2025 (7) TMI 1166 - AT - Income Tax

Action of the AO in not following the directions of DRP while passing the final assessment order - HELD THAT - By respectfully following the judgements of SRF 2021 (7) TMI 1298 - DELHI HIGH COURT Anand NVH Products Ltd 2021 (8) TMI 1262 - DELHI HIGH COURT and Hitachi Astemo Haryana Pvt.Ltd. 2023 (11) TMI 998 - ITAT DELHI and Honda R D Pvt.Ltd 2024 (12) TMI 419 - ITAT DELHI we are of the considered view that in the present case the assessee has successfully demonstrated that AO has not followed the directions given by the Ld.DRP and accordingly we remit back the issue to the file of AO with the direction that AO shall pass the final assessment order after incorporating and considering the directions given by Ld.DRP. Accordingly Ground of the assessee is allowed for statistical purposes.

Summary

ISSUES:

Whether the final assessment order passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961, without giving effect to the directions of the Dispute Resolution Panel (DRP), is valid.Whether the Assessing Officer (AO) erred in disallowing leasehold improvement expenses without following DRP directions and without passing a speaking order.Whether the AO and Transfer Pricing Officer (TPO) erred in making transfer pricing adjustments, including the determination of associated enterprises and benchmarking of Advertising, Marketing and Promotion (AMP) expenses.Whether the AO erred in disallowing Employee Stock Option Plan (ESOP) expenses under section 37(1) of the Act.Whether the AO erred in disallowing leasehold improvements expenditure under sections 37(1) and 30(a)(i) of the Act.Whether the AO erred in denying credit for Dividend Distribution Tax and in levying interest under sections 115P, 234B, 234C, and 234D of the Act.Whether the AO erred in initiating penalty proceedings under section 270A of the Act for under-reporting of income.

RULINGS / HOLDINGS:

The final assessment order passed without incorporating the directions of the DRP is not a fatal error rendering the assessment void but requires remand to the AO for passing a fresh order incorporating such directions, as per the mandatory provisions of section 144C(13) of the Act.The AO failed to give effect to the DRP's directions regarding leasehold improvement expenses, specifically the allowance of INR 7,75,23,358 as revenue expenditure, which constitutes a violation of section 144C(13) and renders the order liable to be set aside and remanded.The Tribunal declined to adjudicate on transfer pricing and other grounds since the matter was remanded for compliance with DRP directions; however, the AO/TPO's invocation of Chapter X and related transfer pricing adjustments were challenged on multiple grounds including misclassification of associated enterprises and incorrect benchmarking.The disallowance of ESOP expenses under section 37(1) was contested on grounds of incorrect characterization as capital receipt and failure to consider prior judicial decisions in favor of the assessee.The disallowance of leasehold improvements without a speaking order and without following DRP directions was held to be erroneous and contrary to settled principles under sections 37(1) and 30(a)(i) of the Act.The AO's denial of credit for Dividend Distribution Tax and levy of interest under sections 115P, 234B, 234C, and 234D were contested but not adjudicated due to remand.The initiation of penalty proceedings under section 270A for under-reporting was raised but not decided pending remand.

RATIONALE:

The legal framework applied includes the provisions of sections 143(3), 144C(5), 144C(10), and 144C(13) of the Income Tax Act, 1961, which mandate that the AO must pass the final assessment order in conformity with the directions of the DRP.Binding precedents from the jurisdictional High Court establish that failure to incorporate DRP directions in the final assessment order requires remand rather than outright invalidation of the assessment, thereby ensuring procedural compliance and adherence to the statutory scheme under Chapter XIV-B of the Act.The Tribunal relied on prior decisions of the jurisdictional High Court and coordinate benches of the Tribunal which held that non-compliance with DRP directions is a procedural irregularity warranting remand for correction rather than nullification of assessment proceedings.The Tribunal noted that the DRP's directions were based on prior assessments and legal and factual matrices that remain unchanged, thus mandating their application mutatis mutandis.The Tribunal refrained from adjudicating other substantive grounds of appeal at this stage, deferring them to the AO upon remand, in line with judicial discipline and procedural propriety.