization of the financial statements, then there would not have been any requirement to provide for royalty payment in the current year’s financial statements. Hence, in our view, the reversal of the royalty transaction made in the financial year relevant to the AY 2006-07 would not impact the determination of ALP in the current year.

19. The Ld A.R also has taken a stand that it has disallowed the royalty payment u/s 40(a)(i) of the Act and hence the T.P adjustment would result in double addition. We notice that the Ld CIT(A) has given relief to the assessee with regard to the addition made u/s 40(a)(i) of the Act. Since, we are restoring the issue relating to T.P adjustment to the file of the AO/TPO, the issue relating to sec. 40(a)(i) disallowance would also resurrect. However, we may clarify here that, in our view, the determination of ALP of international transaction would precede the application of the provisions of sec. 40(a)(i) of the Act, since the former relates to the validation of Net profit declared by the assessee and the latter is only a technical disallowance rather deferment of allowance prescribed under a legal fiction introduced into the Income tax Act. The technical disallowance would have to be considered only after validation of Net profit. We may explain the same with an example. Let us assume that a company has made royalty payment of say Rs.10.00 lakhs and did not deduct tax at source thereon. Let us assume that the TPO determines the ALP of the same at Rs.3.00 lakhs. The AO would automatically disallow Rs.7.00 lakhs. Hence the disallowance to be made u/s 40(a)(i) of the Act would be restricted to Rs.3.00 lakhs only. This example would make it clear that the disallowance to be made u/s 40(a)(i) is influenced by the T.P adjustments and not vice versa. Accordingly, in our view, the disallowance made/to be made u/s 40(a)(i) would not debar the AO/TPO from determining the ALP of international transactions. In view of the above said contentions, it appears that the assessee did not furnish the relevant details. Since we have rejected the contentions of the assessee, the ALP of the royalty amount is required to be determined as per the provisions of the Act. Accordingly, we are of the view that the issue relating to the determination of ALP requires fresh examination. Accordingly, we set aside the decision rendered by the Ld CIT(A) in respect of this issue and restore the same to the file of the AO/TPO for fresh consideration in accordance with the law.

20. We shall now take up the appeal filed for AY 2006-07, where in following issues are urged by the assessee:—

(a) Validity of assessment order passed by the AO.
(b) T.P. adjustment made u/s 92CA(3) of the Act.
(c) Additions made u/s 145A of the Act.
(d) Interest charged u/s 234B and 234C of the Act.
(e) Validity of initiation of penalty proceedings u/s 271(1)(c) of the Act.

21. The first issue relates to the validity of the assessment order passed by the assessing officer. The assessment order for AY 2006-07 has been passed by the AO on 30-12-2009 and in that order; the AO has made addition proposed by the TPO. The Ld A.R submitted that the provisions of sec. 144C (1) is attracted in the case of “eligible assessees”, if the assessing officer, after 1st day of October 2009, proposes to make any variation in the income or loss returned by the eligible assessee. The Ld A.R submitted that the expression “Eligible assessee” is defined in sec. 144C(15)(b) of the Act, according to which it means any person in whose case the variation referred to in sec. 144C(1) arises as a consequence of the order of the Transfer Pricing Officer passed u/s 92CA(3) of the Act. The Ld A.R submitted that the assessing officer has passed the final order for the year under consideration on 30-12-2009, wherein he has made the addition proposed by the TPO. Since the assessee has become an “eligible assessee” and since the AO has added the variation proposed by the TPO, the AO should have forwarded draft assessment order first to the assessee in terms of sec. 144C(1) of the Act. Accordingly, the Ld A.R submitted that, since the AO has failed to follow the mandate of the provisions of sec. 144C(1), the impugned assessment order is liable to quashed. In support of this proposition, the AO placed reliance on the decision of Hon’ble Madras High Court rendered in the case of Vijay Television (P.) Ltd. v. Dispute Resolution Panel [2014] 369 ITR 113 wherein it was held that the assessment order passed in violation of statutory provisions prescribed by the statute is liable to be quashed. He further submitted that the Hon’ble High Court of Andhra Pradesh has also taken identical view in the case of Zuari Cement Ltd. v. ACIT [Writ Petition No. 5557 of 2012, dated 21-2-2013]. The Ld A.R submitted that the Delhi bench of ITAT has also taken identical view in the case of Capsugel Healthcare Ltd. v. Asstt. CIT [2015] 152 ITD 142.

22. On the contrary, the Ld D.R submitted that the Finance (No.2) Act, 2009 has inserted the provisions relating to “Dispute Resolution Panel” and accordingly the provisions of sec. 144C of the Act were introduced into the Act. The sub-sec. (1) of sec. 144C reads as under:—

“The Assessing officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee”.

The CBDT issued a Circular No.5 of 2010 dated 3.6.2010 (2010) (324 ITR (St.) 293 @ 340), wherein it expressed the view that the new amendments will apply in relation to the assessment year 2010-11 and subsequent years. He submitted that the assessing officer’s action in not following the procedures prescribed in sec. 144C of the Act cannot be found fault with, since the same is in accordance with the view expressed by the CBDT, whose circulars and instructions are binding upon the AO. The Ld D.R further submitted that the AO has assumed the jurisdiction for the assessment year under consideration in a valid manner and hence non-compliance with the procedure prescribed in sec. 144C would not make the assessment order a nullity. In this regard, he placed reliance on the decisions rendered by the Hon’ble Supreme Court in the cases of Guduthur Bros. v. ITO [1960] 40 ITR 298 and Kapurchand Shrimal v. CIT [1981] 131 ITR 451

23. We heard the parties on this legal issue. The year under consideration is AY 2006-07 and the assessee filed its return of income 30-11-2006. Hence the AO should have initiated assessment proceedings by 30-11-2007 by issuing notice u/s 143(2) of the Act. The AO made a reference to the T.P.O on 7.7.2008 and the T.P.O passed the order u/s 92CA(3) of the Act on 21.10.2009, i.e. after expiry of 15 months from the date of reference.

24. In the mean time, the Finance (No.2) Act, 2009 received the assent of the Hon’ble President of India on 19-08-2009, in which the provisions of sec. 144C of the Act came to be introduced in the Act. The said provisions mandate that the assessing officer should forward draft assessment order to the assessee, if he proposes, on or after 1st October, 2009, to make any variation to the income as suggested by the TPO. However, the CBDT has taken the view that the new provisions of sec. 144C shall have application in relation to AY 2010-11 and subsequent assessment years and it has been so expressed by the CBDT in its Circular No.5/2010 (supra). In the said Circular, it is also stated that the Dispute Resolution Panel Rules have been notified by S.O. No. 2958(E) dated 20th November, 2009.

25. We have earlier noticed that the order of TPO was passed on 21.10.2009 and the Dispute Resolution Panel Rules (to comply with the provisions of sec. 144C) itself was notified subsequently on 20-11-2009. Further, the view of the revenue is that the provisions of sec. 144C shall have application in relation to AY 2010-11 and subsequent years. Under these circumstances, it appears that the assessing officer has proceeded to pass the order, in accordance with old procedures, on 30-12-2009, since the applicability and impact of new provisions of sec. 144C were unclear. Further, the view of the CBDT/Circular of CBDT is binding on the assessing officer. The Ld A.R brought to our notice that the CBDT has issued another Circular on November 19, 2013 (2013)(350 ITR (St.) 0007), where in the CBDT has modified its earlier Circular No.5 of 2010 (supra) and stated that the provisions of section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009, irrespective of the assessment year to which it pertains. However, it can be noticed that the clarification was issued only on 19-11-2013, by which time the impugned assessment order had already been passed by the AO and in fact, the Ld CIT(A) has also disposed of the appeal by that time.

26. The facts prevailing in the case of Vijay Television (P.) Ltd. (supra), on which the assessee had placed reliance, are different. In the above said case, the assessment year involved was AY 2009-10 and the TPO order was passed on 30th Jan., 2013 and the assessing officer passed the assessment order on 26-03-2013. The AO, subsequently, realized his mistake and accordingly issued a Corrigendum on 15th April, 2013 modifying the assessment order passed on 26-03-2013 and stated that the assessment order passed on 26-03-2013 should be read as Draft assessment order purported to have been passed u/s 144C of the Act. It is also pertinent to note that the Corrigendum was issued after the expiry of limitation period prescribed in sec. 153 of the Act. Thus, it is seen that the assessing officer was very much sure about the applicability of provisions of sec. 144C and hence he issued a Corrigendum, which the Hon’ble High Court of Madras has held that the mistake committed by the AO is not curable. Even otherwise, it can be seen that the AO has issued corrigendum after the expiry of limitation period prescribed u/s 153 of the Act for completion of the assessment. Once the assessment order is passed, the assessing officer shall become functus officio and hence he could not have issued Corrigendum.

27. On the contrary, in the instant case, the AO has passed the final assessment order on 30-12-2009 on a bona fide belief that the provisions of sec. 144C shall apply from AY 2010-11 onwards and hence there was no attempt on his part to correct the same by issuing a corrigendum. Hence, we are of the view that the assessing officer has committed only a procedural irregularity.

28. In this regard, we derive support from the decision rendered by Hon’ble Supreme Court in the case of Guduthur Bros(supra). The facts prevailing in the case of Guduthur Bros (supra) are that the assessee therein failed to file return of income within the prescribed time limit and hence the ITO issued a penalty notice u/s 28(1)(a) of 1922 Act (corresponding to sec. 271(1)(a) of 1963 Act. The assessee furnished a written reply and there after the ITO proceeded to levy penalty without affording a hearing to the assessee. The penalty order of the ITO was set aside by Appellate Assistant Commissioner, since no opportunity of being heard was given to the assessee. Thereupon, the ITO issued notice calling upon the assessee to appear before him so that it might get an opportunity of being heard. Before the ITO could decide the case, the assessee filed a petition under article 226 of the Constitution for the issuance of the writs against the ITO, but the said petition was dismissed in limine by the High Court holding that the contentions raised by the assessee might perhaps be raised before the Income tax authorities. On appeal filed before Hon’ble Supreme Court, the Hon’ble Apex Court held as under:—

“There is no question here that the requirements of section 28(1)(a) of the Income-tax Act were not completely fulfilled. If the appellants had not filed their return, as they were required by law to do, the omission would attract clause (a) of sub-section (1) of section 28. We say nothing as to that. Sub-section (3) of section 28, however, requires that the penalty shall not be imposed without affording to the assessee a reasonable opportunity of being heard. This opportunity was denied to the appellants and, therefore, the order of the Income-tax officer was vitiated by an illegality which supervened, not at the initial stage of the proceedings, but during the course of it. The order of the learned Appellate Assistant Commissioner pointed out the ground on which the illegality proceeded and his order directing the refund of the penalty, if recovered, cannot but be interpreted as correcting the error and leaving it open to the Income-tax Officer to continue his proceedings from the stage at which the illegality occurred. No express remand for this purpose, as is contended, was necessary.

Our attention was drawn to a decision of a learned single judge of the Kerala High Court reported in Jos Chacko Poothokaran v. Income-tax Officer, Ernakulam Circle, in which, in similar circumstances, it has been held that since an appeal was not taken by the Commissioner of Income-tax to the Appellate Tribunal under sub-section (2) of section 33, the order of the Appellate Assistant Commissioner became final and the Income-tax Officer could no longer proceed to reassess the penalty. The reason given is, in our opinion, beside the point. What the Appellate Assistant Commissioner did was to vacate the order and direct refund of the penalty in view of an illegality which had occurred during the course of the assessment proceedings. On receipt of the record it was open to the Income-tax officer to take up the matter from the point at which the illegality supervened and to correct his proceedings. It was pointed out in the course of the statement of the case by the appellants that such proceedings could only be taken during the course of assessment proceedings and those proceedings are concluded. In our opinion, the notice issued to the appellants to show cause why penalty should not be imposed on them did not cease to be operative because the Appellate Assistant Commissioner pointed out an illegality which vitiated the proceeding after it was lawfully initiated. That notice having remained still to be disposed of, the proceedings now started can be described as during the course of the assessment proceedings, because the action will relate back to the time when the first notice was issued.

In our opinion, the Income-tax Officer is well within his jurisdiction to continue the proceedings from the stage at which the illegality has occurred and to assess the appellants to a penalty, if any, which the circumstances of the case may require.”

29. We may also gainfully refer to another landmark decision rendered by Hon’ble Supreme Court in the case ofKapurchand Shrimal (supra). The assessee therein was a Hindu Undivided family. The kartha of the assessee claimed partition and accordingly requested for an order u/s 25A of 1922 Act (corresponding 171 of the 1963 Act). However, the ITO passed assessment order on the HUF without holding an enquiry as contemplated u/s 25A of the Act. In the appeal filed before the AAC, the Appellate Assistant Commissioner held that the partition has taken place on a particular date. However he did not agree with the contentions of the assessee that the assessment order should be quashed. The Tribunal held that the assessments made without conducting an enquiry into the claim of partition as required by sec. 25A was illegal and void. Accordingly, it cancelled the assessment, but did not issue any further direction to the ITO to make fresh assessments. The Tribunal observed that it was open to the ITO to do so if the law otherwise so permitted. The High Court, however, held that the assessment was valid but only required modification and accordingly directed the Tribunal to direct, while giving effect to the order of the High Court, the ITO to modify the assessments in the light of sec. 25A(2). The assessee preferred further appeal before the Hon’ble Supreme Court. The Hon’ble Apex Court held as under:—

“From a fair reading of s. 25A of the Act it appears that the ITO is bound to hold an inquiry into the claim of partition if it is made by or on behalf of any member of the HUF which is being assessed hitherto as such and record a finding thereon. If no such finding is recorded, sub-s. (3) of s. 25A of the Act becomes clearly attracted. When a claim is made in time and the assessment is made on the HUF without holding an inquiry as contemplated by s.25A(1), the assessment is, liable to be set aside in appeal as it is in clear violation of the procedure prescribed for that purpose. The Tribunal was, therefore, right in holding that the assessments in question were liable to be set aside as there was no compliance with s. 25A(1) of the Act. It is, however, difficult to agree with the submission made on behalf of the assessee that the duty of the Tribunal ends with making a declaration that the assessments are illegal and it has no duty to issue any further direction. It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute. The statute does not say that such a direction cannot be issued by the appellate authority in a case of this nature. In interpreting s. 25A(1), we cannot also be oblivious to cases where there is a possibility of claims of partition being made almost at the end of the period within which assessments can be completed making it impossible for the ITO to hold an inquiry as required by s. 25A(1) of the Act by following the procedure prescribed therefor. We, however, do not propose to express any opinion on the consequence that may ensue in case where the claim of partition is made at a very late stage where it may not be reasonably possible at all to complete the inquiry before the last date before which the assessment must be completed. In the instant case, however, since it is not established that the claim was a belated one the proper order to be passed is to set aside the assessments and to direct the ITO to make fresh assessments in accordance with the procedure prescribed by law. The Tribunal, therefore, erred in merely cancelling the assessment orders and in not issuing further directions as stated above.

We do not, however, agree with the orders made by the High Court by which it upheld the assessments and directed the ITO to make appropriate modifications. Such an order is clearly unwarranted in the circumstances of this case. The order of the High Court is, therefore, set aside. The question referred by the Tribunal to the High Court does not appear to be comprehensive enough to decide the matter satisfactorily. The question may have to be read as including a further question regarding the nature of the orders to be passed by the Tribunal if the orders of assessments are held to be contrary to law. In the light of the above, we hold that the orders of assessments are liable to be set aside but the Tribunal should direct the ITO to make fresh assessments in accordance with law.”

30. In both the decisions discussed above, the Hon’ble Supreme Court has made it clear that the illegality which has occurred after proper initiation of proceedings vitiates the order and hence the proceedings should be restored back to the stage at which the illegality has occurred. In any case, in the instant case, we have noticed earlier that the revenue was under the impression that the provisions of sec. 144C shall have application from AY 2010-11 and subsequent years and the AO has also acted in a bona fide manner in accordance with the view entertained by the revenue. Under these set of facts, we are of the view that the impugned assessment order suffers from illegality in not following the procedures prescribed under sec. 144C of the Act and hence the said illegality needs to be corrected by restoring the matter to the file of the assessing officer at the stage at which the illegality has occurred.

31. Accordingly, we set aside the order of Ld. CIT(A) and restore all to the file of the assessing officer with the direction to follow the procedure prescribed under sec. 144C of the Act, i.e., the assessing officer is directed to furnish a draft of the proposed assessment order to the assessee as provided u/s 144C(1) of the Act and proceed thereafter in accordance with the law.

32. Since we have restored all the issues to the file of the assessing officer, the issues contested by the assessee on merits have become infructuous.

33. In the result, all the appeals of the assessee are allowed for statistical purpose

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