2023 (1) TMI 1370 - AT - Income Tax

Foreign non-resident company's assessment order under section 144C exceeded 21-month limitation period and was barred

ACIT (IT) -2 (2) (1), Mumbai Versus M/s. Erisse Investments Ltd. C/o. G.M. Kapadia & Co.

ITAT Mumbai held that assessment order u/s 143(3) r.w.s. 144C was barred by limitation. For eligible assessee under s. 144C(1), draft order issuance ... Validity of assessment passed u/s 143(3) r.w.s. 144C as barred by limitation - need for issuance of draft order u/s 144C(1) - According to CIT(A), since there was no variation in the returned income by the assessee/foreign non-resident company (eligible assessee), the AO ought not to have passed the draft assessment order and should have straight away proceeded to pass the assessment order - HELD THAT:- We note that though the assessee herein is an eligible assessee u/s 144C(1) of the Act, however the condition required to be satisfied for issuance of draft order u/s 144C(1) of the Act has not been satisfied because there was no variation of returned income which is prejudicial to the interest of the assessee. Therefore, we find that the aforesaid condition prescribed u/s 144C(1) of the Act was not satisfied. Therefore, the AO ought to have passed the assessment order u/s 143(3) of the Act within the limitation time prescribed u/s 153(1) of the Act i.e. within the twenty one (21) months from the end of the assessment year i.e. on or before 31st December, 2016. And since the assessment order was framed on 7th Feb, 2017, the action of the AO is barred by limitation. No infirmity in the impugned order of the Ld. CIT(A). Therefore, we confirm the action of the Ld. CIT(A) and decline to interfere with the order of the CIT(A). Hence the appeal of the revenue is dismissed. Issues Involved:1. Validity of the assessment order passed by the AO after the prescribed time limit.2. Whether the AO's action of applying a higher tax rate constitutes a variation in income.3. The interpretation and application of Section 144C(1) of the Income Tax Act.4. The applicability of Section 292B to cure the defect in the draft assessment order.5. The consideration of the AO's remand report by the CIT(A).6. The timing and procedural correctness of the draft assessment order issued by the AO.Detailed Analysis:1. Validity of the Assessment Order Passed by the AO After the Prescribed Time Limit:The revenue challenged the decision of the CIT(A) which held that the assessment order dated 07.02.2017 was time-barred, as it was passed after the statutory deadline of 31.12.2016. The CIT(A) concluded that since there was no variation in the returned income, the AO should have passed the final assessment order before the time-barring date. The Tribunal upheld the CIT(A)'s decision, confirming that the assessment order was indeed time-barred and therefore void.2. Whether the AO's Action of Applying a Higher Tax Rate Constitutes a Variation in Income:The revenue argued that the AO's application of a 40% tax rate on interest income instead of the 10% rate under the India-Cyprus DTAA constituted a variation in income, prejudicial to the assessee. The Tribunal, however, found that there was no variation in the quantum of income returned by the assessee, only a dispute over the applicable tax rate. Thus, the condition for issuing a draft assessment order under Section 144C(1) was not met.3. The Interpretation and Application of Section 144C(1) of the Income Tax Act:Section 144C(1) stipulates that a draft assessment order should be issued if there is a variation in the income or loss returned, prejudicial to the assessee. The Tribunal noted that in this case, the AO did not vary the returned income but only applied a higher tax rate. Citing precedents, the Tribunal emphasized that the issuance of a draft assessment order is not warranted unless there is a variation in the income or loss returned. The Tribunal upheld the CIT(A)'s view that the AO should have passed the final assessment order within the prescribed time limit.4. The Applicability of Section 292B to Cure the Defect in the Draft Assessment Order:The revenue contended that the defect in issuing the draft assessment order could be cured under Section 292B, as the draft order was issued before the date of limitation. The Tribunal rejected this argument, stating that the procedural requirement under Section 144C(1) was not met, and thus, the defect could not be cured under Section 292B.5. The Consideration of the AO's Remand Report by the CIT(A):The revenue argued that the CIT(A) failed to consider the AO's factual comments in the remand report against the additional grounds raised by the assessee. The Tribunal did not find merit in this argument, as the primary issue was the procedural correctness and timing of the assessment order, which was already determined to be time-barred.6. The Timing and Procedural Correctness of the Draft Assessment Order Issued by the AO:The revenue claimed that the draft order was issued and served before the date of limitation, and the assessee delayed its response to take advantage of Section 144C. The Tribunal found that the AO's action of issuing a draft order was procedurally incorrect, as there was no variation in the returned income. Therefore, the final assessment order was time-barred and invalid.Conclusion:The Tribunal upheld the CIT(A)'s decision, confirming that the assessment order passed by the AO was time-barred and void. The AO's action of applying a higher tax rate did not constitute a variation in income under Section 144C(1), and the procedural defect could not be cured under Section 292B. The appeal of the revenue was dismissed.