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Suo Moto Revision not for Minor Errors: Gauhati HC quashes order initiated without proper scrutiny

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CASE TITLE – Karan Jain v. Union of India & Ors.

CASE NUMBER – WP(C)/3999/2021

DATED ON – 08.05.2024

QUORUM – Justice Kaushik Goswami

 

FACTS OF THE CASE

The challenge made in this writ petition is the Show Cause Notice No. ITBA/REV/F/REV1/2020-2021/1031736689 (1) dated 24.03.2021 issued by respondent No. 2 initiating proceedings under Section 263 of the Income Tax Act, 1961 (herein after referred as ‘the Act’) for the assessment year 2017-18, and subsequent ex-parte Order No. ITBA/REV/F/REV5/2020-21/1031849150(1) dated 28.03.2021 passed by the respondent No. 2 under Section 263 of the Act for the assessment year 2017-2018. the petitioner has filed its original return under Section 139(1) of the Act for the assessment year 2017-18 on 01.08.2017 declaring a total income of Rs.43,95,310/-. Later, vide Notice No. ITBA/AST/S/143(2)/2018-19/1010911976(1) dated 09.08.2018 under Section 143(2) of the Act, the case of the petitioner was selected for “limited scrutiny” under Computer Assisted Scrutiny Selection (“CASS”). During the course of assessment proceedings, Show Cause Notice dated 29.09.2018 was issued by the then Assessing Officer (i.e. predecessor of respondent No. 4) and the same was duly replied to vide letter dated 19.12.2018 by the petitioner. Thereafter, the then Assessing Officer (i.e. predecessor of respondent No. 4) passed the final assessment under Section 153D/143(3) of the Act vide Assessment Order dated 28.12.2018, accepting the returned income of Rs.43,95,310/-. By Show Cause Notice dated 24.03.2021 the petitioner was directed to furnish reply thereto and appear for hearing on 26.03.2021 at 12 pm, thereby, giving only one day to the petitioner to respond to the said notice. Due to such short span of time, the petitioner could not attend the Show Cause Notice dated 24.03.2021. The respondent No. 2 thereafter vide his ex-parte Order No. ITBA/REV/F/REV5/2020-21/1031849150(1) dated 28.03.2021, held the Assessment Order dated 28.12.2018 passed by the respondent No.4 as erroneous and prejudicial to the interests of the revenue.

 

ISSUE

Whether the Assessment Order dated 28.12.2018 can be said to be erroneous and prejudicial.

 

LEGAL PROVISIONS

Section 263 of the Income Tax Act, 1961, the powers vested upon he Commissioner of Income Tax to revise orders passed by Assessing Officers if the Commissioner believes they are wrong and harm the government’s tax collection.

 

CONTENTIONS BY THE PETITIONER

The Learned Counsel for the Petitioner submitted that the power of suo moto revision under Section 263 of the Act is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exists. Two circumstances must exist to enable the Commissioner to exercise the power of suo moto revision under Section 263 of the Act, i.e (i) the order is erroneous and; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of revenue, and stated that it is not sufficient to show that the order is erroneous. It must be erroneous and also prejudicial to the interest of the revenue. If an order is erroneous but not prejudicial to the revenue, the Commissioner cannot exercise power under section 263 of the Act. He further submitted that the Respondent No. 2 in his impugned order dated 28.03.2021 has undisputedly failed to establish as to how the Assessment Order dated 28.12.2018 is prejudicial to the interest of revenue and as such the impugned Show Cause Notice dated 24.03.2021 and order dated 28.03.2021 are absolutely illegal, arbitrary and not tenable in law.

 

CONTENTIONS BY THE RESPONDENTS

The Learned Counsel, Income Tax Department submitted that the petitioner filed his return of income for the assessment year 2017-18 declaring the total income of Rs.43,95,310/-, wherein in the capital account, an amount of Rs. 36,89,039/- only was shown as long term profit on sale of shares and while in the computation sheet an amount of Rs.31,15,782/- only has been claimed as exempt under Section 10(38) leaving a discrepancy of Rs. 5,30,257/- which was not offered to tax. He further contended that the said discrepancy, the Assessment Order dated 28.12.2018 passed under Section 153(D)/143(3) of the Act is erroneous insofar as it is prejudicial to the interest of the revenue. He accordingly submits that in view of the fact that the said order is erroneous and prejudicial to the interest of the revenue, the Principal Commissioner of Income Tax correctly invoked the powers conferred under the provision of Section 263 of the Act on 28.03.2024. He stated that the said order dated 28.12.2018 is erroneous insofar as it is prejudicial to the interest of revenue because the said order was passed without making inquiries or verification which should have been made.

 

COURT ANALYSIS AND JUDGEMENT

The Hon’ble Gauhati High Court stated that after a reading of Section 263 of the Act, it is clear that the suo moto revision proceedings under section 263 of the Act can be exercised only when the Revisional Authority considers the Assessment Order to be erroneous in so far as the same is prejudicial to the interest of revenue. Thus, merely if the Assessment Order is erroneously done is not sufficient for exercising revisional jurisdictional power unless and until the same is prejudicial to the interest of revenue. Section 263 of the Act would not be invoked merely to correct a mistake or error committed by the Assessing Officer unless it has caused prejudice to the interests of the revenue. And in the present case, it is clear that suo moto revisional proceeding was initiated simply on the basis of a proposal under section 263 of the Act and there was no independent application of mind by the Principal Commissioner of Income Tax. The Hon’ble High Court held that the learned Principal Commissioner of Income Tax has initiated the proceedings simply on the basis of the proposal of the subordinate authority and has not applied his mind after perusal of the records called for by him and thereby the very initiation of the proceeding in the instant case is illegal, without jurisdiction and not tenable in law. They mentioned that the non-disclosure of Rs.5,30,257/- while computing the long-term capital gains cannot result in causing prejudice to the department. Pertinent, that the net long-term capital gain was shown in the return after deduction of the long-term capital loss and both the long-term capital gains and long-term capital loss were duly shown in the return. In any case even if the said amount of Rs.5,30,257/- is further considered to be as long-term capital gain there would have been no further Income Tax Liability and thereby no prejudice would have been caused to the department and thereby the preconditions for the exercise of powers under Section 263 of the Act were wholly not fulfilled in view of the fact that the said amount of Rs.5,30,257/- being long-term capital gain is exempted, and held that therefore, by no stretch of imagination, non-disclosure of the said amount in the computation sheet can be said to be prejudicial to the interest of revenue and no loss of revenue. The Hon’ble High Court proceeded to state that the Show Cause Notice No. ITBA/REV/F/REV1/2020- 2021/1031736689(1) dated 24.03.2021 and subsequent ex-parte Order No.ITBA/REV/F/REV5/2020-21/1031849150(1) dated 28.03.2021 is hereby set aside and quashed.

 

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Judgement Reviewed by – Gnaneswarran Beemarao

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Delhi High Court Ruling on Tax Assessment Dispute: Implications of Statutory Provisions and Tribunal Orders

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Delhi High Court Ruling on Tax Assessment Dispute: Implications of Statutory Provisions and Tribunal Orders

Case title:  NEW DELHI TELEVISION LIMITED VS DISPUTE RESOLUTION PANEL 2 & ANR

Case no.: W.P.(C) 2322/2021

Dated on: 20TH May 2024

Quorum: Hon’ble Mr. Justice YASHWANT VARMA and Hon’ble Mr. Justice PURUSHAINDRA KUMAR KAURAV

FACTS OF THE CASE

The writ petitioner impugns the order of the Dispute Resolution Panel1 dated 29 January 2021 and which has negated its objections to the draft assessment order framed on 31 March 2013. The said draft assessment order came to be made pursuant to an order made by the Transfer Pricing Officer on 29 October 2019. Although the TPO had framed an order on 17 October 2017, the record would reflect that no corresponding order as envisaged under Section 92CA (4) of the Income Tax Act, 1961 was framed. The petitioner had urged for the consideration of the DRP that the reference made on 27 December 2018 and the consequential order dated 29 October 2019 framed by the TPO seeking to give effect to the original order of the ITAT dated 14 July 2017 were clearly barred by the prescription of limitation as embodied in Section 153(3) of the Act. The petitioners had argued that the period of nine months when computed from the passing of the order of the ITAT would have come to an end on 31 December 2018. It was in the aforesaid light that it was urged that there was no authority which inhered in the Assessing Officer to pass further orders referable to Section 92CA (4) of the Act. The petitioner filed its Return of Income for Assessment Year 2009-10 on 30 September 2009 declaring a loss of INR 64 crores. Taking note of certain international transactions, the AO after obtaining requisite approvals is stated to have made a reference to the TPO. The TPO proceeded to determine the transfer pricing adjustments liable to be made in terms of an order dated 30 January 2013. Both the respondents as well as the petitioner herein aggrieved by the final assessment order proceeded to institute appeals before the ITAT. The ITAT upon consideration of the challenges so made, by a final order dated 14 July 2017 confirmed the additions made by the AO under Section 69A of the Act. The additions on account of disallowance under Section 14A of the Act as well as those made with the reference to Section 68 of the Act on account of unexplained secured loans were set aside and the matter remitted to the AO for fresh adjudication. Pursuant to the aforesaid order, the AO on 26 July 2017 proceeded to draw an appeal effect order dealing with the subjects and heads which were remitted for its consideration. In terms of this order, the tax demand of the writ petitioner was revised to INR 428,93,32,536/-. The said order of the AO came to be challenged by the writ petitioner by way of W.P.(C) 6483 of 2017 and on which the Court by an order of 01 August 2017, upon finding that the petitioners had been able to establish a prima facie case directed that no coercive steps would be taken pursuant to the demands which had been raised. The said writ petition continues to remain pending on the board of the Court.

ISSUES

whether the objections raised by the writ petitioner against the draft assessment order, which were negated by the Dispute Resolution Panel (DRP), are justifiable?

whether the Transfer Pricing Officer (TPO) and Assessing Officer (AO) had the authority to take certain actions, particularly in light of the orders issued by the Income Tax Appellate Tribunal (ITAT) and statutory provisions?

LEGAL PROVISIONS

  1. Income Tax Act, 1961

Section 92CA: This section deals with the reference to Transfer Pricing Officer (TPO) for computation of Arm’s Length Price (ALP) in case of international transactions or specified domestic transactions.

Section 144C: This section outlines the procedure for making draft assessment orders in cases of transfer pricing adjustments, and the role of the Dispute Resolution Panel (DRP) in resolving objections raised by taxpayers.

Section 153: This section pertains to the time limits for completion of assessments. Subsections (3) and (4) of this section seem particularly relevant in the case, concerning assessments made in accordance with the procedure prescribed by Section 92CA.

Section 69A: This section deals with unexplained money, investment, etc.

Section 14A: This section deals with disallowance of expenditure incurred in relation to income not includible in total income.

Section 68: This section pertains to cash credits.

Section 254: This section relates to orders of Appellate Tribunals and the powers of such tribunals.

 

CONTENTIONS OF THE APPELLANT

Mr. Jolly, learned counsel appearing in support of the writ petition, at the outset, submitted that as would be evident from a reading of the order of the ITAT dated 14 July 2017, the Mr. Jolly, learned counsel appearing in support of the writ petition, at the outset, submitted that as would be evident from a reading of the order of the ITAT dated 14 July 2017, the It was further highlighted by Mr. Jolly that although the respondents on 02 January 2018 preferred appeals against the order dated 14 July 2017 of the ITAT, those appeals stand confined to the merits of the various issues which came to be decided. Even in those appeals Mr. Jolly submitted, the respondents do not assail or question the correctness of the action of the ITAT in remitting the matter to the TPO. Mr. Jolly submitted that as is well settled in law, neither the AO nor the TPO can possibly be recognized to have the authority to act contrary to the terms of the remand as the ITAT may choose to frame. It was his submission that once the ITAT had itself remanded the matter to the TPO, there existed no justification or requirement in law for a reference being made by the AO on 27 December 2018. The fact that the respondents had never questioned the validity of the aforesaid order of the ITAT according to Mr. Jolly is evident from the various notices which were issued by the AO as well as the TPO and are dated 18 August 2017, 22 August 2017, 05 September 2017 and 15 September 2017. Mr. Jolly then argued that a bare reading of the first order of the TPO dated 17 October 2017 would itself establish that the said authority had proceeded to act in terms of the directions of the ITAT and in order to give effect to and implement the order of 14 July 2017. It was then submitted by Mr. Jolly that once the TPO acting in compliance with the direction of the ITAT had proceeded to pass an order on 17 October 2017, it clearly stood divested of any authority or jurisdiction to undertake an identical exercise while purporting to act in terms of the reference which came to be subsequently made by the AO on 27 December 2018. It was pointed out by Mr. Jolly that the second reference which the AO chose to draw on 27 December 2018, was itself more than a year after the first order had been passed by the TPO. In any case, according to learned counsel, such a reference was wholly unnecessary bearing in mind the admitted position of the ITAT itself having remitted identified issues for the consideration of the TPO. The reference and the assumption of jurisdiction by the TPO was then assailed on the ground of limitation as constructed in terms of Section 153 of the Act. Mr. Jolly submitted that undisputedly in terms of the order of 14 July 2017, and which would clearly be liable to be read as requiring a fresh assessment being undertaken, the time frame within which the AO or the TPO could have concluded that exercise would be governed by Section 153(3) of the Act. Viewed in that light, learned counsel submitted that the limitation for drawing up a draft appeal effect order would have expired on 31 December 2018. This, according to Mr. Jolly, would clearly flow from the plain language of Section 153(3) of the Act.

CONTENTIONS OF THE RESPONDENTS

Mr. Zoheb Hossain, learned counsel appearing for the respondents, firstly raised a preliminary objection and contended that the writ petition ought not to be entertained against the directions of the DRP. Mr. Hossain submitted that in terms of the scheme underlying Section 144C of the Act, the statute creates a special mechanism to deal with cases where variations may arise as a result of transfer pricing adjustments. Mr. Hossain submitted that in all such cases, eligible assessees are furnished a draft assessment order against which the statute entitles them to prefer objections before the DRP. It was pointed out that once the DRP disposes of those objections, the matter stands placed before the AO who would then proceed to pass an assessment order. According to learned counsel, it is only when a final assessment order in accordance with the direction of the DRP comes to be framed that an assessee could be recognised to have a right to assail the action of the respondents or take recourse to a legal remedy. Mr. Hossain submitted that the adjudication of objections by the DRP is only a step-in aid of assessment in the case of an eligible assessee and does not result in a creation of a liability. A tax liability, according to learned counsel would arise only once a final assessment order is passed and which is appealable before the ITAT. Mr. Hossain also alluded to courts having noticed the aforesaid distinctive features underlying assessments undertaken in terms of Section 144C of the Act and desisting from invoking their extraordinary jurisdiction, bearing in mind the remedy available to an assessee and which would be available to be pursued once a final assessment order is framed. It was then submitted that the challenge as laid to the directions of DRP is misconceived since the said authority clearly stands denuded of the jurisdiction to examine objections of limitation or other jurisdictional challenges that may be raised. It was submitted that as would be evident from Section 144C (8) of the Act, the power of the DRP stands restricted to “confirming, reducing or enhancing the variations proposed”. That power, according to Mr. Hossain, cannot possibly be recognized as being akin to or equated with a power to set aside. It was the submission of Mr. Hossain that a statutory authority, as is well settled, is bound to exercise its jurisdiction within the four corners of the statute. Mr. Hossain submitted that since the DRP derives its power from Section 144C(8) of the Act, it cannot possibly be construed to have the authority to rule on every portrayed illegality or aspects pertaining to asserted jurisdictional errors.

 

COURT’S ANALYSIS AND JUDGEMENT

Although we had in the introductory parts of this decision noted that both Mr. Jolly as well as Mr. Hossain had addressed submissions on the basis of Section 153 as it appears on the statute book presently and post the amendments introduced by Finance Act, 2022, we had chosen to briefly digress and examine the various amendments introduced in that provision commencing from Finance Act, 2014 principally to underline the following two fundamental aspects. The TPO while undertaking that evaluation also stands enabled by virtue of Section 92CA(2B) to take into consideration any international transaction which though not disclosed in the report under Section 92E by the assessee may come to its notice. In any case, and as would be evident from the undisputed facts which obtain in the instant matter, the order of the ITAT dated 14 July 2017 and to the extent that certain aspects were remanded for the consideration of the TPO directly were neither questioned nor assailed at any time by the respondents. In fact, and as the writ petitioners have rightly pointed out, the aforesaid directions as framed were duly acknowledged and accepted and which fact becomes evident from not only the various notices which were issued by the jurisdictional AO and form part of our record such as Annexure P-12, P-14, P-15 and P-16 but also by the action of the TPO itself which had proceeded to pass an order on 17 October 2017. It thus becomes apparent that the principal order of the ITAT dated 14 July 2017 had come to be duly implemented by the TPO on 17 October 2017 itself. We are thus of the considered opinion that once the TPO had proceeded to pass the order of 17 October 2017, all that the AO was obliged to do was pass an assessment order in accordance with the procedure prescribed in Section 92CA (4) of the Act. It is pertinent to note that sub-section (4) of Section 153 is concerned with a reference referable to Section 92CA (1). That provision, as noticed hereinabove, is confined to a reference to the TPO that may be made by the AO. The limited application of Section 153(4) is also evidenced from that provision using the expression “made during the course of the proceeding for the assessment or reassessment”. That leaves us to examine the argument of a deemed reference which was advanced by Mr. Hossain. According to Mr. Hossain, the order of 14 July 2017 should be construed as being a reference governed by Section 153(4) of the Act and consequently the expanded period of limitation of twelve months becoming applicable. We find ourselves unable to sustain that submission bearing in mind the indubitable position which emerges from a plain reading of Section 153(3) of the Act and which encompasses and makes adequate provisions for a fresh order under Section 92CA (4) being liable to be made pursuant to an order of the ITAT under Section 254 of the Act. Since the aforesaid contingency is already provisioned for in sub section (3), there would exist no justification for such an order of the ITAT being placed or viewed as traceable to sub-section (4) of Section 153 of the Act. We further find that the judgment rendered by a learned Single Judge of the Karnataka High Court in TE Connectivity was concerned with an order of the ITAT which had remitted the matter to the “Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel”. In any case the High Court in that case had ultimately held in favour of the assessee. We find ourselves unable to discern any observation or conclusion appearing in that decision which could possibly be viewed as lending credence to the submissions addressed by the respondents in this proceeding. Accordingly, and for all the aforesaid reasons, while we refuse to interfere with the order of the DRP impugned herein, we allow the instant writ petition and hold that the second respondent stands barred in law from passing any further orders of final assessment pertaining to AY 2009-10. The petitioner shall consequently be entitled to all consequential reliefs.

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Judgement Reviewed by – HARIRAGHAVA JP

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The liability of TDS under Section 194-H can’t be extended for the ‘Payments’ made by the Assesses under ‘genuine business operations’: Supreme Court

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The issue revolving around this judgement is relating to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961, which provides that the payer (in the present case assessee) responsible for making the payment must deduct tax from the amount paid to another person.

In the case of Bharti Cellular Limited (now Bharti Airtel Limited) versus Assistant Commissioner of Income, the Cellular mobile telephone service providers referred to as the Assesses (Appellants) contend that the discounted amount neither qualify as commission or brokerage to the franchisees/distributors, nor are the franchisees/distributors their agents.

The Revenue (Respondents) contends that the discounted amount is commission under the purview of Section 194-H which is payable to an agent by the Assesses under the franchise/ distributorship agreement between the Assesses and the franchisees/distributors.

This matter was brought before different High Courts which led to conflicting decisions. The Assesses challenged the decision of the Delhi and Calcutta High Courts which held that the assesses were liable to deduct tax at source under Section 194-H of the Act. On a contrary, the Revenue challenged the decisions of Rajasthan, Karnataka and Bombay High Courts which held that Section 194-H of the Act is not attracted under the circumstances of this case.

Subsequently, both the parties challenging the above decisions of the High Courts, appealed before the Supreme Court of India. The key issue before the Court was to interpret the Section 194-H and determine the liability of the cellular mobile service providers to deduct tax at source on the income/profit component received by their distributors/franchisees from third parties/customers.

The court fundamentally dealt with the questions of interpretation Section 194-H which further necessitated in determining the Principal-Agent relationship. Delving into the provisions of the Section the Court stated that the Section 194-H imposes the liability to deduct tax at source on “the person responsible for paying”. The provision provides that such a liability arises when income is credited or paid by the person responsible for paying. Further, the term “direct and indirect” in Explanation (i) states that the obligation vests even when the payment is made indirectly by the payer to the payee.

The Court while interpreting the term ‘acting on behalf of another person’ states that such a phrase entails the existence of a legal relationship of principal and agent, between the payer and the payee. The legal relationship of principal and agent is hence, necessary to impose the liability to deduct tax at source under Section 194-H.

The court lays down five important criteria to be considered for determining the Principal-Agent Relationship.

The Agent’s legal power to alter his principal’s legal relationship with a third party and the Principal’s co-relative liability to have his relations altered.

  • The degree of control by the principal over the conduct of the activities of the agent.
  • The task entrusted by the principal to the agent should result in a fiduciary relationship.
  • The Agent’s liability to render accounts of the Principal and his entitlement to remuneration for the work he performs for the principal.

Further the Courts relied on two decisions to determine what constitutes ‘commission’. In the case of Director, Prasar Bharati v. Commissioner of Income Tax, Thiruvananthapuram, the Court held that the expression ‘commission or brokerage’ is an inclusive definition and hence, must be interpreted widely.

Further, the court highlights the Delhi High Court’s decision in Commissioner of Income Tax v. Singapore Airlines Ltd., which held that tax under Section 194-H is not required to be deducted on discounted tickets sold by airlines through travel agents. The court notes that the revenue did not challenge this decision, leading to its finality. 

Further, the court rejected the contention of the Revenue relying upon the decision of this Court in Singapore Airlines Limited (supra) that assesses would be liable to deduct tax at source even if the assesses are not making payment or crediting the income to the account of the franchisee/distributor.

The court stated that in the instant case, the relationship between the Assesses and the Distributors is not a fiduciary relationship but instead is an activity carried out by an Independent Contractor. Moreover, it highlighted that the facts of each case and the authority given by ‘principal’ to the distributors must be considered while determining the relationship.

Therefore, with regard to the above observations, the Court held that the business operations of the Assesses which amounts to ‘discounted payments’, does not qualify for ‘commission’ under Section194-H of the Act. Accordingly, the appeals filed by the assesses – cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta were allowed and the Assesses were not liable to deduct the tax at source under the said section.

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Judgement Reviewed By – Keerthi K

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