2020 (1) TMI 168 - HC - Income Tax

Court Invalidates DAO for A.Y. 2007-08, Allows Deductions

M/s. Vedanta Limited Versus Assistant Commissioner of Income Tax Company Circle V (4), Chennai, Commissioner of Income-tax -III, Chennai

The court held that the Draft Assessment Order (DAO) issued under Section 144C for A.Y. 2007-08 was invalid and time-barred, as Section 144C could not be ... Scope of amendment to section 144C - retrospective or prospective in nature - validity of CBDT circular - binding nature - Assumption of jurisdiction by the Assessing Authority u/s 144C - Reference to DRP - Deduction under Chapter VI-A and Section 10B disallowed - HELD THAT:- It is for the Court to declare what a particular provision of the Statute states and not go by what the Executive has or has not stated. He also relies on a decision of the Division Bench of the Gujarat High Court in Commissioner of Income Tax, Vadodara – 2 V. C-Sam (India) (P.) Ltd. [2017 (8) TMI 291 - GUJARAT HIGH COURT] which states that the procedure set out under Section 144C is a mandatory procedure and thus, in any case where the said procedure has not been complied with by the Assessing Authority, such assessment would be liable to be set aside. Thus, according to him, reference to Section 144C by the Assessing Authority in the present case is proper. As far as Chapter VIA deductions are concerned, learned Senior Counsel for the petitioner points out that the issue relating to deduction under Section 80IA stands covered by a decision of the learned Single Judge of this Court in the case of this very assessee that has attained finality. Thus the question of deduction under Section 80IA has been decided in favour of the assessee. Going by the purport of Section 80 IB, on the admitted facts as to the date of commercial production, there could be no denial of the relief. The procedure inserted is substantive, in that it offers a new scheme of assessment to a distinct class of assessees, that is, those assessee whose assessments involve the issues of Transfer Pricing and determination of Arms Length Price. The provisions of Section 144C do not, thus merely prescribe procedure but a substantive exercise in assessment. Where there is a change in the form of assessment itself, such change is not a mere deviation in procedure but a substantive shift in the manner of framing an assessment. A substantive right has enured to the parties by virtue of the introduction of Section 144C, that, bearing in mind the settled position that the law applicable on the first day of assessment year be reckoned as the applicable law for assessment for that year, leads one to the inescapable conclusion that the provisions of Section 144C can be held to be applicable only prospectively, from AY 2011-12 only. The right that has enured to the parties in 2009 cannot be modified by a Clarification issued by the Board, three years thereafter. It appears to me quite possible that the long silence of the Board followed by the sudden Clarification issued in 2013 might itself be inspired by challenges similar to the one before me now, perhaps, even the present one. Though the Clarificatory Circular has not been challenged, in the light of the detailed discussion as above, I am of the view that this Circular will not bind the Assessing Officer, particularly when it does not lay down the correct position of law Issues Involved:1. Validity of the draft assessment order (DAO) under Section 144C.2. Rejection of deductions under Sections 80IA, 80IB, and 10B of the Income Tax Act.Detailed Analysis:1. Validity of the Draft Assessment Order (DAO) under Section 144C:The petitioner contended that the DAO dated 30.12.2010 was barred by time under Section 153(1) and (3) read with Section 92C(4) of the Income Tax Act. The petitioner argued that Section 144C, inserted by the Finance (No.2) Act, 2009, effective from 01.04.2009, was applicable only to A.Y. 2010-11 and subsequent years. The Central Board of Direct Taxes (CBDT) initially issued an explanatory circular supporting this view, but later issued a clarificatory circular in 2013 stating that Section 144C applied to all pending proceedings as of 01.04.2009. The petitioner argued that this retrospective application was incorrect and contrary to the settled position of law.The court examined the legislative intent behind Section 144C, which introduced a new scheme of assessment for cases involving transfer pricing, distinct from regular assessments. The court referenced the Supreme Court's judgment in Karimtharuvi Tea Estate Ltd. v. State of Kerala, which established that the law applicable on the first day of the assessment year governs that year's assessments. The court concluded that Section 144C, being a substantive change, could not be applied retrospectively and was applicable only from A.Y. 2010-11 onwards. Consequently, the DAO issued for A.Y. 2007-08 was deemed invalid and barred by limitation.2. Rejection of Deductions under Sections 80IA, 80IB, and 10B:Section 80IA:The Assessing Officer (AO) rejected the deduction under Section 80IA, stating that the power generated by the petitioner's power plant was used captively and not sold to third parties. The court noted that this issue had already been decided in favor of the petitioner in a previous judgment (W.P.No.7400 of 2008) which had attained finality. Therefore, the deduction under Section 80IA was allowed.Section 80IB:The AO disallowed the deduction under Section 80IB, arguing that it related to the 10th year of the Chinchpada Unit. The court referenced another judgment in the petitioner's favor (W.P.Nos.24476 to 24478 of 2009), which clarified that the initial assessment year for deduction purposes should be based on the date of commercial production, not the date of the license. This decision had also attained finality. Consequently, the deduction under Section 80IB was allowed.Section 10B:The AO partially disallowed the deduction under Section 10B, arguing that the conversion of copper anode to copper cathode did not constitute 'manufacture' as no new product emerged. The court acknowledged that the exercise of fact-finding on this issue should be undertaken by the AO, subject to the court's conclusion on jurisdiction.Conclusion:The court allowed the writ petition, holding that the DAO issued under Section 144C was invalid for A.Y. 2007-08 as it was barred by limitation and the provision was not applicable retrospectively. The deductions under Sections 80IA and 80IB were allowed based on previous judgments in favor of the petitioner. The issue under Section 10B was remanded to the AO for fact-finding. The court emphasized that the clarificatory circular issued by the CBDT in 2013 did not bind the AO as it did not reflect the correct legal position.