Duty of IT Department to ensure that the Assessing Officer (AO) follow the mandate of law: Delhi High Court

Duty of IT Department to ensure that the Assessing Officer (AO) follow the mandate of law: Delhi High Court

The Delhi High Court (HC) held that the Assessing Officer (AO) had wrongfully assumed the jurisdiction and passed the final assessment order without passing a draft assessment order

M/s Headstrong Services India Pvt. Ltd. (respondent/ assessee), is a wholly-owned subsidiary of Headstrong Services LLC, USA. The respondent had filed its return of income declaring income of Rs. 30,64,480 for the relevant assessment year.

On 30 January 2009, the respondent had filed the revised return of income that was processed under Section 143(1) of the Income Tax Act, 1961 (IT Act). The respondent was selected for scrutiny assessment and notice under Section 143(2) of the IT Act was issued.

The AO during the scrutiny assessment made a reference to the office of Transfer Pricing Officer (TPO) regarding the international transaction between the respondent and its Associated Enterprise (AE). On 31 December 2010, a draft assessment order under Section 144C(1) of the IT Act was passed.

An objection was filed by the respondent before the Dispute Resolution Panel (DRP). Under Section 143(3)/144C of the IT Act, an assessment was completed and directions were issued by the DRP. Under the said assessment an addition was made on account of an excess claim of deduction under Section 10A of the IT Act and transfer pricing adjustment made by the TPO.

An appeal was filed by the respondent before the Income Tax Appellate Tribunal (ITAT). The ITAT had set aside the additions on account transfer pricing and deduction under Section l0A of the IT Act. The ITAT also directed the AO to frame the assessment afresh.

An appeal was filed by the Commissioner of Income Tax before the Delhi High Court (HC) against the order of the ITAT. The matter was listed before the division bench of Justices Manmohan and Sanjeev Narula.

It was held that by the HC that the AO had wrongfully assumed the jurisdiction and passed the final assessment order without passing a draft assessment order and without allowing the respondent to raise objections before the Dispute Resolution Panel.

The HC concluded, "Till the Income Tax Department ensures that the Assessing Officers follow the mandate of law, in particular, binding provisions like Section 144C and eschew filing of unnecessary appeals rather than in nearly all matters where the Assessing Officer has taken a view against the Assessee, the assessments will not achieve finality for a number of years like in the present case where the case of assessment year 2007-08 stands remanded and restored to the file of the Assessing Officer. "The HC confirmed the order of the ITAT and imposed a cost of Rs.11,000 that is to be paid to the Delhi High Court Legal Services Committee.