India: BSC Beacon NOV 23 Newsletter

I. Direct Taxes

A. Corporate Taxes

Background

The Assessee (Diversey India Hygiene Private Limited) was in receipt of several notices issued under Section 148 and Section 142(1) of the Act. These notices were issued to a non-existent entity i.e. Diversey India Private Limited (DIPL). The Assessee argued that DIPL got amalgamated with the Assessee from 1 April 2015 and referred to rulings of PCIT v. Maruti Suzuki India Ltd. [416 ITR 163] and Saraswati Industrial Syndicate Ltd v. CIT [186 ITR 278 (SC)], which held that the notices and assessment orders issued in the name of an amalgamated company that no longer exist are without jurisdiction and legally flawed.

Further, the Assessee also brought to the notice of the Hon'ble High Court that a letter dated 12 May 2016 was filed with the Assessing Officer and the Principal Commissioner, informing them about the amalgamation. Despite such information available on record, the AO issued the notices and passed assessment order dated 1 March 2019 for AY 2016-17.

However, the revenue authorities argued that the Assessee participated in reassessment proceedings for AY 2012-13 and 2013-14 without protesting and that the PAN of the noticee (DIPL) was not deactivated.

Judgement of the Hon'ble High Court

The Hon'ble High Court observed that PAN may not have been deactivated in view of the on-going proceedings for scrutiny or for issuance of refund for various prior years. The Hon'ble High Court also held since the tax authorities were aware about the non-existence of the amalgamating entity, it cannot sanction the department to issue notices to a non-existent entity. Accordingly, the Hon'ble High Court disposed of the writ petition by quashing the reassessment proceedings.

Background

The department has initiated reassessment proceedings under Section 148 of the Act, vide notice dated 31.03.2021 under the old regime. A show cause notice was issued on 12.03.2022 proposing to add INR 50,94,24,738 alleging the same to be an accommodation entry. The Assessee filed its response on 22.03.2022 contending that the alleged accommodation entry in the bank accounts does not belong to him. Pursuant to the reply of the Assessee, the AO rejected Assessee's contention and passed order under Section 147 r.w.s 144 without making any addition, however, the Revenue issued demand notice of INR 67,55,23,292.

Against the said reassessment order, the Assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) allowed the appeal and directed the revenue to recalculate the gross total income. Consequent to SC ruling in Ashish Agarwal, the Revenue reissued show cause notice under Section 148A(b) of the Act alleging that Assessee is beneficiary of accommodation entry of INR 50,94,24,738 which stood credited in HDFC bank and DCB bank maintained by Assessee in AY 2015-16. However, the Assessee objected to show cause notice on the contention that:

1. it does not maintain any bank account with HDFC and DCB bank, rather, it maintains bank account in ICICI and Jammu and Kashmir Bank,
2. show cause notice under Section 148A(b) is vague since no inquiry is conducted under Section 148A(a) and the assessment order under Section 147 read with Section 144 has been passed which was subject matter of appeal before CIT(A).

However, the Revenue rejected Assessee's objection and passed order under Section 148A(d) along with reassessment notice under Section 148 of the Act. Against the said order and notice, the Assessee filed a writ petition before the Hon'ble High Court.

Judgement of the Hon'ble High Court

The Hon'ble Delhi High Court observed that the moot point is whether Ashish Agarwal ruling mandates the Revenue to trigger proceedings under the new regime, even where the proceedings were commenced under the old regime based on a set of allegation and material which ultimately had culminated in an assessment order. The Hon'ble High Court remarks that, "no such aspect was the subject matter of discussion in the said judgement". It is observed that order under Section 148A(d) of the Act records that the Assessee failed to provide the evidence to establish the amount found in accounts maintained with HDFC Bank and DCB Bank in AY 2015-16, ignoring the fact that Assessee took emphatic stand that the bank accounts does not belong to him and also furnished bank statement of two accounts i.e., ICICI Bank and Jammu and Kashmir Bank duly maintained by him.

Further, it opines that in absence of actionable material, Revenue embarked to reopen a closed assessment which has reached to assessment order under Section 147 read with Section 144 of the Act at the time of issuance of show cause notice under Section 148A(b). Also, it has placed reliance on the order of CIT(A) which clearly demonstrated that no addition to the declared income was actually made by the Revenue except a demand notice stipulating tax demand of INR 67,55,23,292. The CIT(A) had called for a response to the remand report which was not placed by the Revenue. Accordingly, the Hon'ble High Court, held that in the absence of remand report, it is presumed that there might be a mistake of calculation of gross total income in the computation sheet. Thus, allows Assessee's appeal.

Background

The AO pursuant to the assessment proceedings for AY 2006-07 under section 143(3) of the Act had allowed the Assessee's claim for deduction with respect to the write-off of interest receivable forgone of INR 6,01,84,862 on account of one-time settlement and the deduction for interest expenditure of INR 2,49,53,390 for the borrowings made for slum rehabilitation project considering it as revenue expenditure.

The Assessee was issued a show cause notice by CIT as to why the assessment order as issued by the AO should not be treated as erroneous and prejudicial to the interest of the revenue, considering that the AO has provided the excess relief by allowing these expenses without adequate inquiry.

The Assessee filed a detailed response by stating that both issues have already been dealt with by AO, and therefore it cannot be held as erroneous. However, the Commissioner rejected the submissions of the Assessee considering that AO has not examined these issues, and directed the assessment order passed by AO to be cancelled and a fresh assessment be restored.

The Tribunal pronounced in favour of the Assessee stating that the Assessee has duly filed the details as asked by the AO in the notice under section 142(1). The Revenue, appealed before Bombay High Court on the substantial question of law, as to whether the Tribunal was justified in holding CIT was not correct in law in exercising the jurisdiction under section 263.

Judgement of the Hon'ble High Court

The Hon'ble High Court dismissing the appeal of revenue held that there is no error apparent nor any perversity in the findings of the Tribunal.

The Hon'ble High Court held that this was not the case where the AO had not made any inquiry and blindly accepted the return filed by the assesse.

It is pertinent here to refer to explanation 2 to section 263 which was inserted by Finance Act 2015, explanation 2 to section 263 was inserted by the Finance Act, 2015 with effect from June1, 2015. This Explanation empowers the Commissioner with effect from June 1, 2015 to invoke section 263 , if in the opinion of the Principal Commissioner or the Commissioner the order is passed without making inquiries or verification which should have been made ; (b) the order is passed allowing any relief without inquiring into the claim ; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119 ; or (d) the order has not been passed in accordance with any decision which is prejudicial to the Assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the Assessee or any other person. Prior to insertion of Explanation 2 with effect from June 1, 2015, it was the prerogative of the Assessing Officer to determine what inquiries he wanted to make while completing the assessment. Where two views are possible, the revisional CIT could not invoke section 263 of the Act and substitute his views upon the view of the AO unless the view taken by the AO is unsustainable in law.

Going forward due consideration should be made to the amendment by the Finance Act 2015, before placing any reliance on this decision.

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Footnotes

1. Diversey India Hygiene Private Limited v. ACIT [Writ petition No: 3034 and 3505 of 2022] / TS-673-HC-2023(BOM)

2. Arun Khanna v. ITO, Ward 63(1) New Delhi & Ors. W.P. (C) 13578/2022 / TS-653-HC-2023(DEL)

3. PCIT vs. Shivshani Punarvasan Prakalp ltd [2023] 456 ITR 336 (Bom)

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