ITAT criticises AO and DRP for blatantly frivolous and unsustainable additions

Issue-  whether or not addition of Rs 5,739.60 crores (Rs 5739,60,05,089) made by the Assessing Officer with respect to the dis allowance of loss on transfer of telecom infrastructure is justified, tenable in law and on the facts of this case. The related grievances, as set out in the memorandum of appeal, are as follows:

Briefly stated, the relevant material facts are like this. The assessee before us is a company engaged in the business of telecommunication services. On 30th September 2008, the assessee filed an income tax return disclosing taxable income of Rs 1,608.58 crores (Rs 1608,58,05,679). In its computation of  taxable income, the starting point was the profit as per profit and loss account. In the course of scrutiny assessment proceedings, the Assessing Officer noted that “the assessee has booked an expenditure of Rs 5739,60,05,089 on account of loss on transfer of telecom infrastructure to Bharti Infratel Limited as a reduction in WDV ( i.e. written down value) of fixed assets” and that “the same is dis allowable from the profit and loss account, as per provisions of the Income Tax Act, as it is clearly a capital loss”. It was explained by the assessee that the reflecting the loss in the profit and loss account did not have any impact on the profits as the debit, by way of loss on transfer of telecom infrastructure, was squared by corresponding credit from the ‘business restructuring reserve’, and thus there was no debit to the profit and loss account. The amounts were only in the inner columns and there was no net debit by way of entry in the outer column. It was explained that “the loss on sale of telecom infrastructure to BIL is corresponding to the amount credited to business restructuring reserve” and that “if this amount is not withdrawn from the said reserve, the profit of assessee company is lowered by Rs 5,739 crores for the year under consideration”. None of these submissions impressed the Assessing Officer and, in the draft assessment order, the Assessing Officer proposed an addition of Rs 5739,60,05,089 in respect of the above loss.

An objection was taken up by the assessee before the Dispute Resolution Panel as well  however, the DRP proceeded to reject the same by making following brief, or rather cryptic, observations:

” We have considered the facts of the case. Submission of assessee has also been gone through. The dis allowance of Rs.5 73 9,60,05,000 by the AO in normal computation provisions as capital loss representing loss on transfer of Telecom Infrastructure to Bharti Infratel Limited is held as perfectly in order. Therefore, as for as dis allowance is concerned, no interference is called for. However, as regards the claim of assessee of not reducing the equivalent sum from the computation of income, it is noted that it is a matter of pure verification. The AO is directed, to verify the claim of the assessee from the records and take necessary action.”

In the final assessment order, passed as a result of the above DRP directions, the Assessing Officer made the impugned additions. The Assessing Officer noted that the “from the directions of Hon’ble DRP, it is abundantly clear that the DRP has categorically held that the dis allowance of Rs 5739,60,05,089 by the Assessing Officer represents capital loss on transfer of telecom infrastructure to Bharti Infratel Limited in the computation as per normal provisions of the Act was perfectly in order and no interference was called for”, and “therefore, the contention of the assessee company that there is double addition of the above sum, is incorrect”. As for the DRP’s directions to the Assessing Officer to make verifications with respect to “not reducing the claim of assessee of not reducing the equivalent sum from the computation of income”, the Assessing Officer noted that “after verifications, it is ascertained that these are the same documents and papers which were available before the Assessing Officer during the course of assessment proceedings leading to draft assessment order” and that “there are no fresh or additional documents except the written submissions”. The Assessing Officer then took note of the fact that in the computation of income attached to the return of income, the assessee has first added Rs 5739,60,05,089 as “Loss on transfer of telecom infrastructure to Bharti Infratel Limited” and then reduced Rs 5 739,60,05,089 as “amount withdrawn from Reserve for Business Restructuring”. Effectively thus, according to the Assessing Officer, there was a debit and credit of the same amount and he was justified in adding back the loss of transfer of telecom infrastructure debited to the profit and loss account. He thus concluded that “in view of the above and consequent upon verification of facts as directed by the learned DRP, the finding for addition of Rs 5739,60,05,089 in the computation of income by the Assessing Officer under the normal provisions of the Act is found to be correct for the assessment year under consideration”.

 When this issue came up in hearing before us, learned counsel for the assessee submitted that it is a case of frivolous double addition on deliberate misconception of the facts. He took us through the year-end financial statements of the assessee and its computation of income to demonstrate that the impugned addition made by the Assessing Officer amounted to making an addition for loss on transfer of telecom assets whereas no deduction in respect of such loss was claimed by the assessee. He invited our attention to the observations made in the stay order to the effect that it is a case of “prima facie” double addition and it was also submitted that at the stage of hearing of stay petition in this case, the Assessing Office himself has accepted that it is a case of double addition. Learned Departmental Representative, on the other hand, dutifully placed his rather bland reliance on the stand of the Assessing Officer and the Dispute Resolution Panel. It was in this backdrop that we called for personal appearance of the Assessing Officer concerned. When the Assessing Officer appeared before us, and we asked him to justify this addition of Rs 5,739.60 crores, whereas, for all practical purposes, the assessee has not even claimed deduction of the same in the computation of business income, he had nothing to say. When he was asked why DRP’s directions about verifications were not complied with, he stated that, as stated in the assessment order itself, there was no fresh material at that stage over and above what was produced in the original assessment proceedings, and thus it was not open to the Assessing Officer to take any other view of the matter than the view originally taken. The Assessing Officer submitted that the loss on sale of assets could not be allowed as a deduction but that does not justify the addition on merits, because the assessee has not challenged this proposition at any stage and has merely contended that no such dis allowance is warranted on the facts of this case as the said amount has not been debited to the profit and loss account at all. In effect thus, we are dealing with a situation that here is a Rs 5,739.60 crore addition, which has been made by the Assessing Officer and sustained by the Dispute Resolution Panel, and effectively there is no argument to defend it.

It is not an uncommon sight that even the most distinguished and learned Departmental Representatives, as also other revenue authorities appearing before us, simply place their bland reliance on the impugned orders- as in this case, rather than dealing with specific justification for the additions or dis-allowances made therein and with the arguments advanced by the taxpayer’s representatives. By such a conduct, any transparent debate about correctness or otherwise of such additions impugned in appeal is pre-empted. Of course, such an exercise does render our adjudication process a one way street but, as long as legal and factual position warrants due relief to the assessee and as long as impugned additions are so frivolous, there is nothing wrong in it. However, if an action of the Assessing Officer is so blatantly unreasonable that such seasoned senior officers well versed with functioning of judicial forums, as the learned Departmental Representatives are, cannot even go through the convincing motions of defending the same before us, such unreasonable conduct of the Assessing Officer deserves to be scrutinized seriously. At a time when evolving societal pressures demand greater degree of accountability in the governance also, it does no good to the judicial institutions to watch such situations as helpless spectators. If it is indeed a case of frivolous addition, someone should be accountable for the resultant undue hardship to the taxpayer -rather than being allowed to walk away with a subtle, though easily discernable, admission to the effect that yes it was a frivolous addition, and, if it is not a frivolous addition, there has to be reasonable defence, before us, for such an addition. The case before us, for the reasons we will set out now,  appears to be in the category of a wholly frivolous, and simply indefensible, addition to the income returned by the assessee.

A plain look at the above material shows that there was no effective debit to the profit and loss account as the amount of Rs 5739,60,05,089 reflected in the “Loss on transfer of telecom infrastructure to Bharti Airtel Limited” was squared up against the credit amount of Rs 5739,60,05,089 representing “Amount withdrawn from Reserve for Business Structuring” in the inner column  of the profit and loss account. These entries were absolutely profit neutral so far as the profit as per profit and loss account is concerned, and since it is this profit which is starting point for computation of business income, effectively no adjustments thereto were required. Even if no adjustment was carried out in the computation of income, the resultant income would have been the same, but the adjustments, if at all required for the sake of completeness and transparency, were required for both the entries, i.e. loss on transfer of assets as also amount withdrawn from business restructuring. This is precisely what the assessee has done. As much as the loss on transfer of assets is not a tax deductible item, the amount transferred from reserves is also not a taxable item. The assessee thus reversed both these entries, as depicted above, in the computation of income. The Assessing Officer has taken note of the fact that in the computation of income attached to the return of income, the assessee has first added Rs 5739,60,05,089 as “Loss on transfer of telecom infrastructure to Bharti Infratel Limited” and then reduced Rs 5739,60,05,089 as “amount withdrawn from Reserve for Business Restructuring”, but then, instead of taking note of the unambiguous fact that these two distinct entries representing two facets duly reflected in the profit and loss account, the Assessing Officer assumes that since debit and credit of the same amount, resulting in neutralizing each other, he is justified in adding the loss of transfer of telecom infrastructure to the profit as per profit and loss account. Neither there was an effective debit to the profit and loss account, since the loss was squared up by transfer from reserve rather than by debit to profit and loss account, nor was it open to the Assessing Officer to take into account loss on transfer of assets, though reflected in the inner column, without taking into account another inner column item reflecting transfer from reserves to square up this loss. Whichever way one looks at these entries, the inescapable conclusion is that the addition made by the Assessing Officer is wholly erroneous and devoid of any legally sustainable merits. In this case, the Dispute Resolution Panel has also been somewhat superficial in its approach in confirming the addition by observing that, “the dis allowance of Rs.5739,60,05,000 by the AO in normal computation provisions as capital loss representing loss on transfer of Telecom Infrastructure to  Bharti Infratel Limited is held as perfectly in order” because the grievance raised by the assessee was specifically against the erroneous approach of the Assessing Officer in not taking a holistic view of the accounting entries. There is no, and there was never, any dispute on whether such a loss is tax deductible or not. The dispute was confined to the question whether, on the given facts, the Assessing Officer could have made an addition for this amount to the income returned by the assessee. The contention of the assessee was that no such addition was justified because the assessee has, on his own, made appropriate adjustments in the computation of taxable income and an addition by the Assessing Officer will result in double dis allowance of the said amount. No doubt, the Dispute Resolution Panel did mention that, “as regards the claim of assessee of not reducing the equivalent sum from the computation of income, it is noted that it is a matter of pure verification” and directed the Assessing Officer “to verify the claim of the assessee from the records and take necessary action”, but then it was the inaction and inability of the Assessing Officer in correctly doing so that the objection was raised before the Dispute Resolution Panel and all the related facts, including accounting entries and treatment given in the computation of taxable income, were placed before the Dispute Resolution Panel. The fact that even such purely factual issues are not adequately dealt with by the DRPs raises a big question mark on the efficacy of the very institution of Dispute Resolution Panel. One can perhaps understand, even if not condone, such frivolous additions being made by the Assessing Officers, who are relatively younger officers with limited exposure and experience, but the Dispute Resolution Panels, manned by very distinguished and senior Commissioners of eminence, will lose all their relevance, if, irrespective of their heavy work load and demanding schedules, these forums do not rise to the occasion and donot deal with the objections raised before them in a comprehensive and effective manner. While we delete the impugned addition of Rs 5739,60,05,089, we also place on record our dissatisfaction with the way and manner in which this issue has been handled at the assessment stage. Let us not forget that the majesty of law is as much damaged by not rendering justice to the conduct which cannot be faulted as much it is damaged by a wrongdoer going unpunished; not giving relief in deserving cases is as much of a disservice to the cause of justice and the cause of nation as much a disservice it is, to these causes, by granting undue reliefs. The time has come that a strong institutional check is put in place for dealing with such eventualities and de-incentivizing this kind of a conduct. With these observations, the impugned addition of Rs 5739,60,05,089 is deleted. The assessee gets the relief accordingly.