Source: https://taxcaselaw.com/income_tax_case_laws/section-144/section-144c/delhi-h-c-the-assessment-proceedings-had-to-necessarily-be-completed-by-the-ao-within-the-time-limit-specified-in-section-153-2a-of-the-act-inasmuch-as-the-ao-failed-to-do-so-the-impugned-notice/
Timestamp: 2019-04-22 02:41:07+00:00

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Delhi H.C : The assessment proceedings had to necessarily be completed by the AO within the time limit specified in Section 153 (2A) of the Act. Inasmuch as the AO failed to do so, the impugned notice dated 14th September 2015 issued by the AO and all proceedings consequential thereto including the order dated 2nd December 2015 passed by the AO are hereby set aside.
S. Muralidhar & Prathiba M. Singh, JJ.
1. This writ petition by Nokia India Pvt. Ltd. (‘Assessee’) seeks the quashing of the notice dated 14th September 2015 issued by the Deputy Commissioner of Income Tax, Circle-18 (2), New Delhi (hereafter the Assessing Officer -‘AO’) under Section 254 read with Sections 144-C and 143 (3) of the Income Tax Act, 1961 (‘Act’) for Assessment Year (‘AY’) 2007-08. The Assessee also challenges the consequential order dated 2nd December 2015 passed by the AO rejecting the plea of the Assessee that in terms of Section 153 (2A) of the Act, the proceedings under the aforementioned notice dated 14th September 2015 would be time-barred.
2. The Petitioner, which is engaged in manufacture and sale of mobile handsets, filed its return 1stof income for the AY 2007-08 on November 2007 declaring an income of Rs. 8,10,62,32,096/-. Since, during the AY in question, the Assessee was involved in international transactions with its Associated Enterprise (‘AE’), a reference was made by the AO to the Transfer Pricing Officer (‘TPO’).
3. The Assessee filed objections to the report of the TPO before the Dispute Resolution Panel (DRP) contesting the transfer pricing (TP) adjustment by which the returned income of the Assessee stood enhanced. These objections were disposed of by the DRP. On the basis of the directions issued by the DRP, the AO completed the assessment by passing an assessment order under Section 143 (3) read with Section 144C (13) of the Act on 29th September 2011. The total income of the Petitioner was assessed at Rs. 12,37,03,19,800/-.
b. As regards the applicable rate of depreciation on computer peripherals, the ITAT allowed the Assessee’s appeal and directed the AO to allow depreciation on computer peripherals at the rate of 60% instead of 15% as allowed in the original assessment order.
e. As regards working capital adjustment for computing the arm’s length price (‘ALP’) of the international transaction, the ITAT noted that for AY 2006-07, the ITAT had remanded the matter to the file of the AO/TPO for re-consideration in light of the fact that the said adjustment had been allowed to the Assessee in the earlier AYs. Accordingly, the ITAT set aside the matter to the file of the AO with the direction to examine the case of the assessee and decide the issue afresh in accordance with the provisions of law. The AO was asked to provide the Assessee the necessary opportunity of being heard.
g. As regards the power of the TPO to determine ALP in respect of international transactions not referred to him by the AO, the ITAT held that, in view of the amended provisions of Section 92CA of the Act with retrospective effect from 1st April 2002, this ground urged by the Assessee had become academic. It was accordingly rejected.
On receipt of the ITAT’s order, the AO referred the TP issues to the TPO. While the matter was pending with the TPO, the Assessee filed a letter dated 31st March 2014 before the TPO with a copy to the AO’s office. In the said letter, the Assessee submitted that under Section 153 (2A) of the Act, the last date for the AO to pass the fresh assessment order was 31st March 2015. The TPO was requested to take the said provision into consideration.
On 21st January 2015, the TPO responded to the aforementioned letter of the Assessee. According to the TPO, the limitation for passing the order in the assessment proceedings had to be calculated under Section 153 (3) (ii) of the Act. According to the TPO, the ITAT had only partly restored the original order by giving directions to various authorities for considering certain issues afresh after giving a reasonable opportunity to the Assessee. Referring to paragraph 29 of the ITAT’s order which stated that the appeal of the Assessee was being partly allowed for statistical purposes, the TPO stated that the limitation date for completing and passing of the assessment order had to be calculated in terms of Section 153 (3) (ii) of the Act. Alternatively, the TPO stated that, even in terms of Section 153 (2A) of the Act, the proceedings were not time-barred as of 31st January 2015.
On 29th January 2015, the Assessee responded to the TPO and a copy thereof was also sent to the AO. The Assessee reiterated that the limitation period for passage of a fresh order would be calculated in terms of Section 153 (2A) of the Act. Thereafter, the AO issued the impugned notice dated 14th September 2015 calling upon the Assessee to attend the AO’s office on 22nd September 2015 for proceedings under Section 254 read with Sections 144C and 143 (3) of the Act for AY 2007-08.
On 21st October 2015, the Assessee responded to the above notice reiterating that Section 153 (2A) of the Act was applicable and, therefore, the fresh order of assessment was required to be passed within two years from the end of the financial year in which the order of the ITAT had been received by the Commissioner. It was therefore contended that since the proceedings had become time-barred on 31st March 2015, any notice issued thereafter would be without jurisdiction.
By the impugned order dated 2nd December 2015, the AO disposed of the above objections by holding that the case was not covered under Section 153 (2A) of the Act which, according to the AO, was applicable only when a fresh order of assessment has to be made pursuant to an order in appeal or revision. Since the assessment had not been totally set aside or cancelled by the ITAT and, in fact, had been partly upheld on certain issues, the objection regarding limitation was not valid. It was further pointed out that the Revenue was also in appeal before the High Court against the relief allowed by the ITAT as well as to some of the issues restored by the ITAT to the AO/TPO and even to the DRP.
The Assessee states that, despite requesting for a copy of a memorandum of appeal stated to be filed by the Revenue in this Court, it was not provided to the Assessee. A letter was issued by the AO on 29th January 2016 calling upon the Assessee to furnish information regarding the claim of marketing expenses on account of issue of mobile handsets on ‘free of cost’ basis as well as a copy of the additional evidence submitted before the ITAT in respect of the claim on account of price protection expenses. The Assessee replied on 8th February 2016 reiterating that the proceedings were time-barred.
The present petition was listed first for hearing on 29th February 2016 and then again on 2nd March 2016. While directing notice to be issued to the Respondents, it was directed that the further proceedings may go on before the AO but no final order will be passed till the next date of hearing. That interim order has continued since.
Mr. Vikas Srivastava, learned counsel appearing for the Assessee, submitted that it was erroneous on the part of the AO to conclude that Section 153 (2A) of the Act applied only where a fresh order had to be passed de novo on fresh inquiry and not when the proceedings were remanded to the AO with directions from the ITAT. According to him, there was no warrant for such an interpretation on a reading of Section 153 as a whole as was further explained by Circular No. 56 dated 19th March 1971 issued by the Central Board of Direct Taxes (‘CBDT’). Mr. Srivastava relied on the decision of this Court in Commissioner of Income-tax v. Bhan Textile (P) Ltd  300 ITR 176 (Del) and distinguished its decision in Basu Distributors (P) Ltd. v. Income Tax Officer  292 ITR 29 (Del).
On the other hand, Mr. Sanjay Jain, learned Additional Solicitor General of India (‘ASG’), submitted that Section 153 (2A) of the Act would apply only where the entire assessment was set aside or cancelled. However, as in the present case, where the AO was required to follow certain specific directions issued to him by the ITAT he was ‘chained’ as far as exercise of discretion was concerned. In such circumstances, Section 153 (2A) of the Act would not apply. According to the learned ASG, it was only Section 153 (3) (ii) of the Act which would apply to the present case.
Mr. Jain submitted that Section 153 (3) (ii) of the Act would not only apply where ‘appeal effect’ had to be given but cases of “assessment and reassessment” as well. Reference was also made to the phrases ‘an assessment of such income for another assessment year’ used in Explanation 2 to Section 153 and ‘an assessment of such income on such other person’ used in Explanation 3 to Section 153 showed that not only cases of recomputation but also cases of assessment/reassessment on specified aspects are governed by Section 153 (3) (ii) of the Act. Relying on the decision in Basu Distributors (supra), Mr. Jain submitted that the distinction was made by this Court between a situation where the ITAT remands the matter to the AO by setting aside the order under appeal simpliciter and a situation where the assessment order is partially set aside with remand only on ‘select issues or aspects of assessment’. According to him, the expression ‘fresh assessment’ used in Section 153 (2A) indicates a situation tantamount to the cancellation or setting aside of the entire assessment and not where some part of the assessment order was upheld. According to him, the ratio of the decision in Bhan Textile (supra) was, in fact, helpful to the Revenue.
16. Mr. Jain painstakingly took the Court through each of the directions issued by the ITAT to emphasize that the setting aside and remanding of the matter to the AO was only in respect of some of the issues and that too with directions and therefore it is Section 153 (3) (ii) of the Act which would apply. He also referred to the decision of Bombay High Court in Rikhabdas Jhaverchand v. CIT  249 ITR 774 (Bom) and the Supreme Court in Rajinder Nath v. CIT [I979] 120 ITR 14 (SC) to distinguish the expression ‘finding’ from the expression ‘direction’.
17. Prior to its amendment by the Taxation Laws (Amendment) Act, 1970, Section 153 of the Act read as under: “Time limit for completion of assessments and reassessments.
(c) the expiry of one year from the date of the filing of a return or a revised return under sub-section (4) or sub-section (5) of Section 139; whichever is latest.
(ii) the expiry of one year from the date of service of the notice under Section 148, whichever is later.
(iii) where the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under section 147.
20. By an amendment brought about by the Finance Act, 2001, the general time limit under Section 153 (2A) was reduced to one year. With effect from 1st July 2012, the time limit was increased to two years in certain TP cases. Finally, by the amendment in 2016, the time limit under Section 153 (2A) has been reduced to 9 months.
(2) of section 153 for the completion of assessment or reassessment has expired.
Having perused the impugned order of the ITAT carefully and the operative portions qua which the assessment order was set aside and the matter remanded to the AO, the Court is unable to agree with the contention of learned ASG that the aforementioned order of the ITAT did not constitute a complete setting aside of the assessment with directions to the AO to pass a fresh order. The Court does not agree with the submission of the learned ASG that the AO was ‘chained’ by the ITAT’s directions and could not have passed a fresh assessment order de novo pursuant to such remand.
The Court is also unable to agree with the contention that unless the entire assessment order is wholly set aside, the time limit for passing the fresh order under Section 153 (2A) would not be attracted. There is no warrant for such an interpretation. The object behind introduction of sub-section (2A) was to prescribe a time limit for completing the assessment proceedings upon the original assessment being set aside or being cancelled in appeal. Clearly, the intention was not to restrict the applicability of sub-section (2A) only to such cases where the ‘entire’ original assessment order is set aside. It was noted that, “Under the existing provisions of section 153 (3), such fresh assessments are not subject to any time limit.” Indeed, Section 153, as it stood at that time, did not prescribe any time limits. Section 153 (3) (ii), in particular, did not require the order passed thereunder to be issued within any particular time limit. Further there is a distinction between an ‘assessment’ that is set aside and an ‘assessment order’ being set aside. When the assessment on an issue is set aside and the matter remanded, with a direction that the issue has to be determined afresh, Section 153 (2A) of the Act would get attracted.
What is important to note is that, along with the insertion of sub-section (2A), sub-section (3) underwent a simultaneous change. It was expressly made “subject to the provisions of subsection (2A).” This meant that Section 153 (3) would thereafter apply only to such cases where Section 153 (2A) did not apply. In other words, in all instances of an AO having to pass a fresh assessment order upon remand where Section 153 (2A) would apply, the AO would be bound to follow the timelimit imposed by sub-section (2A). Where the AO was only giving effect to an appellate order, then Section 153 (3) (ii) of the Act would apply.
25. In the present case, of the seven issues, the assessment in respect of five was set aside and the issues remanded for a fresh determination. Whether the remand was to the TPO or the DRP would not make a difference as long as what results from the remand is a fresh assessment of the issue. Clearly, therefore, the time limit for completing that exercise was governed by Section 153 (2A) of the Act.
26.2 The fact situation in the context of which the above directions were issued was that the AO had made additions to the returned income of the Assessee pertaining to cash payments made to Ritz Theatres (P) Ltd. (‘Ritz’) and to Honey Enterprises (‘HE’) which, according to the AO, were in violation of Section 40A (3) of the Act. The grievance of the Assessee was that sufficient opportunity had not been given to it to place the complete facts and therefore, offer the necessary explanation and evidence regarding such cash payment. The ITAT agreed with this contention of the Assessee and therefore passed a remand order after setting aside the order of the AO and the CIT(A). Although the remand order was dated 23rd June 2000, no action was taken by the AO for over four years till 2nd September 2004 and the final assessment order was passed only on 20th February 2005.
“20. Having had the advantage of perusing the plethora of precedents on the aspect of law which has engaged our attention, we are of the view that Section 153(2A) is not attracted in the facts of the present case; no period of limitation is prescribed as per the provisions of Section153(3)(ii). It is trite that Parliament is continuously concerned with the evils or undesirability of the proverbial sword hanging over the head of an Assessee. Parliament has therefore set-down the parameters within which an assessment must be completed and over the years has shortened the span of time in this regard. It has, however, carved out an exception to the rule where a specific, limited or restricted direction is passed by an Appellate Authority which is of the opinion that it would not be possible to decide the appeal before it without a clarification on this point. The Appellate Authority has also the power to set aside the Assessment Order and direct a de novo enquiry, in which case every aspect, computation and dimension is open for consideration. This partakes of the nature of an assessment which is akin to the original assessment and, therefore, the period of limitation applicable to the original assessment must apply to the fresh assessment. Where the Appellate Authority remands the case for a determination on a selected issue or aspect of the assessment, the uncertainty or discomfort of the sword of uncertainty provides no peril to the assessee. All the parties are fully aware of the parameters within which the fresh enquiry is circumscribed and limited. It is obviously for this reason that the rigours of limitation are totally removed. If the AO is unduly slow in completing the assessment, it may be open to the assessee to approach the High Court under Articles 226 and 227 of the Constitution seeking a direction for an expeditious end and closure to the restricted enquiry.
everting to the facts of the case at hand it is manifestly clear that in substance the entire assessment had not been set aside. The Assessee’s contention was that Section 40A(3) had not been violated in its spirit since no expenditure exceeding Rupees Twenty Thousand had been incurred in cash; these were incurred by effecting entries in the Books of Accounts and hence were as undisputable as payments made by Account Payee Cheques or Account Payee Bank Draft. It was only on this restricted aspect of the assessment that the Tribunal had remanded the case to the AO. The entire assessment exercise, therefore, had not been undertaken de novo, thereby, rendering Section 153 (2A) of the Act inapplicable to the case.
From para 20 of the aforementioned judgment, it is plain that the ITAT had in fact set aside the entire assessment order and directed a de novo enquiry. The Court noted that where the remand is on a “selected issue or aspect of the assessment, the uncertainty or discomfort of the sword of uncertainty provides no peril to the assessee.” The enquiry to be undertaken by the AO upon evidence being furnished by the Assessee was indeed a fresh enquiry and if no time limit was prescribed for that exercise, the Assessee would undoubtedly have the sword of uncertainty hanging. Considering the additions made, there was, in fact, no other substantive issue that had to be examined afresh by the AO. Therefore, the Court, in terms of its own analysis of Section 153 (2A) in the aforementioned decision, required a fresh assessment order to be made by undertaking a de novo enquiry. For such an exercise the limitation in Section 153 (2A) had to apply. On the facts of Basu Distributors (supra), it is not understood how Section 153 (2A) would not apply.
Turning now to the other decision of this Court, i.e. Bhan Textile (supra), it requires to be noticed at the outset that although for some reason, the Court in Bhan Textile (supra) did not refer to the earlier decision in Basu Distributors (supra), its interpretation of Section 153 (2A) did not contradict the interpretation in Basu Distributors (supra). In Bhan Textile (supra), the Court observed that the setting aside of the assessment order became necessary as the AO did not give an opportunity to the Assessee to place its evidence on record. The CIT (A) had in effect cancelled the assessment order although those specific words were not used. This Court held that, in such a situation, “Section 153 (2A) is clearly applicable.” This decision, therefore, fully supports the case of the Assessee.
“24. With this background in mind, we may revert back to the facts of the case. The Tribunal on an appeal filed by the assessee, upheld the assessee’s contention that the commission was disallowed in case of two agencies, placing reliance on statements recorded behind the back of the assessee without affording the cross-examination of such witnesses. It was on this count that the Tribunal remitted the matter to the file of Assessing Officer with direction to summon those two parties again and allow the assessee an opportunity to cross-examine them so that true facts may emerge in relation to the payment of commission by the assessee company to these two agencies. While doing so, (be Tribunal also granted liberty to the Assessing Officer to probe into the matter further by way of an inquiry and investigation into the alleged payment of commission to such parties.
In the considered view of the Court, the aforesaid decision of the Gujarat High Court fully supports the case of the Assessee here. The decisions of the Madhya Pradesh High Court in Gulabchand Motilal v. Commissioner of Income-tax  174 ITR 117 (MP), the High Court of Punjab and Haryana in Bharti Engineering Corporation v. Union of India  298 ITR 400 (P&H) and Deep Chand Jain v. ITO  145 ITR 676 (P&H), and the Karnataka High Court in CIT v. Paul Noel Rodrigues  231 Taxman 811 (Kar), all hold likewise. The Kerala High Court in Patel R.P. v. ACIT 2015 (5) KHC 370 held that Section 153 (2A) of the Act would apply even where more than one issue is involved i.e. even where one of the issues has been remanded to the AO for a fresh determination.
The analysis of the terms ‘finding’ and ‘directions’ by the Supreme Court in Rajinder Nath (supra) was in the context of Section 153 (3) (ii) of the Act at a time when Section 153 (2A) of the Act had not been introduced since the relevant AY in that case was 1956-57. The said decision is, therefore, not of help to the Revenue.
For all the aforementioned reasons, the Court holds that, in the present case, the assessment proceedings had to necessarily be completed by the AO within the time limit specified in Section 153 (2A) of the Act. Inasmuch as the AO failed to do so, the impugned notice dated 14th September 2015 issued by the AO and all proceedings consequential thereto including the order dated 2nd December 2015 passed by the AO are hereby set aside.
The writ petition is allowed in the above terms but, in the circumstances, with no orders as to costs.
This entry was posted in Sec. 143(3), Sec. 144C, Section 254 and tagged 407 ITR, Delhi High Court, In favour of Assessee.

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