2012 (8) TMI 218 - AT - Income Tax

Tribunal remands tax assessment due to bias issue in DRP composition, emphasizes importance of fair hearing

The Tribunal set aside the Revenue authorities' orders and remanded the matter to the Dispute Resolution Panel/Assessing Officer for a fresh assessment ... Whether Brand Usage Rights is revenue expenses – Jurisdiction of DRP - disallowance of depreciation on 'intangible assets, Transfer of Pricing Adjustment u/s 92CA(4) of the Act, disallowance of depreciation on goodwill u/s 32 (1)(ii), disallowance of share issue expenditure and disallowance of expenditure u/s 43B of the Act. - Held that:- On the similar facts and circumstances of the case Tribunal has set aside the matter to the authorities to pass fresh assessment order in conformity with the provisions of the Act - in view the rule of consistency - matter remanded back to the file of the DRP/AO - assessee's appeal stands partly allowed for statistical purposes. Issues:Challenging disallowance of depreciation on intangible assets, Transfer Pricing Adjustment u/s 92CA(4), disallowance of depreciation on goodwill u/s 32(1)(ii), disallowance of share issue expenditure, and disallowance of expenditure u/s 43B of the Income Tax Act, 1961.Analysis:The appeal was against the order passed by the Assessing Officer (AO) under sections 143(3) and 144C(13) of the Income Tax Act for the assessment year 2007-08. The assessee, a company engaged in manufacturing and trading chemicals, initially declared a total income of Rs. 19,46,00,340/-, later revised to Rs. 14,77,25,342/- claiming 'Brand Usage Rights' as revenue expenses. The Draft Assessment Order proposed an income of Rs. 37,61,28,215/-, leading to objections by the assessee before the Dispute Resolution Panel-I (DRP). The DRP partially allowed the objections, following which the AO passed the impugned assessment order determining income at Rs. 37,39,30,275/-. The grounds of appeal challenged various disallowances including depreciation on intangible assets, Transfer Pricing Adjustment, depreciation on goodwill, share issue expenditure, and expenditure u/s 43B.During the hearing, the counsel for the assessee disputed the validity of the DRP's order, citing a potential bias issue due to one of the DRP members being the jurisdictional Commissioner of the assessee. The counsel relied on a High Court judgment and a Tribunal order to support the argument that similar cases were set aside for fresh assessment. The Departmental Representative (DR) argued against setting aside the order based on the High Court's findings not being binding on the ITAT, Mumbai, and requested the case to be heard on merits.Considering the submissions, the Tribunal referred to the observations in the Hyundai Heavy Industries Ltd. case and the Lionbridge Technologies case, emphasizing the importance of avoiding bias in the DRP composition. It was noted that the DRP in this case included a member who was the jurisdictional Commissioner when the draft assessment order was passed, indicating a potential conflict of interest. The Tribunal found merit in the assessee's argument and decided to set aside the DRP's order for fresh consideration in line with the Act and previous court observations.The Tribunal rejected the DR's argument that the High Court's findings were not binding, emphasizing the need to follow consistent decisions. Consequently, the Tribunal set aside the Revenue authorities' orders and remanded the matter to the DRP/AO for a fresh assessment while providing the assessee with a reasonable opportunity to be heard. The assessee's grounds were partly allowed for statistical purposes, resulting in the partial allowance of the appeal.