The Principal Commissioner Of ... vs M/S.Apollo Tyres Limited
2021 Latest Caselaw 16175 Ker

            IN THE HIGH COURT OF KERALA AT ERNAKULAM
                              PRESENT
                THE HONOURABLE MR.JUSTICE S.V.BHATTI
                                  &
        THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS
    WEDNESDAY, THE 4TH 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 TAX
          KOCHI-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 TAX
          CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT



RESPONDENT/S:

          M/S.APOLLO TYRES LIMITED
          6TH 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 MARKOS
          SRI.ABRAHAM JOSEPH MARKOS
          SRI.ISAAC THOMAS
          SRI.P.G.CHANDAPILLAI ABRAHAM
          SHRI.VIPIN ANTO H.M.
          SHRI.ALEXANDER JOSEPH MARKOS
          SHRI.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:
 I.T.A. No.36/2017
                                   -2-




                          JUDGMENT

S.V.Bhatti, J.

Heard learned Standing Counsel Mr. Christopher Abraham

and learned Senior Counsel Mr. Joseph Markos for parties.

2. The Principal Commissioner of Income Tax/Revenue

is the appellant. M/s.Apollo Tyres Ltd., Kochi/Assessee is the

respondent. The Revenue, aggrieved by the order dated

10.01.2017 in ITA No.222/Coch/2016, is in appeal before this

Court. The issues canvassed in the appeal relate to Assessment

Year 2010-11. Prefaced in the beginning, the issues raised by

the Revenue arise under Section 144C read with Section 143(3)

vis-a-vis Section 263 of the Income Tax Act, 1961 (for short 'the

Act').

I.T.A. No.36/2017

2.1 On 23.10.2012 the assessee filed income tax returns

for the Assessment Year 2010-11. The Joint Director of Income

Tax/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 of

Income Tax issued a draft assessment order under Section 144C

of the Act. The assessee filed objection to the draft assessment

order and the proposed assessment was referred to the Dispute

Resolution Panel-I (for short 'DRP'), Bangalore. The DRP,

through order dated 26.12.2014 in Annexure-C, issued

directions to the Assessing Officer for carrying out the

assessment in terms of the directions issued by DRP. The

Assessing Officer vide order dated 18.02.2015 in Annexure-D

made the assessment in terms of directions issued in Annexure-

C order dated 26.12.2014. Though it is not germane for

adjudicating the controversy arising in the appeal, but it is I.T.A. No.36/2017

contextual to refer to the circumstance that the assessee and

the Revenue questioned the assessment order dated 18.02.2015

before the Income Tax Appellate Tribunal (for short 'the

Tribunal'). On 23.03.2016 the Principal Commissioner of Income

Tax/appellant, purporting to exercise his power and

jurisdiction under Section 263 of the Act, directed the Assessing

Officer as follows:

"This issue was not properly examined by the Assessing Officer. The Assessing Officer also did not examine the applicability of Section 40(a)(ia) in respect of payment to persons on account of R&D expenditure claimed. Hence the order dated 28.03.2014 is erroneous in so far as it is prejudicial to the interests of revenue on the above discussed points. To that extent the order passed under section 144C read with Section 143(3) of the Income-tax Act, 1961, dated 28.03.2014 is set aside and the Assessing Officer is directed to examine and pass an order as per the provisions of Income-tax Act, after giving ample opportunity to the assessee. The Assessing Officer is directed to examine the issue an allow the expenditure strictly as per the provisions of Section 35(2AB) of the IT Act and 40(a)(ia) of the Income-tax Act, 1961."

I.T.A. No.36/2017

The assessee filed ITA No.222/Coch/2016 questioning the order

of appellant dated 23.03.2016. The Tribunal, through the order

assailed in the appeal, allowed ITA No.222/Coch/2016. Hence

the instant appeal.

3. The following substantial questions of law are raised

for our decision:

"1. Whether, on the facts and in the circumstances of the case and in the light of the principles of law, is the Hon'ble ITAT right in holding that the order under Section 144C read with Section 143(3) dated 28.03.2014 did not cause any prejudice to the revenue?

2. Whether, on the facts and in the circumstances of the case as well as in law, is the Hon'ble Tribunal right in quashing the order under Section 263 dated 23.03.2016 passed by the Principal Commissioner of Income Tax, Kochi-1?"

I.T.A. No.36/2017

4. Learned Standing Counsel Sri.Christopher Abraham

argues that the Tribunal had committed a fundamental error in

law in interdicting the order dated 23.03.2016 made by the

Commissioner under Section 263 of the Act. The Tribunal failed

to appreciate that Annexure-B order dated 28.03.2014 is a draft

assessment order made under Section 144C of the Act. The

character or nature of draft assessment order is not different

from an assessment order and will have to be understood as an

order made under the Act by the Assessing Officer. In other

words, it is argued that draft assessment order is also an order

falling within the ambit of revision under Section 263 of the Act.

The Principal Commissioner of Income Tax/appellant, having

regard to the language in Section 263, is certainly competent to

issue direction by taking note of prejudice occasioning to the

Revenue, either on account of concealment of income by the

assessee 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 not

inhibit the Revenue/appellant from invoking the jurisdiction

when prejudice is noticed by the Principal Commissioner of

Income Tax. The remedy of the Department against assessment

order dated 18.02.2015 (Annexure-D) is before the Tribunal and

such remedy even when availed is limited to the issues

concerning the draft assessment order, directions of DRP, and

assessment made by the Assessing Officer, but not to the items

which are not included in the return of the assessee or wrong

application 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 Section

263 of the Act is correct and valid. He prays for allowing the

appeal.

5. Learned Senior Advocate Sri.Joseph Markos argues

that 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 illegal

and unavailable. By explaining the scheme of Section 144C of

the Act, it is argued, Annexure-B order dated 28.03.2014 is

nothing but a draft assessment proposed by the Assessing

Officer. The assessee, upon receipt of notice of draft assessment

order, has options either to accept the draft assessment or file

objections on the dis-allowances, additions etc made by the

Assessing Officer. In the case on hand, the objections were filed

by the assessee. This resulted in the draft assessment order in

Annexure-B, being forwarded to DRP for decision and issuance

of directions to the Assessing Officer. The DRP, in Annexure-C

dated 26.12.2014, issued directives which resulted in Annexure-

D order dated 18.02.2015.

5.1 Therefore, interdicting draft assessment order

proposed by the Assessing Officer in exercise of power under

Section 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 have

occasioned to the Revenue and secondly, that any issue stated

without admitting there is neither suppression nor

misapplication in the case on hand. Even otherwise the

Revenue/appellant notices such an occasion, the power is not to

interdict draft assessment order. According to him, if this

uncertainty is accepted, the assessee would never know which

is going to be the final order, namely the assessment order

emanating pursuant to directions of DRP or orders made

pursuant to directions under Section 263 of the Act. He read

out the reasons stated by the Tribunal and concluded by

canvassing that no exception to basic requirements, i.e., error

and prejudice, are examined by the Tribunal. He has invited

our attention to the orders of the Income Tax Appellate Tribunal,

New Delhi1, and Income Tax Appellate Tribunal, Kolkata2. These

I.T.A. No.36/2017

two appeals are at the instance of the assessee. The purpose of

relying on these decisions is to explain that the presence of

prejudice is a sine qua non for exercising the power under

Section 263 of the Act. In these orders, the case of Revenue is

that draft assessment order under Section 144C, when objected

by the assessee, would not result in prejudice to both, i.e.,

Revenue/assessee.

6. We have heard the learned counsel appearing for the

parties and also perused the record. At the outset, we make it

clear that in the case on hand we are not examining the scope

and applicability of Section 263 vis-a-vis a final assessment order

made pursuant to directions of DRP, under Section 144C read

with Section 143(3) of the Act. We are, in the case on hand,

examining whether the draft assessment order communicated

to assessee under Section 144C of the Act is an order amenable

to revision under Section 263 of the Act or not. I.T.A. No.36/2017

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 any variation in the income or loss returned by the assessee which is prejudicial to the interest of such assessee serves on the assessee a draft of the proposed assessment order (2) The assessee shall within the time permitted in this behalf, could either:

(a) file his acceptance of the variation to the Assessing Officer; or

(b) file his objections, if any, to variations proposed in the draft assessment order.

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 is

made over to DRP for resolution. This mechanism is more in I.T.A. No.36/2017

the nature of an alternate dispute resolution mechanism for

expeditious finalization of disputed returns falling under

Section 144C of the Act. The DRP conducts hearing/enquiry,

issues directions to the Assessing Officer on the draft

assessment forwarded to DRP for directions. The Assessing

Officer complies with the directions and issues the assessment

order. Section 144C is not reproduced, for, in the present case,

the Commissioner has interdicted the draft assessment

proposed in Annexure-B. It is well established by a series of

decisions that the fulcrum on which the power under Section

263 is exercised, rests on the orders made under the Act, being

erroneous and the orders prejudicial to the interest of the

Revenue. Let us juxtapose the scheme under Section 144C of

the Act with an order being erroneous and prejudicial to the

interest 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 of

prejudice insofar as the Revenue is concerned does not arise vis-

a-vis the draft assessment inasmuch as no demand could be

raised on the draft assessment order proposed by the Assessing

Officer and objected to by the assessee.

7.2 We have taken note of the requirement of prejudice

considered by the Tribunal in the decisions referred to above.

The circumstances in the said orders are slightly different. For

the purpose of appreciating that the order is erroneous insofar

as it is prejudicial to the interest of Revenue is sine qua non for

taking recourse to the power under Section 263. The appellant

had reasons to believe that a few matters required

reconsideration by the Assessing Officer, the remedy is not by

interdicting a draft assessment order proposed in Annexure-B,

but a different mechanism is available as per the scheme of the

Act.

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 draft

assessment order is only a proposed assessment order and there

is no demand notice attached to the draft assessment order. In

cases covered by Section 144C of the Act, the assessment order

comes into picture only after an assessment order is passed

pursuant to draft assessment order or in compliance with the

directions of the DRP. The draft assessment order by itself

cannot levy tax on the assessee. Therefore, there is no question

of loss of revenue in the draft assessment order. It is further

held that Section 263 has no application for revising the draft

assessment 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 are

similar, namely that invocation of power under Section 263 of

the 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 condition

required for invoking Section 263, namely the order being

erroneous insofar as it is prejudicial to the interest of Revenue,

does not arise. Hence the reasons are in accordance with the

scheme of the Act envisaged on one hand by Section 144C and

on another by Section 263 of the Act.

For the above reasons, the substantial questions are

answered in favour of the assessee and against the Revenue.

ITA No.36/2017 stands dismissed.

Sd/-

S.V.BHATTI JUDGE

Sd/-

BECHU KURIAN THOMAS JUDGE

jjj I.T.A. No.36/2017

APPENDIX OF ITA 36/2017

PETITIONER ANNEXURE

ANNEXURE A COPY OF THE ORDER U/S.92CA(3) DATED 29/01/2014 FOR AY 2010-11 PASSED BY THE JDIT, TRANSFER PRICING OFFICER-1, KOCHI.

ANNEXURE B COPY OF THE DRAFT ASSESSMENT ORDER U/S. 144C RWS 143(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 D COPY OF FINAL ASSESSMENT U/S. 143(3) R.W.S. 144C DATED 18/02/2015 FOR AY 2010-11.

ANNEXURE E COPY OF THE ORDER U/S. 263 DATED 23/03/2016 PASSED BY THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI-I.

ANNEXURE F COPY 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).