Hon’ble Gujarat High Court (HC) held that the application made by the taxpayer before the DRP seeking its consent to approach the Assessing Officer (AO), requesting him to finalise the draft assessment order passed under Section 144C(1) of the Income-tax Act, 1961 so as to enable it to file an appeal before the CIT(A), does not tantamount to withdrawal of the DRP application. The HC further held that the case ought to have been considered on merit even in case the DRP was of the opinion that it did not have the requisite powers under the provisions of the Act to entertain the application of the taxpayer.
Facts of the case
• The taxpayer filed its objections before the DRP against the draft assessment order passed under Section 144C(1) of the Act wherein various additions were proposed to the total income by the AO / TPO;
• The Central Board of Direct Taxes (CBDT) issued a clarification that taxpayer had the choice of availing the DRP route or to prefer an appeal through normal appellate channel of CIT(A). The said clarification, although dated before the date of filing of DRP application by the taxpayer, was not known to the taxpayers until the date on which the DRP application was filed by the taxpayer;
• Pursuant to the CBDT clarification, the taxpayer was desirous of opting for the normal appellate procedure i.e. the CIT(A) route. Accordingly, at the time of the first hearing before the DRP, it filed an application seeking DRP’s consent to enable the AO to finalise the draft order so that it could file an appeal with the CIT(A);
• The DRY in its order stated that it did not have the requisite powers under the Act to entertain the application made by the taxpayer. Consequently, it treated the taxpayer’s application as an application for withdrawal of objections filed before the DRY and passed an order confirming the additions proposed by the AO;
• Aggrieved by the DRY order, the taxpayer filed a writ petition before the HC requesting it to quash the DRY order. Whilst the writ petition was pending before the HC for hearing, the AO finalised the assessment based on the directions contained in the DRY order.
• The application made by the taxpayer to the DRY was not an application for withdrawal of objections filed before the DRY but the taxpayer had sought DRY’s consent to approach the AO and follow the alternate appellate procedure;
• The taxpayer contented that at the time of its filing of the DRY application there was considerable uncertainty whether the taxpayers had the option of availing the alternate appellate procedure. In support of its contention, the taxpayer also relied on the endorsement in the AO’s order which required the taxpayer either to file the acceptance of the proposed variations to the total income or to file objections before the DRY;
• Once the CBDT clarification came to the notice of the taxpayer, it decided to avail the alternate appellate procedure route by seeking to file an appeal before the CIT(A). Accordingly, it sought DRY’s consent to do so in the first hearing itself;
• The DRY order was passed without application of mind. Thus, in case DRY’s order was not quashed, the taxpayer would lose the opportunity granted by CBDT of alternate appellate remedy and would have to directly approach the ITAT.
Tax Department’s contentions
• The clarification issued by the CBDT is dated much before the date of filing of DRY application by the taxpayer. Further, the application requesting DRY’s consent to approach the AO and follow the CIT(A) route was filed by the taxpayer after more than 3 months of the CDBT clarification. This indicated that the application seeking DRY’s consent was made after proper deliberation of the issues by the taxpayer;
• Once the DRY application is filed by the taxpayer, the DRY was required to issue directions to the AO to enable him to complete the assessment. Accordingly, the DRY did not have the powers under the provisions of the Act to allow the taxpayer’s application for giving its consent to approach the AO and to avail of the alternate appellate procedure of filing an appeal before the CIT(A);
• The writ petition filed by the taxpayer was not required to be entertained as an alternative remedy i.e. the alternative of filing an appeal with the ITAT was available to the taxpayer, and more so when the final assessment order under Section 143(3) read with Section 144C(13) was passed by the AO.
• Based on the endorsement made in the draft order passed by the AO that the taxpayer was required to communicate his acceptance of proposed variations to the total income or file objections before the DRP, the taxpayer was justified in its belief that CIT(A) route was not available;
• A perusal of the application filed by the taxpayer before the DRP makes it clear that the taxpayer had not requested the DRP for the withdrawal of its objections. The taxpayer had requested for DRP’s consent to allow it to approach the AO and to avail of the alternate appellate procedure route of filing an appeal before the CIT(A). The DRP has failed to consider the contents of the application filed by the taxpayer before passing the final order;
• In case the DRP was of the opinion that the application filed by the taxpayer requesting its consent to enable the taxpayer to follow the CIT(A) route could not be entertained under the provisions of the Act, it should have considered the objections filed by the taxpayer on merits. The order passed by the DRP suffers from the vice of being contrary to the record as well as non-application of mind;
• Owing to the impugned order passed by the DRP the taxpayer had virtually lost all the appellate remedies as (i) the DRP passed the order without considering the merits of the case; (ii) the CIT(A) route would not be available to the taxpayer; and (iii) the ITAT will not entertain the appeal filed by the taxpayer due to DRP’s observations that the taxpayer had filed for withdrawal of the objections;
• Consequently, the HC quashed the order passed by the DRP and that passed by the AO based on DRP’s directions and remanded the matter back to the DRP with the direction to consider the case on merits.
The order of the HC quashing the DRP’s order on the ground of non-application of mind is in line with the principles of natural justice. The same would ensure that the taxpayers retain the right to choose the dispute resolution options granted to them by law and as further clarified by the CBDT.
The ruling would also ensure that the taxpayer’s objections are considered on merits in the subsequent rounds of DRP hearings and that the intended objective of setting up a fair alternative remedial route to ensure fast track resolution of tax disputes is achieved.
Source:- AIA Engineering Ltd Vs. Dispute Resolution Panel (Gujarat High Court)