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CASE LAW

2016-TII-46-HC-AP-INTL

RAIN CEMENTS LTD Vs DCIT: ANDHRA PRADESH HIGH COURT (Dated: August 31, 2016)

Income tax - Sections 10B, 143(3), 144C(5) & 144C(12).

Keywords - expiry of limitation period - filing of objection - remand of matter & service of assessment order.

Whether AO is obligated u/s 144C(1) to have served the draft assessment order to the assessee - YES: HC

Whether the period of 30 days available to the assessee to file objections before the DRP against such draft assessment order, would start running only from the date on which the assessee is in receipt of the draft assessment order - YES: HC

Whether where the DRP had wrongly rejected the objections of the assessee without going into the merits, the logical consequence of such a finding would be to set aside the order of rejection and remit the matter back to the file of DRP for a consideration of the objections in accordance with law - YES: HC

Whether the expiry of limitation period provided to the DRP u/s 144C(12) to issue direction u/s 144C(5), would act as a bar for the High Court to remit an impugned matter to the DRP for consideration afresh - NO: HC

The assessee, a wholly owned subsidiary of Rain Industries Limited, is engaged in the business of manufacture of Calcinated Petroleum Coke and Power Generation in the State. It had filed the return for the A.Y 2008-09 declaring a loss of Rs.23,71,90,124/- after claiming exemption of an amount of Rs.84,87,05,352/- u/s 10B. The assessee's case was taken up for scrutiny and after considering the documents, an order u/s 143(3) was passed by the Joint CIT allowing deduction u/s 10B to a lesser extent than what was claimed in the original return by the assessee. Consequent to the same, an appeal was preferred before the CIT(A) which was kept pending for the past more than four years. In the meantime, a notice u/s 148 was issued to the assessee, in replt to which, the assessee requested the Department to treat its original return as the return filed in response to the impugned notice. However, the Deputy Commissioner passed a draft assessment order computing the total income at Rs.34,62,48,597/-. However, the assessee claimed that the draft assessment order was not served on them, for a full period of about five months and it was only served by hand on the assessee on 22nd Aug, 2014. Thereafter, the assessee filed their objections before the DRP within 30 days of receipt of such order in terms of Section 144C(2)(b). During the pendency of the objections, the CBDT issued instructions dated 1st Jan, 2015, reconstituting the jurisdiction of the DRP, as per which, the DRP Bengaluru assumed jurisdiction over the States of Andhra Pradesh and Telangana. The DRP Bengaluru, however passed an order holding that the period of nine months fixed by Section 144C(12) had expired by 31st Dec, 2014 and that since he assumed jurisdiction only from 1st Jan, 2015, they did not have jurisdiction to pass any orders on the objections of assessee. Immediately thereafter, the AO passed a final assessment order.

Having heard the parties, the High Court held that,

+ as rightly pointed out by the assessee's counsel, Section 144C is a complete code in itself, as it incorporates, all the dos and donts for the DRP as well as the AO. It appears that from the time Section 144C was inserted, there have been some misgivings and misunderstandings. Therefore, an Explanatory Circular for Finance (No.2) Act, 2009 was issued in Circular No.5/2010, dated 3rd June, 2010, which explained the new Section 144-C and the consequential amendments made in the other Sections of the Act. However, while doing so, the Circular wrongly indicated that the amendments, made applicable w.e.f 1st Oct, will apply in relation to A.Y 2010-11 and subsequent A.Ys. In order to set right the above mistake, another Circular bearing No.9/2013 was issued on 19th Nov, 2013, which clarified that Section 144-C is applicable to any order which proposed to make variation in income or loss returned by an eligible assessee on or after 1st Oct, 2009, irrespective of the A.Y to which it pertains. An interesting aspect to be taken note of from Circular No.5/2010, dated 3rd June, 2010, is that, once the option of filing an objection against the draft assessment order before the DRP has been exercised, the assessee cannot withdraw the objection and opt for the normal channel of filing an appeal before CIT(A). Irrespective of whether the understanding of the Government of Circular No.5/2010 is correct or not, the Circular seems to proceed on the footing that the availing of the remedy to go before the DRP, would take away the right of appeal. Therefore, it is clear that the option exercised by an assessee to avail the alternative mechanism of dispute resolution, by going before the DRP, cannot be rendered an exercise in futility, by throwing the objections out, on flimsy grounds. As a matter of fact, the CBDT had already issued a set of rules known as Income Tax Rules, 2009, in exercise of the powers conferred by Section 144-C(14). With regard to the power of the Panel to issue directions, Rule 10(2) makes it clear that the Panel need not consider itself bound by the grounds set out in the objections, but shall have the power to consider any matter or grounds arising out of the proceedings. In addition, Rule 13 confers a power upon the Panel, both suo motu and on an application from the assessee or the AO, to rectify any mistake or error found in the directions issued under sub-section (5);

+ admittedly, the draft assessment order was passed on 26th March, 2014, which according to the assessee was received only on 22nd Aug, 2014. But according to the proceedings dated 22nd June, 2015, they did not find any credible evidence placed on record as to the date of service of the draft order. Therefore the DRP has wondered as to how it could have taken five long months for the draft assessment order to be served on the assessee. But unfortunately, the Tribunal has misdirected the above question to the assessee. It is already extracted that Section 144C(1) makes it mandatory for the AO to forward a draft assessment order to the assessee. What is the meaning of the expression forward appearing in sub-section (1). The answer to this question would depend upon the consequences that would flow out of the compliance or non-compliance with the obligation to forward. The word 'forward' appearing in sub-section (1) cannot have a meaning that is completely contrary to the words and expressions found in sub-section (2). Unless the word forward is understood to mean actual service of the copy of the draft assessment order on the assessee, the word receipt found in sub-section (2) would lose its meaning. Therefore it is clear that the obligation on the part of the AO under sub-section (1) is to serve the draft assessment order on the assessee. It is not enough for the AO merely to pass a draft assessment order and keep it in his almirah. It is necessary for him to send the same in a manner known to law and serve the same on the assessee. The period of 30 days available to the assessee to file objections, would start running only from the date on which the assessee receives the draft assessment order. In the case on hand, the Department has no doubt produced a letter, by which the draft assessment order was purportedly forwarded to the assessee. But it is not indicated anywhere as to how the service of the same on the assessee was sought to be effected. In an Additional Counter Affidavit, Joint CIT has indicated that the office copy of the forwarding letter contains an endorsement of the Notice Server to the effect that the door of the assessee-companys office was locked. Therefore the AO seeks to contend that the service of the draft assessment order should be deemed to be complete. But, it seems difficult to understand as to why the draft assessment order was sought to be sent through a Notice Server, rather than by post;

+ interestingly the endorsement of the Notice Server does not even contain a date. Even the Tear off acknowledgment slip that contains the endorsement of the Notice Server on the reverse, does not bear a date. Therefore the claim made in the Additional Counter Affidavit is completely contrary to truth. Moreover the letter sent by the Tax Recovery Officer to the AO, which is filed along with the Additional Counter Affidavit, discloses that the objections filed by the assessee in Form 35A was forwarded to DRP, Bengaluru on 31st March, 2015. As per the proceedings on such date, the DRP had time up to August, 2015 to issue directions u/s 144C(5) on the objections filed by the assessee. Therefore the stand taken by DRP, Bengaluru in its impugned communication that the jurisdiction to pass orders lapsed on 31st Dec, 2014 was completely contrary to facts as well as law. Once it is found that the order of the DRP rejecting the objections as incapable of being considered, to be contrary to law, then the next question that arises for consideration is as to what would follow logically as a consequence of the same. On first principles of law, if the rejection of an appeal or a set of objections by the Appellate or the Original Authority, on pure technicalities, is found to be not in accordance with law, then the normal course to be adopted by a Court would be to send the matter back to the same Authority for a consideration on merits. Therefore once we find that the DRP, Bengaluru had wrongly rejected the objections of assessee without going into the merits, the logical consequence of such a finding would be to set aside the order of rejection of the DRP and to send the matter back to the DRP for a consideration of the objections on merits and in accordance with law. But in this case, Section 144C(12), on the face of it, appears to pose an obstacle. Under this provision, no direction can be issued by the DRP u/s 144C(5), after the expiry of nine months from the end of the month in which the draft assessment order was forwarded to the eligible assessee. In this case we have found the date of forwarding of the draft assessment order to be 22nd Aug, 2014. Hence, the period stipulated u/s 144C(12) would expire by 31st May 2015. But the DRP passed an order on 22nd June 2015 holding that it had lost jurisdiction to pass an order on 31st Dec, 2014 itself. Even though the date mentioned is not correct, the fact remains that the DRP could not have issued any direction after 31st May 2015, even on undisputed facts;

+ the question that then arises is as to whether this Court can now issue a direction to the DRP to consider the matter on merits and pass an order. The bar u/s 144C(12) does not appear to be one that goes to the root of the jurisdictional issue. The first is that as per the scheme of Section 144C, the DRP is constituted as an alternative mechanism for resolution of disputes. The intention behind the insertion of Section 144C is to provide a mechanism for speedy resolution of disputes and to ensure finality to litigation. Therefore the bar under sub-section (12) cannot be treated as one going to the root of the matter. Therefore we are of the considered view that it is possible for this Court to set aside the order of the DRP and remit the matter back to them for a consideration on merits, inspite of the fact that the period stipulated in sub-section (12) would have expired. In view of the above, the order of the DRP Bengaluru is set aside and he is directed to take up Form 35A filed by the assessee along with the annexures and the evidence for a consideration on merits. As a consequence of setting aside the DRPs order, the final assessment order passed by the AO is set aside.

Case remanded