Issues in assessment proceedings. May 2017

Issues in assessment proceedings May 2017

Overview Regular assessment Intimation - 143(1) Scrutiny assessment 143(3) Best judgment assessment - 144 Income escaping assessment 147 Transfer pricing assessment 92CA Time limit section 153 Rectification - 154 TDS assessment - 201 Appeals and Revisions Revision 263 / 264 Appeals CIT(A), ITAT, HC and SC

Assessment - overview Return filed - section 139 or 142(1) Intimation - section 143(1) Assessment - section 2(8) Regular Assessment Revision Reassessment - section 147 Scrutiny assessment - 143(3) Best judgment assessment - 144 Revision - 263 Revision - 264

Intimation under Sec 143(1) Processing of return/ Summary Assessment Reasons Processing of return prima facie includes adjustments in relation to arithmetical error, apparent incorrect claims, TDS/ TCS/ any relief in the Return of Income ( ROI ) Disallowance of ineligible loss claim Disallowance of expenditure qualified in the tax audit report Disallowance of tax holiday benefit exceeding specified statutory limit Acknowledgement (ITR V) shall be deemed to be intimation incase no intimation has been issued Time frame Intimation to be sent within 1 year from the end of the Financial Year ( FY ) in which ROI is filed Remedies available with assessee against intimation u/s 143(1) Appeal u/s 246A(1)(a) Rectification u/s 154 if mistake is apparent from record

Intimation under Sec 143(1) Processing of return/ Summary Assessment Recent amendments/ developments Intimation not necessary where a notice has been issued u/s 143(2) (Amendment FA 2012) - restriction has been lifted w.e.f AY 2017-18 CBDT extended time frame for processing of intimation where the delay is not attributable to the assessee (Instruction No. 18 dated December 17, 2013) Powers given to CPC vide section 143(1A) Important legal ratio / judicial controversies Intimation not an order of assessment Rajesh Jhaveri Stock Brokers (P) Ltd. (291 ITR 500)(SC) in the context of reassessment Mahanagar Telephone Nigam Ltd. vs. CBDT (246 ITR 173)(Del) Intimation under section 143(1) deemed to be demand notice u/s 156 ACIT vs Rajesh Jhaveri Stock Brokers (supra) Section 156 has been amended vide Finance Act, 2012 Jurisdictional HC decision is binding incase of contrary decisions - Raghuvir Synthetics Ltd., Ahmedabad (SC)

Initiation of Scrutiny Assessment Notice under section 143(2) Purpose of Notice u/s 143(2) Income has not been understated Excessive loss has not been computed Tax has not been underpaid Notice requires the assessee to either attend the AO s office or produce any evidence to be relied on in support of the return on a specified date Time frame - notice to be served within 6 months from end of FY in which return is filed Regular assessment possible, even after summary assessment u/s 143(1), by issue of notice u/s 143(2) Notice to be issued before commencement of scrutiny assessment u/s 143(3)

Initiation of Scrutiny Assessment Notice under section 143(2) Important ratios/ recent judicial controversies Notice u/s.143(2) must be served and not merely issued within prescribed time CIT vs AVI-OIL India (323 ITR 242) (P&H) [in favour of assessee] DCIT Vs. Maxima Systems Ltd. (236 CTR 443) HC (Gujarat) [in favour of assessee] VRA Cotton Mills (P) Ltd vs UOI & Ors (CWP No 18193 of 2011) (P&H) [against the assessee] Recent development Limited scrutiny & complete scrutiny

Initiation of Scrutiny Assessment Notice under section 143(2) Validity of notice Section 292BB : Notice deemed to be valid if no objection taken for Invalid service; Notice not served; or Improper service. However, objection raised before completion of assessment or reassessment is sufficient Important ratios/ recent judicial controversies Section 292BB is applicable from AY 2008-09 [Kuber Tobacco Product Ltd. 117 ITD 273 (Del) (SB)] Assessment cannot be held to be invalid once the assessee has participated in proceedings before the AO - CIT vs Ramnarain Bansal (2011)(202 Taxman 213) (P&H) No immunity to revenue if the notice has not been issued, only improper issue of notice is subject to section 292BB - Travancore Diagnostics (P.) Ltd. (Kerala HC)

Scrutiny assessment Section 143(3) Based on the material and evidences gathered by the AO/ furnished by the assessee, the AO shall determine the income or loss of the assessee and the tax payable or refundable to him Order in writing under section 143(3). Notice of demand u/s.156 along with computation sheet sent with assessment order Time frame for completion of scrutiny assessment Assessment order without AO s signature u/s 143(3) is void M/s Vijay Corporation vs ITO [(2012) (ITA No 1511/Mum/2010) (Mum ITAT)] Particulars Existing provisions From AY 2018-19 From AY 2019-20 In case of reference to Transfer Pricing Officer Time limit 21 months from the end of the relevant AY 18 months 12 months Additional time of 12 months available

Time limit - others Particulars Order passed u/s 254, 262 or 264 ordering for fresh assessment Order passed u/s 254, 262 or 264 not ordering for fresh assessment Time limit 9 months from the end of the FY in which the order is received/ passed by the CIT/PCIT 3 months from the end of the month in which the order is received by the CIT/ PCIT Order passed u/s 254, 262 or 264 not ordering for fresh assessment if it requires verification of facts 9 months from the end of the FY in which the order is received/ passed by the CIT/PCIT Period not to be included Stayed by a High Court Reference to valuation office u/s 142A Application before AAR Application before Settlement Commission

Best judgment assessment An ex-parte assessment done by the AO, if any person: Fails to furnish a ROI u/s 139(1) /139(4) or 139(5), or Fails to comply with notice issued u/s 142(1), or Fails to comply with a direction issued u/s 142(2A), or Fails to comply with notice issued u/s 143(2) Assessment must be on the basis of: Honest and fair estimate of assessee s income All relevant material which AO has gathered Principles of natural justice must prevail: Opportunity of being heard to assessee, except when a notice has been issued u/s 142(1) and the assessee has not complied with the said notice Order u/s 144 being appealable needs to be a speaking order Time frame for completion of assessment Same as assessment under section 143(3)

Income escaping assessment Reassessment Reassessment under Section 147 Income deemed to have escaped assessment Assessment completed No assessment completed Income under-assessed Income assessed at too low a rate Income subject of excessive relief Excessive loss, deduction, allowance Return furnished Income understated Claim of excessive loss, deduction, allowance or relief No return furnished Income exceeds maximum amount chargeable to tax Report u/s 92E not furnished Foreign Assets

Income escaping assessment Reassessment Pre-conditions Recording of reasons Reason to believe that income chargeable to tax has escaped assessment Formation of belief No reassessment beyond 4 years if scrutiny assessment has been completed and unless any income has escaped assessment Reason to believe Valid material Application of mind; Not mere change of opinion Not to be based on rumour or conjecture Relevant and bonafide belief and should be recorded in writing Notice u/s.148 has to be served before initiating reassessment u/s 147 Proceedings void ab initio in case notice not issued or notice invalid Notice not specifying assessment year or specifying different assessment year is invalid. Return to be filed in response to notice Income to be assessed u/s 147 should be income other than those involving matters which are subject matter of any appeal or revision All original proceedings must have been terminated before re-assessment proceedings can be validly initiated

Income escaping assessment Reassessment Steps involved - GKN Driveshafts (India) Ltd. vs. ITO (259 ITR 19)(SC) Is to file the return, If he so desires, to seek reasons for issuing the notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice, and The Assessing Officer is bound to dispose of the same by passing a speaking order Writ petition challenging the re-assessment proceedings possible?

Income escaping assessment Reassessment Important judicial controversies Reasons must be communicated if demanded by the assessee after submission of return in compliance to notice, to allow assessee for appreciation and defense GKN Driveshafts (India) Ltd. vs. ITO (259 ITR 19)(SC) Surya Restaurant v. Union of India [(1994) 120 CTR (MP) 515] In absence of notice being served, the AO had no jurisdiction to make assessment. Absence of notice cannot be held to be curable under Section 292BB of the Act - CIT vs M/S Cebon India Limited [2009] 184 TAXMAN 290 (P&H) Mere change of opinion cannot form basis of reassessment - CIT vs. Kelvinator of India Ltd. (256 ITR 1)(Del)(FB) No restriction on number of times that reassessment can be made Assessment u/s 147 cannot be reopened in absence of new material or tangible material Delta Airlines Inc vs ITO [(2012) (ITA No 3476/Mum/2008)]; Inductotherm (India) Pvt Ltd vs DCIT [(2012) (SC No 858 of 2006) (Guj)]

Income escaping assessment Reassessment Important judicial controversies Merely writing approved in the sanction form without recording satisfaction renders the reopening void Amarlal Bajaj vs ACIT [(2013) ITA No 611/Mum/2004 (ITAT)] The Income-tax Act provides a complete machinery for the assessment/reassessment of tax which should not be superseded; Writ petition to challenge a reassessment order should not be entertained- CIT vs Chhabil Das Agarwal [Civil Appeal 6704 of 2013 (SC)] Reopening on change of opinion is not permissible ACIT vs ICICI Securities Primary Dealership Ltd [(2013) Civil Appeal No 5960 of 2012 (SC)] Failure to recorded reasons before passing reassessment order renders the reopening void. Subsequent supply does not validate reassessment order Tata International Ltd vs DCIT [(2013) ITA No 3359/ Mum/2009 (ITAT)] AO has to make additions only in respect of the issue for which notice u/s 148 was issued; he has no jurisdiction over any other income of the assessee CIT vs Mohmed Junded Dadani - [(2013) Tax Appeal No 964 of 2011 (HC)]

Income escaping assessment Reassessment Explanation 1 to Section 147 Mere production of accounts from which material evidence could have been discovered using due diligence would not amount to disclosure Ema India Ltd. vs. ACIT 30 DTR 82 (All. HC) Explanation 2 to Section 147: Deemed cases where income has escaped assessment No Return furnished by the assessee although income chargeable to tax Return furnished but no assessment made and AO noticed that income has been understated or excessive loss, deduction, allowance or relief claimed Report u/s 92E not furnished Assessment made but Income chargeable to tax was under-assessed Income assessed at a too lower rate Excessive relief granted Excessive loss, depreciation, allowed Asset (including financial interest located outside India) Finance Act 2012, however, applicable to previous AYs also

Income escaping assessment Reassessment Review of concluded items unconnected with the escapement of income not permitted in reassessment proceedings; Fishing and roving enquiries not permitted CIT vs. Sun Engineering Works P. Ltd. (198 ITR 297)(SC) Amrinder Singh Dhiman vs. ITO (269 ITR 378)(P&H) All primary facts available or there was no concealment or there was no application of mind at all, merely reliance placed on internal revenue audit then a case for reopening the assessment could not be made out Sita World Travel (India) Ltd v. CIT [2004] 140 Taxman 381 (Delhi) If AO has drawn a wrong legal inference from the facts disclosed he will not be competent to open reassessment proceedings CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC) ITO v. Nawab Mir Barkat Ali Khan Bahadur [1974] 97 ITR 239 (SC)

Income escaping assessment Reassessment Intimation u/s 143(1) is not an assessment; there is no question of treating the reassessment in such a case as based on change of opinion, thus AO is free to initiate proceedings u/s 147 even where intimation is issued Asst CIT v. Rajesh Jhaveri Stock Broker (P). Ltd [2007] 161 Taxman 316/291 ITR 500 (SC) Bombay HC recent There is a difference between change of opinion and failure to form an opinion - CIT vs Usha International (2012) (ITA No 2026/2010) (Delhi HC) Audit objection not a valid reason for re-opening assessment Even in a case where only intimation under section 143(1) was passed, reassessment cannot be initiated without a fresh material Orient Crafts Ltd (Delhi HC) No other adjustments can be made if the adjustments as per the reasons recorded does not sustain - CIT v. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom) Reassessment merely on the basis of investigation wing held to be not valid - Kamdhenu Steel & Alloys Ltd. (2012) 248 CTR 33 (Delhi)(High Court) Can writ be filed against re-assessment proceedings?

Income escaping assessment Reassessment No re-assessment just to make enquiry or verification -Bhor Industries Ltd. v. ACIT [(2004) 267 ITR 161 (Bom. HC) Distinction between reason to believe and reason to suspect - Universal Power Systems (P) Ltd - 48 ITR (Tribunal) 191 (Chennai) Re-assessment does not mean re-doing the entire assessment Notice u/s 143(2) mandatory CIT v. Mundra Nanvati (Bombay High Court) 227 CTR 387 Bom. CIT v. Virendra Kumar Agarwal Appeal No. 2429 OF 2009 Dt. 7/1/2010 (Bom.) Mechanically granted approval not valid - CIT v. Suman Waman Chaudhary (2010) 321 ITR 495 (Bom) Reassessment based on statement of third party-assessee not given opportunity to be heard-reassessment not valid - Kothari Metals v. ITO (2015) 377 ITR 581 (Karn.)(HC) Disclosure in balance sheet also amounts to disclosure-cit v. Corporation Bank Ltd (2002) 254 ITR 791 (SC) Reassessment jurisdiction is available for benefit of revenue only - K. Sudhakar S. Shanbhag v. ITO (2000) 241 ITR 865 (Bom.)

Time limit in cases of Income escaping assessment Time limit for initiating proceedings (issuance of Notice u/s 148) Condition Time limit Where income escaping income < 1 lakh 4 years Where income escaping income > 1 lakh In case resident has income in relation to any asset located outside India which has escaped income Notice issued to an agent u/s 163 6 years 16 years 6 years Time limit for completion of reassessment proceedings commences from date of service Condition Time limit If notice was served u/s 148 9 months from end of relevant FY If notice was served u/s 148 and reference made to TPO 21 months from end of relevant FY

Issue vs. Service of notice Section Issue/Serve Time Limit Notice u/s 143(2) Served Served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished. Order u/s 143(3)/144 Made No order of assessment shall be made under section 143 or section 144 Notice u/s 148 Issued No notice under section 148 shall be issued after elapse of 4/6/16 years from end of relevant AY Order u/s 147 r.w.s 143(3) Served Order shall be made under section 147 before the expiry of one year/ 9 months from the end of the financial year in which the notice under section 148 was served

Important points relating to assessment proceedings To be kept in mind Checking from client the date of service of notice (ask him to preserve the envelope) Reply to first notice should be annexed with important documents like: Return of Income along with computation of Income and Notes to computation Financial Statements Tax Audit Report Form 3CEB Note, if there are any important changes in the computation of income as compared to previous year Assessment submission and risk assessment in each hearing Relationship of mutual trust Ask the officer to issue a show cause notice for proposed adjustments, if any Earlier year adjustments and department position Position taken in other cases through continuous discussions in order to understand the mindset of the officer Surrender of Income/Expense, Additional claim etc.

Fresh claim CASE STUDIES 1. X Co, an Indian company is entitled to avail deduction under section 80-IA of the Act? The company has not claimed such benefit in the return of income? Whether such claim can be made during the course of assessment proceedings? 2. Y Co is engaged in the business of manufacture of steel. The company has not claimed additional depreciation at the rate of 20 percent on new assets acquired during the year? 3. A Co is engaged in the business of development and export of software. For AY 2009-10, the company claimed tax holiday benefit under section 10B of the Act. The AO denied such deduction citing that approval under Industrial Development and regulation Act? Under such circumstances, whether the company can claim alternate deduction under section 10A of the Act? 4. Whether fresh claim can be made before the appellate authorities?

TRANSFER PRICING ASSESSMENT

Reference to TPO

TP Litigation scenario

Reference to TPO

TP Audit Process Section 92CA Section 92CA(2) if the Assessing Officer ( AO ) considers it necessary or expedient to do, he may refer the computation of Arm s Length Price ( ALP ) to the Transfer Pricing Officer ( TPO ) with the previous approval of the Commissioner Section 92CA(2) TPO to serve notice on the Assessee requiring him to produce evidence in relation to arm s length price computed Section 92CA(2A) and (2B) The TPO can suo-motto take cognizance of the transaction not reported by the Assessee or not referred by the AO Section 92CA(3) provides that the TPO after taking into account the material available with him shall, by an order in writing, determine the arm's length price in accordance with s 92C(3). Section 92CA(3A) Time limit for passing an order - 60 days prior to the date of limitation referred in S. 153. Section 92CA(4) Provides that on receipt of the order of the TPO, the AO shall proceed to compute the total income of the assessee in conformity with the ALP as determined by the TPO. Section 92CA(5) and (6) refers to rectification of mistake apparent from record in TPO s Order Section 92CA(7) exercise of power specified under 131(1) -Power regarding discovery, production of evidence, etc. 133(6) -May require any person to furnish information or 133A -Power of Survey

Revised guidelines CBDT Instruction No 3/ 2016 The CBDT post several rounds of discussions, examination of suggestions received from various stake holders, has replaced earlier Instruction No. 15/2015 with a set of new guidelines vide Instruction No. 3/2016 dated March 10, 2016. The new guidelines provide more clarity on how TP case would be referred/selected on a going forward basis for audit purpose, the role of TPO and AO for determination of ALP. The important changes in this instruction as compared to the earlier one are: (a) specifying instances, for reference to be made to the TPO, for cases selected under non-tp risk parameters. These instances also include where (i) TP adjustment has been made of INR 10 crore or more in earlier years which has been upheld by judicial authorities or pending in appeal; and (ii) where the AO/Investigation wing records findings on TP issues in case of search and seizure or survey operations; (b) For administrating TP regime in an efficient manner, the AO should not exercise the powers to perform TP assessments; (c) instruction applicable to SDT as well.

Bird s eye view

Rectification - Section 154

Section 154 - Rectification of Mistake Rectification of a mistake apparent from Record Mistake Obvious Self evident and reached without debate Fresh determination of facts should not be required Error of fact Clerical or arithmetical error Misreading of a clear provision of law/ applying an inapplicable provision/ overlooking mandatory provision Statutory interpretation should not be involved Mistakes arising out of retrospective amendment of law Decision of Jurisdictional High Court or Supreme Court Record Includes all materials/ documents available at the time of passing the order of assessment Fresh documents/ materials not recorded at the time of passing the order cannot be considered Record of any period can be considered

Section 154 - Rectification of Mistake Section 154 - An income-tax authority may with a view to rectifying any mistake apparent from the record: amend any order passed by it amend any intimation or deemed intimation u/s 143(1) amend any intimation u/s 200A (FA 2012) Rectification may also be made on application by assessee Time Limit - Orders cannot be rectified after expiry of 4 years from the end of the financial year in which order sought to be amended was passed Time limit - On rectification plea by assessee - Amendment/ refusal order to be passed within 6 months from the end of the month in which the application is received Online rectification of mistake possible for a return filed online