2010 (3) TMI 894 - AT - Income Tax

Rejection of accounts - assessee-company is a non-resident company established in USA and operates its branch office from India - business of distribution of films and has derived income by way of distributing films and advertising accessories and trailers claim of the assessee is that the said profit has been shown as per books of account regularly maintained by it and the Assessing Officer without examining the books of account rejected the same and applied net rate of profit at 25 per cent of gross film rental as per Boards letter - Held that - Assessing Officer had no ground to reject books of account within meaning of section 145(3) and thus he was required to calculate income as per books of account by applying section 145(1) matter remanded back to AO Transfer pricing - Reference to transfer Pricing Officer Assessing Officer referred matter to TPO under section 92CA(1) who vide order under section 92CA(3) directed that certain amount was required to be added to income of assessee - Assessing Officer made addition Held that - No opportunity has been provided by the Assessing Officer for final determination of income under sub-section (4) of section 92C read with sub-section (4) of section 92CA of the Act matter remanded to AO

Issues Involved:
1. Application of Section 145(1) of the Income-tax Act.
2. Adjustment directed by the Transfer Pricing Officer (TPO).
3. Opportunity of being heard before determining total income.
4. Applicability of Section 92B and Chapter-X of the Income-tax Act.
5. Reduction of specific amounts included in the computation of income by mistake.

Issue-wise Detailed Analysis:

1. Application of Section 145(1) of the Income-tax Act:
Facts:
The assessee, a non-resident company operating a branch in India, filed returns showing profits from film distribution. The Assessing Officer (AO) applied a 25% profit rate on gross film rentals based on a CBDT letter from 1987, rejecting the books of account without examination.

Judgment:
The CIT(A) directed the AO to compute income as per the books of account under Section 145(1), rejecting the AO's application of a 25% profit rate. The Tribunal upheld this decision, emphasizing that the AO had no grounds to reject the books of account without examination. The Tribunal referenced the Special Bench decision in Warner Bros. (F.E.) Inc., which supported the application of the 1987 settlement principles even after March 31, 1987.

2. Adjustment Directed by the Transfer Pricing Officer (TPO):
Facts:
The AO added Rs. 1,27,65,461 to the assessee's income based on the TPO's direction. The CIT(A) deleted this adjustment, stating there were no comparable uncontrolled transactions to justify it.

Judgment:
The Tribunal found that the AO failed to provide the assessee with an opportunity to be heard before making the adjustment, violating Section 92C(3). The Tribunal set aside the orders and remanded the issue back to the AO for fresh consideration, ensuring the assessee is given a reasonable opportunity to be heard.

3. Opportunity of Being Heard Before Determining Total Income:
Facts:
The assessee claimed that the AO did not provide an opportunity to be heard before determining the total income, violating procedural fairness.

Judgment:
The Tribunal agreed with the assessee, citing the Delhi High Court's judgment in Sony India (P.) Ltd. v. CBDT, which mandates that taxpayers must be given a formal opportunity to present their case. The Tribunal remanded the issue back to the AO for fresh adjudication, ensuring compliance with procedural requirements.

4. Applicability of Section 92B and Chapter-X of the Income-tax Act:
Facts:
The assessee contested the applicability of Section 92B and Chapter-X, which deal with transfer pricing regulations.

Judgment:
The Tribunal found merit in the assessee's argument that the AO did not follow proper procedures under these sections. The issue was remanded back to the AO for a fresh decision, ensuring that the assessee is given a fair opportunity to present its case.

5. Reduction of Specific Amounts Included in the Computation of Income by Mistake:
Facts:
The assessee sought the reduction of Rs. 6,97,448 and Rs. 3,73,461, included in the computation of income by mistake, for the assessment years 2003-04 and 2004-05, respectively.

Judgment:
The Tribunal noted that the assessee did not press these grounds and, in the absence of supporting material, rejected these claims.

Conclusion:
The Tribunal's judgment addressed multiple issues concerning the computation of income and procedural fairness in tax assessments. The Tribunal upheld the CIT(A)'s direction to compute income based on the books of account, remanded issues related to transfer pricing adjustments and procedural fairness back to the AO, and rejected the assessee's unpressed claims regarding mistaken income computation. The judgment emphasizes the importance of adherence to procedural norms and fairness in tax assessments.

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