1. Preamble
The present article discusses amendment proposed by Finance Bill (No. 2) 2009 regarding provisions of Dispute Resolution Panel (DRP) and deduction u/s. 80-IB(10).
Though the provisions relating to Dispute Resolution Panel are not a complete code for full and complete resolution of dispute referred to it, it is a step in right direction. Litigation is time consuming and it has been demand of AIFTP from time to time that Law must provide for Alternative Dispute Resolution mechanism for settling of dispute at the option of the assessee. In his editorial in the month of June 2009, our revered Chief Editor has reiterated the same demand and we are happy that Hon’ble Finance Minister has made a beginning in the said direction.
2. Dispute Resolution Panel (DRP)
Finance Bill (No. 2) 2009 proposes to insert new section 144C and amend provisions of Ss. 131, 246A, and 253 to introduce a new scheme for Dispute Resolution.
2.1. What is DRP
DRP is a Collegium of three Commissioners of Income Tax (CIT) to be constituted by the Central Board of Direct Taxes (CBDT) for the purpose (S. 144C(16)(a)). A body of three CITs would be constituted by the CBDT to decide specified issues. CBDT will also make Rules for functioning of DRP (S. 144C(14)).
2.2. Eligible assessees
2.2.1 S. 144C(16)(b) provides the class of assessees who would be entitled to and be subject to process of DRP. The Scheme proposes that process of dispute resolution would apply only to two specified class of assessees. Maybe with time and experience gained, the category of cases that may be referred would be widened. The two class of assessees specified as eligible assessee’s are as follows:
i) Any person in whose case TPO has passed order u/s. 92CA(3) varying its income, and ii) any foreign company.
2.2.2 S. 92C gives power to Assessing Officer to vary price in any international transaction entered into by an assessee by applying arm’s length price for the transaction and determine total income chargeable to tax under Income-tax Act, 1961 accordingly. Under section 92CA, the AO may refer the matter of determination of arm’s length price for an international transaction to Transfer Pricing Officer (TPO) and order passed by the TPO on reference would be binding on the Assessing Officer. The CBDT has by an administrative circular fixed monetary limit for cases in which Assessing Officer may determine arm’s length price himself without reference to TPO and when reference has to be made to TPO. As only in cases where order is passed by TPO u/s. 92CA(3) would be referred to DRP, cases where variation in arm’s length price for an international transaction, in case of an assessee other than a foreign company, is carried out by Assessing Officer without reference to TPO, such variation would not be subject to proceedings under S. 144C.
2.3. When to be referred to DRP
2.3.1 Sub section (1) provides that in every case of eligible assessee, the Assessing Officer shall make a draft assessment order, if he proposes to vary income to prejudice of eligible assessee. Though eligibility is only if order is passed by TPO u/s. 92CA(3) or in case of a foreign company, once variation is proposed, all issues would be before the DRP. Any decision in assessment which would be prejudicial to eligible assessee would be subject matter of draft assessment order and therefore will be referred to DRP.
2.3.2 Sub-section (2) provides that an assessee served with the draft assessment order may either file objection with both the DRP and the Assessing Officer on the draft assessment order within thirty days of receipt of such order or file his acceptance for proposed variations with the Assessing Officer.
2.3.3 The case is referred to DRP only if the assessee files objection within thirty days. If assessee files acceptance with Assessing Officer for the proposed variations or does not file objections with DRP within thirty days, then under sub- section (3), the Assessing Officer shall pass assessment order on the basis of draft order.
2.3.4 If objection is not filed with DRP within prescribed time or assessee accepts variation, case will not be referred to DRP but Assessing Officer has to pass final assessment order on the basis of draft order.
Whether assessee can opt not to refer the case to DRP
2.3.5 Question arises as to whether the assessee has an option not to refer the case to DRP and yet object to the variation proposed. In my opinion, the assessee can opt not to refer the case to DRP and yet object to variations proposed by the Assessing Officer. The assessee can file objections with the Assessing Officer after period of thirty days but before due to date of passing the assessment order. As objections are not filed within thirty days with DRP, case does not get referred to DRP. Though the Assessing Officer has to pass orders on the basis of draft order but regular appeal to Commissioner of Income Tax (Appeals) u/s. 246A is not barred. Appeal to Commissioner of Income Tax (Appeals) is barred only in case where assessment order is passed in pursuance of directions of DRP and not otherwise.
Whether assessee can file further submissions and evidences with DRP after filing of objections
2.3.6 The assessee has to file objections to DRP within specified time of thirty days and the same may not be sufficient in all cases. Case is referred to DRP only if assessee files objection to draft order with DRP within thirty days of receipt of draft order and there is no provision for extension of time. In case of scarcity of time, the assessee may file grounds of objections within prescribed time and later file further submissions before or during the course of hearing granted by DRP. Sub-section (11) provides for opportunity for hearing and sub- section (6) provides that DRP shall issue directions after considering the objections filed by assessee and evidences furnished by the assessee.
2.4 Powers of DRP
Section 131 is proposed to be amended and DRP shall have all the powers granted to an income tax authority u/s. 131. Also under sub-section (7) of S. 144C, the DRP may itself make such enquiries or cause any further enquiry by any Income Tax Authority and report the result of such enquiry.
2.5 Orders of DRP
2.5.1 Sub-section (5) of S. 144C provides that the DRP may issue such directions as it thinks fit for the guidance of Assessing Officer to enable him to complete the assessment. Sub-section (10) provides that such directions will be binding on the Assessing Officer. The directions are binding only on the Assessing Officer and not on the assessee. Though no appeal is provided against the directions of the DRP, the assessee can file appeal against the assessment order passed in pursuance of such directions with Income Tax Appellate Tribunal.
2.5.2 Sub-section (8) provides that the DRP may confirm, reduce, or enhance the variation proposed in draft assessment order. The wordings are similar to S. 251 except that unlike the Commissioner of Income Tax (Appeals) the DRP cannot annul the draft assessment order. It has been further specifically provided that the DRP shall not set aside the proposed variation nor issue direction for further enquiry and passing of assessment order. Therefore the DRP has to pass a final order on the variation proposed and not set aside for further enquiry. It is a salutary provision inasmuch as finality will be given without prolonging the issue.
2.5.3 Issue arises whether the DRP can delve on its jurisdiction to deal with the issue or of reference of the case to it u/s. 144C. Any authority before which any legal proceedings are being prosecuted has the jurisdiction to decide whether it has jurisdiction to deal with the case. Though DRP does not have jurisdiction to annul the draft assessment order, it has jurisdiction and also the duty, on being issue being raised before it, to decide whether it has jurisdiction to issue directions u/s. 144C(5). In view of S. 292BB, it is essential that irrespective of whether the DRP disposes of objections as to its jurisdiction, the assessee raises objections to DRP’s jurisdiction, if it is of the view that the DRP does not have the necessary jurisdiction.
2.5.4 Sub-section (9) of S. 144C provides that in case of difference of opinion amongst members of the DRP, points shall be decided according to the opinion of the majority.
2.5.5 Sub-section (11) provides that before issuing directions which are prejudicial to the assessee, opportunity of being heard will be granted to the assessee. Similarly if the directions are prejudicial to the Assessing Officer, opportunity of being heard shall be granted to the Assessing Officer.
2.5.6 Sub section (6) provides that DRP shall issue directions under sub section (5) after considering the draft assessment order, objections and evidences filed by the assessee, enquiry made or caused to be made, reports of Assessing Officer, the TPO, or any other authority.
2.6 Time limits
2.6.1 No time limit has been prescribed for passing of the draft assessment order and in view of extension of time to pass assessment orders subsequent to passing the draft assessment order, draft assessment order shall have to be passed within time prescribed for passing of the assessment order u/s. 153.
2.6.2 If the assessee intends to object to variations in draft assessment order with DRP, it has to file objections with DRP and the Assessing Officer within thirty days of receipt of draft assessment order.
2.6.3 If assessee accepts the variation proposed in the draft assessment order or does not file objections with DRP and the Assessing Officer within thirty days of receipt of draft order, then under sub-section (3) Assessing Officer has to pass assessment order within one month from the end of month in which acceptance is received or time for filing objection expires.
2.6.4 The DRP has to issue directions under sub- section (5) within nine months of the end of month in which draft assessment order is forwarded to the assessee. The time limit starts from the month in which draft assessment order is forwarded by Assessing Officer irrespective of month in which order is served on the assessee and month in which objections are filed by the assessee.
2.6.5 The Assessing Officer shall pass assessment order within one month from end of month in which direction is received from the DRP.
2.7 Appeals
No appeal has been provided against the directions issued by the DRP but appeal can be filed u/s. 253 against assessment order passed in pursuance of such directions with the Income Tax Appellate Tribunal. Appeal can be filed only by the assessee and department cannot file appeal against directions issued by DRP nor against the assessment order.
3. Amendment of provisions of S. 80-IB(10)
One is advised to look for pitfalls in carrying out any act by a saying: “Look before you Leap”. The spate of amendments following any new provision for exemption/deduction inspires one to give the same advice to law makers. S. 80IB(10) was enacted w.e.f. 1-10-1998 granting exemption to developer and builders developing a housing project if prescribed conditions are satisfied. The provisions have been amended from time to time and benefit of deduction of profits is available only in respect of housing projects commenced on or before 31-3-2007. As benefit is not available to projects commenced after 31-3-2007, one would not be unreasonable to expect that no legislative amendment would be made to the said provisions. But that is not to be. Two amendments have been proposed to provisions of S. 80-IB(10).
3.1 Size of residential unit
3.1.1 Clause (c) of S. 80IB(10) provides condition as to size of residential unit in eligible housing project. It provides that size of residential unit in a housing project in city of Mumbai and Delhi should not exceed 1000 sq. ft. and in any other areas is should not exceed 1500 sq. ft. Disputes have arisen as to whether condition is violated if a flat purchaser buys more than one unit either by himself or in names of his relatives and amalgamates the two flats. The department took the stand that size of residential unit after amalgamation of two or more units exceeds the prescribed size and the assessee contended that it has no control over units after sale and that it had constructed units within the prescribed sized.
3.1.2 Clause (e) is proposed to be inserted in S. 80-IB(10) with effect from 1-4-2010. It provides that not more than one unit shall be allotted to any person other than an individual. In case of sale to an individual, no other unit is allotted in the housing project to spouse or minor child of such individual or to an HUF of which such individual is a Karta or any person representing them. If project is consists of more than one building, the restriction is on second allotment in whole of the project and not only in the same building. Further, once the condition is violated deduction will be denied on whole of the project and not only profit from sale of flats in violation of the condition.
3.1.3 As amendment is w.e.f. 1-4-2010, in respect of projects completed on or before 31-3-2009 in respect of which deduction is claimed prior to A. Y. 2010-11, amendment will not apply. In respect of projects completed after the said date issue would arise as to whether condition can apply to projects which have already commenced.
3.1.4 If sale of flats in violation of condition prescribed by clause (e) is made after amendment then obviously condition is applicable. However, in cases where sale in violation of such condition has already been made prior to amendment, but deduction is claimed on or after A. Y. 2010-11, the department would contend that law as on first day of the assessment year would apply and therefore amended law would apply to claim u/s. 80-IB(10). It is possible to contend in reply to such a contention that law as on first day of assessment year is applicable subject to exceptions (See CIT vs. Laxman Singh (1986) 159 ITR 983 (Raj) and CIT vs. Nirmal Textiles (1997) 224 ITR 378 (Guj)). It can be contended that in case of 80-IB(10), as far as conditions for eligible project one has to look at provisions in the year in which project commenced and not when project is completed and deduction is claimed.
3.1.5 Such an amendment also amounts to violation of promise of deduction of profits and assessee may be able to claim that such an amendment violates principle of promissory estoppel and reliance can be placed on Motilal Padampat Sugar Mills P Ltd vs. State of Uttar Pradesh (1979) 118 ITR 326 (SC).
3.2 Deduction only to a developer and not to a contractor S. 80-IB(10) reads: “in case of an undertaking developing and building housing projects”. The intention of the Legislature is manifest in the opening para itself that deduction is allowable only to a developer. Issue has arisen in few cases about whether the deduction is allowable to a contractor; though the issue was more of interpretation of document of purchase of land, as to whether the assessee is a developer or a contractor and it has been largely undisputed that deduction is not allowable to a mere contractor. Explanation is proposed to be inserted with retrospective effect from 1-4-2001 to provide that benefit would not be available to an undertaking executing housing project as a works contract.
Author: CA. Chetan Karia
