Section 263 Assessment: AO Obliged to Apply Mind & Pass Reasoned Order

MSK Project (India) JV Ltd. Vs ACIT (ITAT Ahmedabad)

Conclusion: The computation of income by AO giving effect to CIT’s direction was an assessment order which was appealable. The order passed by CIT(A), therefore, holding the assessment order to be not appealable was incorrect in law. It was deemed fit to restore the issue back to AO to verify the facts of the case and thereafter pass an order in accordance with the directions of CIT in his order passed u/s 263.

Held: Assessee’s return was selected for scrutiny, wherein AO accepted the returned income. CIT noted error in the assessment order which was prejudicial to the interest of the revenue. He noted that the assessee had not accounted for the amount receivable by it from the Government of Rajasthan as per the Arbitral Tribunal Award in respect of loss of toll collection in connection with construction of Bharatpur bye pass road. Accordingly, a show-cause notice was issued to assessee u/s 263 and the order passed by CIT directing AO to pass a fresh assessment order taxing the award on accrual basis in accordance with the Mercantile System of Accounting. Thereafter, the order giving effect to the order of the CIT passed u/s 263 was passed by AO the very next day, added the amount of arbitral award to the income of the assessee.CIT(A) dismissed the assessee’s appeal holding it was non-maintainable since the order passed by AO was simply to give effect to the findings of the CIT and, as per the CIT(A), no appeal lay against such appeal effect order passed by the AO. Assessee had pleaded before CIT that since the award had been contested by the Government of Rajasthan, therefore, until it attained finality the assessee had no right to receive the same. Therefore, it had not offered to tax and also believed the same to be taxable only on the award attaining finality. It was held that the order passed by AO, therefore, was not a simple order giving effect to the order of CIT. He was required to examine the facts of the case and apply the law as laid down in CIT Vs. Gajapathy Naidu to it while subjecting the arbitral amount to tax. The findings of the CIT(A), therefore, that the order of AO was to give effect to the findings of the lCIT and, therefore, not appealable was incorrect. Assessee was well within his rights to have filed an appeal against this order passed by AO. Even otherwise, it had been held in the case of Kalyan Kumar Ray Vs. CIT, [1991] 191 ITR 634 (SC), that an assessment order comprised the detailed order passed by the AO as well as the computation of income done by him. Therefore, for all purposes, the computation of income by AO giving effect to CIT’s direction was an assessment order which was appealable. The order passed by the CIT(A),therefore, holding the assessment order to be not appealable was incorrect in law. Having held so, it was deemed fit to restore the issue back to AO to verify the facts of the case and thereafter pass an order in accordance with the directions of CIT in his order passed u/s 263.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against order of the learned Commissioner of Income-tax (Appeals)-III, Baroda [hereinafter referred to as “CIT(A)” for short] dated 09.08.2012 passed under Section 250(6) of the Income-tax Act, 1961 [hereinafter referred to as “the Act” for short], for the Assessment Year (AY) 2005-06.

Please become a Premium member. If you are already a Premium member, login here to access the full content.