THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S.APOLLO TYRES LIMITED

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS WEDNESDAY, THE 4TH DAY OF AUGUST 2021 / 13TH SRAVANA, 1943 ITA NO. 36 OF 2017 AGAINST THE ORDER IN ITA 222/2016 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: THE PRINCIPAL COMMISSIONER OF INCOME TAX KOCHI-1, KOCHI, INCOME TAX OFFICES,CENTRAL REVENUE BUILDING, I.S PRESS ROAD,KOCHI 682 018 BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) JOSE JOSEPH, SC, FOR INCOME TAX CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: M/S.APOLLO TYRES LIMITED 6TH FLOOR, CHERUPUSHPAM BUILDING,SHANMUGHAM ROAD, ERNAKULAM 682 031(PRESENT ADDRESS 3RD FLOOR, AREEKAL MANSION, NEAR MANORAMA JUNCTION,PANAMPILLY NAGAR, KOCHI 682 036 BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.ISAAC THOMAS SRI.P.G.CHANDAPILLAI ABRAHAM SHRI.VIPIN ANTO H.M. SHRI.ALEXANDER JOSEPH MARKOS SHRI.SHARAD JOSEPH KODANTHARA THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 04.08.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

I.T.A. No.36/2017 -2- J U D G M E N T S.V.Bhatti, J. Heard learned Standing Counsel Mr. Christopher Abraham and learned Senior Counsel Mr. Joseph Markos for parties. 2. The Principal Commissioner of Income Tax/Revenue is the appellant. M/s.Apollo Tyres Ltd., Kochi/Assessee is the respondent. The Revenue, aggrieved by the order dated 10.01.2017 in ITA No.222/Coch/2016, is in appeal before this Court. The issues canvassed in the appeal relate to Assessment Year 2010-11. Prefaced in the beginning, the issues raised by the Revenue arise under Section 144C read with Section 143(3) vis-a-vis Section 263 of the Income Tax Act, 1961 (for short 'the Act').

I.T.A. No.36/2017 -3- 2.1 On 23.10.2012 the assessee filed income tax returns for the Assessment Year 2010-11. The Joint Director of Income Tax/Assessing Officer vide assessment dated 29.01.2014 (Annexure-A) finalized the return filed by the assessee. Subsequently, on 28.03.2014 the Additional Commissioner of Income Tax issued a draft assessment order under Section 144C of the Act. The assessee filed objection to the draft assessment order and the proposed assessment was referred to the Dispute Resolution Panel-I (for short 'DRP'), Bangalore. The DRP, through order dated 26.12.2014 in Annexure-C, issued directions to the Assessing Officer for carrying out the assessment in terms of the directions issued by DRP. The Assessing Officer vide order dated 18.02.2015 in Annexure-D made the assessment in terms of directions issued in Annexure- C order dated 26.12.2014. Though it is not germane for adjudicating the controversy arising in the appeal, but it is

I.T.A. No.36/2017 -4- contextual to refer to the circumstance that the assessee and the Revenue questioned the assessment order dated 18.02.2015 before the Income Tax Appellate Tribunal (for short 'the Tribunal'). On 23.03.2016 the Principal Commissioner of Income Tax/appellant, purporting to exercise his power and jurisdiction under Section 263 of the Act, directed the Assessing Officer as follows: “This issue was not properly examined by the Assessing Officer. The Assessing Officer also did not examine the applicability of Section 40(a)(ia) in respect of payment to persons on account of R&D expenditure claimed. Hence the order dated 28.03.2014 is erroneous in so far as it is prejudicial to the interests of revenue on the above discussed points. To that extent the order passed under section 144C read with Section 143(3) of the Income-tax Act, 1961, dated 28.03.2014 is set aside and the Assessing Officer is directed to examine and pass an order as per the provisions of Income-tax Act, after giving ample opportunity to the assessee. The Assessing Officer is directed to examine the issue an allow the expenditure strictly as per the provisions of Section 35(2AB) of the IT Act and 40(a)(ia) of the Income-tax Act, 1961.”

I.T.A. No.36/2017 -5- The assessee filed ITA No.222/Coch/2016 questioning the order of appellant dated 23.03.2016. The Tribunal, through the order assailed in the appeal, allowed ITA No.222/Coch/2016. Hence the instant appeal. 3. The following substantial questions of law are raised for our decision: “1. Whether, on the facts and in the circumstances of the case and in the light of the principles of law, is the Hon'ble ITAT right in holding that the order under Section 144C read with Section 143(3) dated 28.03.2014 did not cause any prejudice to the revenue? 2. Whether, on the facts and in the circumstances of the case as well as in law, is the Hon'ble Tribunal right in quashing the order under Section 263 dated 23.03.2016 passed by the Principal Commissioner of Income Tax, Kochi-1?”

I.T.A. No.36/2017 -6- 4. Learned Standing Counsel Sri.Christopher Abraham argues that the Tribunal had committed a fundamental error in law in interdicting the order dated 23.03.2016 made by the Commissioner under Section 263 of the Act. The Tribunal failed to appreciate that Annexure-B order dated 28.03.2014 is a draft assessment order made under Section 144C of the Act. The character or nature of draft assessment order is not different from an assessment order and will have to be understood as an order made under the Act by the Assessing Officer. In other words, it is argued that draft assessment order is also an order falling within the ambit of revision under Section 263 of the Act. The Principal Commissioner of Income Tax/appellant, having regard to the language in Section 263, is certainly competent to issue direction by taking note of prejudice occasioning to the Revenue, either on account of concealment of income by the assessee or misapplication of a provision of law by the Assessing

I.T.A. No.36/2017 -7- Officer. The procedure under Section 144C of the Act does not inhibit the Revenue/appellant from invoking the jurisdiction when prejudice is noticed by the Principal Commissioner of Income Tax. The remedy of the Department against assessment order dated 18.02.2015 (Annexure-D) is before the Tribunal and such remedy even when availed is limited to the issues concerning the draft assessment order, directions of DRP, and assessment made by the Assessing Officer, but not to the items which are not included in the return of the assessee or wrong application of fact or law, resulting in prejudice to the Revenue. These are and were independent of orders in Annexures-B, C, and D. Hence, the invocation of revision power under Section 263 of the Act is correct and valid. He prays for allowing the appeal. 5. Learned Senior Advocate Sri.Joseph Markos argues that the exercise of jurisdiction under Section 263 of the Act, in

I.T.A. No.36/2017 -8- the admitted circumstances of the case, is completely illegal and unavailable. By explaining the scheme of Section 144C of the Act, it is argued, Annexure-B order dated 28.03.2014 is nothing but a draft assessment proposed by the Assessing Officer. The assessee, upon receipt of notice of draft assessment order, has options either to accept the draft assessment or file objections on the dis-allowances, additions etc made by the Assessing Officer. In the case on hand, the objections were filed by the assessee. This resulted in the draft assessment order in Annexure-B, being forwarded to DRP for decision and issuance of directions to the Assessing Officer. The DRP, in Annexure-C dated 26.12.2014, issued directives which resulted in Annexure- D order dated 18.02.2015. 5.1 Therefore, interdicting draft assessment order proposed by the Assessing Officer in exercise of power under Section 263 fails for two reasons, firstly, at the stage of draft

I.T.A. No.36/2017 -9- assessment proposed no prejudice can be assumed to have occasioned to the Revenue and secondly, that any issue stated without admitting there is neither suppression nor misapplication in the case on hand. Even otherwise the Revenue/appellant notices such an occasion, the power is not to interdict draft assessment order. According to him, if this uncertainty is accepted, the assessee would never know which is going to be the final order, namely the assessment order emanating pursuant to directions of DRP or orders made pursuant to directions under Section 263 of the Act. He read out the reasons stated by the Tribunal and concluded by canvassing that no exception to basic requirements, i.e., error and prejudice, are examined by the Tribunal. He has invited our attention to the orders of the Income Tax Appellate Tribunal, New Delhi1, and Income Tax Appellate Tribunal, Kolkata2. These 1 ITA No.1399/Del/2017 Assmt Year 2012-13 2 ITA No.1142/Kol/2016 Assmt Year 2009-10

I.T.A. No.36/2017 -10- two appeals are at the instance of the assessee. The purpose of relying on these decisions is to explain that the presence of prejudice is a sine qua non for exercising the power under Section 263 of the Act. In these orders, the case of Revenue is that draft assessment order under Section 144C, when objected by the assessee, would not result in prejudice to both, i.e., Revenue/assessee. 6. We have heard the learned counsel appearing for the parties and also perused the record. At the outset, we make it clear that in the case on hand we are not examining the scope and applicability of Section 263 vis-a-vis a final assessment order made pursuant to directions of DRP, under Section 144C read with Section 143(3) of the Act. We are, in the case on hand, examining whether the draft assessment order communicated to assessee under Section 144C of the Act is an order amenable to revision under Section 263 of the Act or not.

I.T.A. No.36/2017 -11- 7. For appreciating the above controversy let us briefly refer to the scheme under Section 144C of the Act: (1) The Assessing Officer when proposes to make any variation in the income or loss returned by the assessee which is prejudicial to the interest of such assessee serves on the assessee a draft of the proposed assessment order (2) The assessee shall within the time permitted in this behalf, could either: (a) file his acceptance of the variation to the Assessing Officer; or (b) file his objections, if any, to variations proposed in the draft assessment order. 7.1 In a case where the assessee either accepts or does not file objection, the Assessing Officer is authorized to make the draft as final assessment. Per contra, in a case where objections are received by the Assessing Officer, the case is made over to DRP for resolution. This mechanism is more in

I.T.A. No.36/2017 -12- the nature of an alternate dispute resolution mechanism for expeditious finalization of disputed returns falling under Section 144C of the Act. The DRP conducts hearing/enquiry, issues directions to the Assessing Officer on the draft assessment forwarded to DRP for directions. The Assessing Officer complies with the directions and issues the assessment order. Section 144C is not reproduced, for, in the present case, the Commissioner has interdicted the draft assessment proposed in Annexure-B. It is well established by a series of decisions that the fulcrum on which the power under Section 263 is exercised, rests on the orders made under the Act, being erroneous and the orders prejudicial to the interest of the Revenue. Let us juxtapose the scheme under Section 144C of the Act with an order being erroneous and prejudicial to the interest of Revenue, and deliberation of scheme in this behalf, we observe that, whether the draft assessment order is

I.T.A. No.36/2017 -13- erroneous or not is examined by DRP and the element of prejudice insofar as the Revenue is concerned does not arise vis- a-vis the draft assessment inasmuch as no demand could be raised on the draft assessment order proposed by the Assessing Officer and objected to by the assessee. 7.2 We have taken note of the requirement of prejudice considered by the Tribunal in the decisions referred to above. The circumstances in the said orders are slightly different. For the purpose of appreciating that the order is erroneous insofar as it is prejudicial to the interest of Revenue is sine qua non for taking recourse to the power under Section 263. The appellant had reasons to believe that a few matters required reconsideration by the Assessing Officer, the remedy is not by interdicting a draft assessment order proposed in Annexure-B, but a different mechanism is available as per the scheme of the Act.

I.T.A. No.36/2017 -14- 8. Now let us examine the reasoning of the Tribunal. The Tribunal noticed that from the scheme of the Act the draft assessment order is only a proposed assessment order and there is no demand notice attached to the draft assessment order. In cases covered by Section 144C of the Act, the assessment order comes into picture only after an assessment order is passed pursuant to draft assessment order or in compliance with the directions of the DRP. The draft assessment order by itself cannot levy tax on the assessee. Therefore, there is no question of loss of revenue in the draft assessment order. It is further held that Section 263 has no application for revising the draft assessment order proposed by the Assessing Officer. 9. Our independent consideration of the circumstances; also the scheme of the Act and the view of the Tribunal are similar, namely that invocation of power under Section 263 of the Act to interdict a draft assessment order proposed by the

I.T.A. No.36/2017 -15- Assessing Officer is unavailable to Principal Commissioner of Income Tax. We hasten to add, for, at that stage, the condition required for invoking Section 263, namely the order being erroneous insofar as it is prejudicial to the interest of Revenue, does not arise. Hence the reasons are in accordance with the scheme of the Act envisaged on one hand by Section 144C and on another by Section 263 of the Act. For the above reasons, the substantial questions are answered in favour of the assessee and against the Revenue. ITA No.36/2017 stands dismissed. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj

I.T.A. No.36/2017 -16- APPENDIX OF ITA 36/2017 PETITIONER ANNEXURE ANNEXURE A COPY OF THE ORDER U/S.92CA(3) DATED 29/01/2014 FOR AY 2010-11 PASSED BY THE JDIT, TRANSFER PRICING OFFICER-1, KOCHI. ANNEXURE B COPY OF THE DRAFT ASSESSMENT ORDER U/S. 144C RWS 143(3) DATED 28/03/2014 FOR AY 2010-11. ANNEXURE C COPY OF ORDER U/S. 144C(5) DATED 26/12/2014 CONTAINING DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL, BANGALORE IN F.NO. 183/DRP- BNG/2014-15. ANNEXURE D COPY OF FINAL ASSESSMENT U/S. 143(3) R.W.S. 144C DATED 18/02/2015 FOR AY 2010-11. ANNEXURE E COPY OF THE ORDER U/S. 263 DATED 23/03/2016 PASSED BY THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOCHI-I. ANNEXURE F COPY OF THE APPELLATE ORDER OF THE ITAT COCHIN BENCH IN ITA NO.222/COCH/2016 DATED 10/01/2017 (COMBINED ORDER IN ITA NO.223/COCH/2015 (AY 2010- 11), IT(TP)A NO.189/COCH/2016(AY 2011-12), ITA NO.222/COCH.2016 (AY 2010-11), ITA NO.257/COCH/2015 (AY 2010-11) AND IT (TP)A NO.130/COCH/2016 (AY 2011- 12).