Ita/36/2017 Of The Principal Commissioner Of Income Tax v. M/S.apollo Tyres Limited

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMASWEDNESDAY, THE 4 DAY OF AUGUST 2021 / 13TH SRAVANA, 1943 ITA NO. 36 OF 2017 AGAINST THE ORDER IN ITA 222/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAXKOCHI-1, KOCHI, INCOME TAX OFFICES,CENTRAL REVENUE BUILDING, I.S PRESS ROAD,KOCHI 682 018 BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES)JOSE JOSEPH, SC, FOR INCOME TAXCHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: M/S.APOLLO TYRES LIMITED6TH FLOOR, CHERUPUSHPAM BUILDING,SHANMUGHAM ROAD, ERNAKULAM 682 031(PRESENT ADDRESS 3RD FLOOR, AREEKAL MANSION, NEAR MANORAMA JUNCTION,PANAMPILLY NAGAR, KOCHI 682 036 BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.ISAAC THOMASSRI.P.G.CHANDAPILLAI ABRAHAMSHRI.VIPIN ANTO H.M.SHRI.ALEXANDER JOSEPH MARKOSSHRI.SHARAD JOSEPH KODANTHARA THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 04.08.2021,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T S.V.Bhatti, J. Heard learned Standing Counsel Mr. Christopher Abrahamand learned Senior Counsel Mr. Joseph Markos for parties. 2. The Principal Commissioner of Income Tax/Revenueis the appellant. M/s.Apollo Tyres Ltd., Kochi/Assessee is therespondent. The Revenue, aggrieved by the order dated10.01.2017 in ITA No.222/Coch/2016, is in appeal before thisCourt. The issues canvassed in the appeal relate to AssessmentYear 2010-11. Prefaced in the beginning, the issues raised bythe Revenue arise under Section 144C read with Section 143(3)vis-a-vis Section 263 of the Income Tax Act, 1961 (for short 'theAct'). I.T.A. No.36/2017 2.1On 23.10.2012 the assessee filed income tax returns for the Assessment Year 2010-11. The Joint Director of IncomeTax/Assessing Officer vide assessment dated 29.01.2014(Annexure-A) finalized the return filed by the assessee.Subsequently, on 28.03.2014 the Additional Commissioner ofIncome Tax issued a draft assessment order under Section 144Cof the Act. The assessee filed objection to the draft assessmentorder and the proposed assessment was referred to the DisputeResolution Panel-I (for short 'DRP'), Bangalore. The DRP,through order dated 26.12.2014 in Annexure-C, issueddirections to the Assessing Officer for carrying out theassessment in terms of the directions issued by DRP. TheAssessing Officer vide order dated 18.02.2015 in Annexure-Dmade the assessment in terms of directions issued in Annexure-C order dated 26.12.2014. Though it is not germane foradjudicating the controversy arising in the appeal, but it is I.T.A. No.36/2017 -4- contextual to refer to the circumstance that the assessee andthe Revenue questioned the assessment order dated 18.02.2015before the Income Tax Appellate Tribunal (for short 'theTribunal'). On 23.03.2016 the Principal Commissioner of Income Tax/appellant, purporting to exercise his power andjurisdiction under Section 263 of the Act, directed the AssessingOfficer as follows: “This issue was not properly examined by the Assessing Officer.The Assessing Officer also did not examine the applicability ofSection 40(a)(ia) in respect of payment to persons on account ofR&D expenditure claimed. Hence the order dated 28.03.2014 iserroneous in so far as it is prejudicial to the interests ofrevenue on the above discussed points. To that extent theorder passed under section 144C read with Section 143(3) of theIncome-tax Act, 1961, dated 28.03.2014 is set aside and theAssessing Officer is directed to examine and pass an order asper the provisions of Income-tax Act, after giving ampleopportunity to the assessee. The Assessing Officer is directedto examine the issue an allow the expenditure strictly as perthe provisions of Section 35(2AB) of the IT Act and 40(a)(ia) ofthe Income-tax Act, 1961.” The assessee filed ITA No.222/Coch/2016 questioning the order of appellant dated 23.03.2016. The Tribunal, through the orderassailed in the appeal, allowed ITA No.222/Coch/2016. Hencethe instant appeal. 3.The following substantial questions of law are raisedfor our decision: “1.Whether, on the facts and in the circumstances ofthe case and in the light of the principles of law, is theHon'ble ITAT right in holding that the order underSection 144C read with Section 143(3) dated 28.03.2014did not cause any prejudice to the revenue? 2.Whether, on the facts and in the circumstances ofthe case as well as in law, is the Hon'ble Tribunal rightin quashing the order under Section 263 dated23.03.2016 passed by the Principal Commissioner ofIncome Tax, Kochi-1?” I.T.A. No.36/2017 4.Learned Standing Counsel Sri.Christopher Abrahamargues that the Tribunal had committed a fundamental error inlaw in interdicting the order dated 23.03.2016 made by theCommissioner under Section 263 of the Act. The Tribunal failedto appreciate that Annexure-B order dated 28.03.2014 is a draftassessment order made under Section 144C of the Act. Thecharacter or nature of draft assessment order is not differentfrom an assessment order and will have to be understood as anorder made under the Act by the Assessing Officer. In otherwords, it is argued that draft assessment order is also an orderfalling within the ambit of revision under Section 263 of the Act.The Principal Commissioner of Income Tax/appellant, havingregard to the language in Section 263, is certainly competent toissue direction by taking note of prejudice occasioning to theRevenue, either on account of concealment of income by theassessee or misapplication of a provision of law by the Assessing I.T.A. No.36/2017 Officer. The procedure under Section 144C of the Act does notinhibit the Revenue/appellant from invoking the jurisdictionwhen prejudice is noticed by the Principal Commissioner ofIncome Tax. The remedy of the Department against assessmentorder dated 18.02.2015 (Annexure-D) is before the Tribunal andsuch remedy even when availed is limited to the issuesconcerning the draft assessment order, directions of DRP, andassessment made by the Assessing Officer, but not to the itemswhich are not included in the return of the assessee or wrongapplication of fact or law, resulting in prejudice to the Revenue.These are and were independent of orders in Annexures-B, C,and D. Hence, the invocation of revision power under Section263 of the Act is correct and valid. He prays for allowing theappeal. 5.Learned Senior Advocate Sri.Joseph Markos arguesthat the exercise of jurisdiction under Section 263 of the Act, in I.T.A. No.36/2017 the admitted circumstances of the case, is completely illegaland unavailable. By explaining the scheme of Section 144C ofthe Act, it is argued, Annexure-B order dated 28.03.2014 isnothing but a draft assessment proposed by the AssessingOfficer. The assessee, upon receipt of notice of draft assessmentorder, has options either to accept the draft assessment or fileobjections on the dis-allowances, additions etc made by theAssessing Officer. In the case on hand, the objections were filedby the assessee. This resulted in the draft assessment order inAnnexure-B, being forwarded to DRP for decision and issuanceof directions to the Assessing Officer. The DRP, in Annexure-Cdated 26.12.2014, issued directives which resulted in Annexure-D order dated 18.02.2015. 5.1Therefore, interdicting draft assessment orderproposed by the Assessing Officer in exercise of power underSection 263 fails for two reasons, firstly, at the stage of draft I.T.A. No.36/2017 5.1Therefore, interdicting draft assessment orderproposed by the Assessing Officer in exercise of power underSection 263 fails for two reasons, firstly, at the stage of draft I.T.A. No.36/2017 assessment proposed no prejudice can be assumed to haveoccasioned to the Revenue and secondly, that any issue statedwithout admitting there is neither suppression normisapplication in the case on hand. Even otherwise theRevenue/appellant notices such an occasion, the power is not tointerdict draft assessment order. According to him, if thisuncertainty is accepted, the assessee would never know whichis going to be the final order, namely the assessment orderemanating pursuant to directions of DRP or orders madepursuant to directions under Section 263 of the Act. He readout the reasons stated by the Tribunal and concluded bycanvassing that no exception to basic requirements, i.e., errorand prejudice, are examined by the Tribunal. He has invitedour attention to the orders of the Income Tax Appellate Tribunal,New Delhi[1], and Income Tax Appellate Tribunal, Kolkata[2]. These 1ITA No.1399/Del/2017 Assmt Year 2012-132ITA No.1142/Kol/2016 Assmt Year 2009-102ITA No.1142/Kol/2016 Assmt Year 2009-10 two appeals are at the instance of the assessee. The purpose of relying on these decisions is to explain that the presence ofprejudice is a sine qua non for exercising the power underSection 263 of the Act. In these orders, the case of Revenue isthat draft assessment order under Section 144C, when objectedby the assessee, would not result in prejudice to both, i.e.,Revenue/assessee. 6.We have heard the learned counsel appearing for theparties and also perused the record. At the outset, we make itclear that in the case on hand we are not examining the scopeand applicability of Section 263 vis-a-vis a final assessment ordermade pursuant to directions of DRP, under Section 144C readwith Section 143(3) of the Act. We are, in the case on hand,examining whether the draft assessment order communicatedto assessee under Section 144C of the Act is an order amenableto revision under Section 263 of the Act or not. I.T.A. No.36/2017 -11- 7.For appreciating the above controversy let us briefly refer to the scheme under Section 144C of the Act: (1)The Assessing Officer when proposes to make anyvariation in the income or loss returned by theassessee which is prejudicial to the interest of suchassessee serves on the assessee a draft of the proposedassessment order (2)this behalf, could either: The assessee shall within the time permitted in (a)Assessing Officer; or file his acceptance of the variation to the (b)in the draft assessment order. file his objections, if any, to variations proposed 7.1 In a case where the assessee either accepts or does not file objection, the Assessing Officer is authorized to make the draft as final assessment. Per contra, in a case where objections are received by the Assessing Officer, the case ismade over to DRP for resolution. This mechanism is more in I.T.A. No.36/2017 (1)The Assessing Officer when proposes to make anyvariation in the income or loss returned by theassessee which is prejudicial to the interest of suchassessee serves on the assessee a draft of the proposedassessment order (2)this behalf, could either: The assessee shall within the time permitted in (a)Assessing Officer; or file his acceptance of the variation to the (b)in the draft assessment order. file his objections, if any, to variations proposed 7.1 In a case where the assessee either accepts or does not file objection, the Assessing Officer is authorized to make the draft as final assessment. Per contra, in a case where objections are received by the Assessing Officer, the case ismade over to DRP for resolution. This mechanism is more in I.T.A. No.36/2017 the nature of an alternate dispute resolution mechanism forexpeditious finalization of disputed returns falling underSection 144C of the Act. The DRP conducts hearing/enquiry,issues directions to the Assessing Officer on the draftassessment forwarded to DRP for directions. The AssessingOfficer complies with the directions and issues the assessmentorder. Section 144C is not reproduced, for, in the present case,the Commissioner has interdicted the draft assessmentproposed in Annexure-B. It is well established by a series ofdecisions that the fulcrum on which the power under Section263 is exercised, rests on the orders made under the Act, beingerroneous and the orders prejudicial to the interest of theRevenue. Let us juxtapose the scheme under Section 144C ofthe Act with an order being erroneous and prejudicial to theinterest of Revenue, and deliberation of scheme in this behalf,we observe that, whether the draft assessment order is I.T.A. No.36/2017 erroneous or not is examined by DRP and the element ofprejudice insofar as the Revenue is concerned does not arise vis-a-vis the draft assessment inasmuch as no demand could beraised on the draft assessment order proposed by the AssessingOfficer and objected to by the assessee. 7.2We have taken note of the requirement of prejudiceconsidered by the Tribunal in the decisions referred to above.The circumstances in the said orders are slightly different. Forthe purpose of appreciating that the order is erroneous insofaras it is prejudicial to the interest of Revenue is sine qua non fortaking recourse to the power under Section 263. The appellanthad reasons to believe that a few matters requiredreconsideration by the Assessing Officer, the remedy is not byinterdicting a draft assessment order proposed in Annexure-B,but a different mechanism is available as per the scheme of theAct. I.T.A. No.36/2017 8.Now let us examine the reasoning of the Tribunal. The Tribunal noticed that from the scheme of the Act the draftassessment order is only a proposed assessment order and thereis no demand notice attached to the draft assessment order. Incases covered by Section 144C of the Act, the assessment ordercomes into picture only after an assessment order is passedpursuant to draft assessment order or in compliance with thedirections of the DRP. The draft assessment order by itselfcannot levy tax on the assessee. Therefore, there is no questionof loss of revenue in the draft assessment order. It is furtherheld that Section 263 has no application for revising the draftassessment order proposed by the Assessing Officer. 9.Our independent consideration of the circumstances; also the scheme of the Act and the view of the Tribunal aresimilar, namely that invocation of power under Section 263 ofthe Act to interdict a draft assessment order proposed by the I.T.A. No.36/2017 Assessing Officer is unavailable to Principal Commissioner of 9.Our independent consideration of the circumstances; also the scheme of the Act and the view of the Tribunal aresimilar, namely that invocation of power under Section 263 ofthe Act to interdict a draft assessment order proposed by the I.T.A. No.36/2017 Assessing Officer is unavailable to Principal Commissioner of Income Tax. We hasten to add, for, at that stage, the conditionrequired for invoking Section 263, namely the order beingerroneous insofar as it is prejudicial to the interest of Revenue,does not arise. Hence the reasons are in accordance with thescheme of the Act envisaged on one hand by Section 144C andon another by Section 263 of the Act. For the above reasons, the substantial questions areanswered in favour of the assessee and against the Revenue.ITA No.36/2017 stands dismissed. Sd/- S.V.BHATTIJUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj I.T.A. No.36/2017 APPENDIX OF ITA 36/2017 PETITIONER ANNEXURE ANNEXURE ACOPY OF THE ORDER U/S.92CA(3) DATED 29/01/2014 FORAY 2010-11 PASSED BY THE JDIT, TRANSFER PRICING OFFICER-1, KOCHI. ANNEXURE BCOPY OF THE DRAFT ASSESSMENT ORDER U/S. 144C RWS143(3) DATED 28/03/2014 FOR AY 2010-11. ANNEXURE C COPY OF ORDER U/S. 144C(5) DATED 26/12/2014 CONTAINING DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL, BANGALORE IN F.NO. 183/DRP-BNG/2014-15. ANNEXURE DCOPY OF FINAL ASSESSMENT U/S. 143(3) R.W.S. 144C DATED 18/02/2015 FOR AY 2010-11.DATED 18/02/2015 FOR AY 2010-11. ANNEXURE ECOPY OF THE ORDER U/S. 263 DATED 23/03/2016 PASSEDBY THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI-I.BY THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI-I. ANNEXURE FCOPY OF THE APPELLATE ORDER OF THE ITAT COCHIN BENCH IN ITA NO.222/COCH/2016 DATED 10/01/2017 (COMBINED ORDER IN ITA NO.223/COCH/2015 (AY 2010-11), IT(TP)A NO.189/COCH/2016(AY 2011-12), ITA NO.222/COCH.2016 (AY 2010-11), ITA NO.257/COCH/2015 (AY 2010-11) AND IT (TP)A NO.130/COCH/2016 (AY 2011-12).