AO violated Section 144C by adding PF ESI ROC fees without including in Draft Assessment Order

The ITAT Delhi held that the AO violated Section 144C procedures by making additions for PF ESI, ROC fees, and profit on sale of fixed assets in the final assessment order without including these variations in the Draft Assessment Order. The DRP had only addressed transfer pricing adjustments and set them at NIL. Since the AO failed to propose all variations in the Draft Assessment Order, the assessee was denied the legal right to file objections before the DRP. Under Section 144C(13), the AO can only make additions that were proposed in the draft order. The assessee's appeal was allowed.

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Issues Involved:
1. Jurisdictional validity of the final order by AO/NeAC.
2. Disallowance of Provident Fund and ESI payments.
3. Disallowance of expenditure towards increase in capital.
4. Treatment of profit on sale of fixed assets as income from other sources.
5. Levy of interest under sections 234B, 234C, and 234D.
6. Proposal to initiate penalty proceedings under section 271(1)(c).

Summary:

1. Jurisdictional Validity of the Final Order by AO/NeAC:
The assessee argued that the final order dated 30/03/2021 by the AO/NeAC was jurisdictionally invalid as it included additions not proposed in the Draft Assessment Order dated 25/11/2019. This action prevented the assessee from filing objections before the Dispute Resolution Panel (DRP), violating the principle of natural justice. The tribunal noted that section 144C(1) mandates the AO/NeAC to forward a draft of the proposed order if any variation prejudicial to the assessee's interest is proposed. The AO/NeAC failed to include all variations in the Draft Assessment Order, thus denying the assessee the legal right to object before the DRP.

2. Disallowance of Provident Fund and ESI Payments:
The AO disallowed Rs. 19,93,460/- under section 36(1)(va), treating it as income under section 2(24)(x). The assessee contended that these payments were deposited before filing the Income Tax Return as per section 139(1). The tribunal found that the AO did not consider that Rs. 11,22,959 was the employer's contribution and Rs. 8,70,501 was the employee's share.

3. Disallowance of Expenditure Towards Increase in Capital:
The AO disallowed Rs. 4,08,267/- incurred towards an increase in capital. The tribunal found this disallowance arbitrary and erroneous.

4. Treatment of Profit on Sale of Fixed Assets as Income from Other Sources:
The AO treated Rs. 7,66,993/- as income from other sources under section 56, ignoring that the assets sold were depreciable and the sale proceeds should be reduced from the Written Down Value (WDV) as per section 43(6). The tribunal upheld the assessee's treatment of the sale proceeds.

5. Levy of Interest Under Sections 234B, 234C, and 234D:
The assessee challenged the levy of interest under sections 234B, 234C, and 234D. The tribunal found the AO/NeAC erred in charging interest under these sections.

6. Proposal to Initiate Penalty Proceedings Under Section 271(1)(c):
The assessee contested the AO's proposal to initiate penalty proceedings under section 271(1)(c). The tribunal found the AO's action unjustified.

Conclusion:
The tribunal concluded that the AO/NeAC did not conform to the DRP's directions and made unauthorized additions in the final order. Consequently, the appeal of the assessee was allowed, and the final order dated 30/03/2021 was quashed. The order was pronounced in the open court on 27/02/2024.

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