2025 (6) TMI 1544 - AT - Income Tax

Eligible assessee defined u/s 144C(15)(b) - validity of assessment proceedings as the draft assessment order passed u/s. 144C of the Act was not served on the assessee in accordance with the provisions of section 282 of the Act r.w.r. 127 - contention of the assessee is that the email id on which draft assessment order is communicated is not that of the assessee - HELD THAT - It is an undisputed fact that after conclusion of draft assessment order the assessee filed objection before the DRP within the time prescribed under the provisions of the Act. The assessee participated in draft assessment proceedings and thereafter in DRP proceedings. No prejudice was caused to the assessee in availing the remedy against the draft assessment order. The Hon ble Supreme Court of India in the case of CIT vs. Laxman Das Khandelwal 2019 (8) TMI 660 - SUPREME COURT while dealing with an issue relating to service of notice u/s. 143(2) of the Act and the provisions of section 292BB of the Act which comes to rescue of the Department where the assessee disputes service of notice held that if the assessee has participated in the proceedings it shall be deemed that any notice which is required to be served upon was duly served and the assessee would be precluded from taking any objections that the notice was (a) not served upon him; or (b) not served upon him in time; or (c) served upon him in an improper manner. Once the draft assessment order comes to the knowledge of the assessee and the assessee has taken further steps to seek remedy against the said order within the period of limitation any infirmity in service of notice or order would not impede the validity of proceedings arising from improper service of notice/order in any manner if the assessee has participated in further proceedings. We find no merit in ground no. 2 of appeal hence the same is dismissed. Disallowance of CESS paid u/s. 40(a)(ii) - AO disallowed assessee claim of payment of Cess by merely observing that the expenses claimed in nature of Cess are not allowable as per section 40A(ii) of the Act without identifying the exact nature of such Cess - contention of the assessee is that CESS claimed in P L account under the head Other Expenses is in respect of the condition set out in PSC entered into between Govt. of India and Geopetrol Inc. (the assessee) and other parties on 16.06.1955 - HELD THAT - When the assessee filed objections before the DRP the DRP misread the expression Cess and wrongly decided the issue considering it to be an Education Cess . Therefore findings of the AO and the DRP on this issue are cryptic and contrary to the facts on record. A perusal of the P L account placed on record reveal that the assessee has claimed Cess under the head Other Expenses . The details of other expenses are given in Note No. 19 forming part of the Financial Statement for the year ended 31st March 2018. A perusal of Note No.19 further shows that similar expenditure was incurred in the Financial Year ended on 31st March 2017. Counsel made a statement that in the past assessee s claim of Cess was allowed by the Department. We deem it appropriate to restore this issue back to the AO for the limited purpose to examine whether the payment of Cess was allowed to the assessee in the past. In case the same was allowed to the assessee in preceding assessment years the rule of consistency demands that the same should be allowed to the assessee in the impugned assessment year as well. Addition treating Other Business and Community Development expenditure as a Corporate Social Responsibility (CSR) expenses - contention of the assessee is that since the assessee is engaged in the business of extraction of crude oil it disturbs the land and marine ecosystem - HELD THAT - We find that similar expenditure was incurred by the assessee in the preceding assessment year as well. The PSC was executed way back in the year 1995 ostensibly with no change in the terms and conditions of the contract the assessee must have been claiming such expenditure in the past. No material is available on record which would throw any light to show as to how these expenditure were dealt in the past. Counsel has contended that in the past expenditure was allowed by the Revenue. If such expenditures were allowed to the assessee in the preceding assessment years we see no reason to disturb consistent stand taken by Revenue from the preceding assessment years. Hence we deem it appropriate to restore the issue to AO for limited purpose to examine the treatment given to the expenditure in the preceding assessment year and decide the issue accordingly. The ground no. 5 of appeal is thus allowed for statistical purpose. Seismic Geological and Reservoir Studies - treating it as capital expenditure as against Revenue expenditure - HELD THAT - No effort was made by the AO or the DRP to examine the issue and understand the nature of expenditure. The ld. Counsel for the assessee has explained that the expenditure was in respect of Arbitral Award dated 30.07.2012 in favour of Geophysical Institute of Israel. Aggrieved by the Arbitral Award the operator has challenged the Award by filing an objection before the Hon ble High Court and the matter is still sub judice. The ld. Counsel has further pointed that as per the accounting policy of the company Production and Exploration cost are to be transferred to the profit and loss account in the year in which Seismic Geological and Reservoir Studies expenses are incurred for production of crude oil. These are routine expenses and were allowable u/s. 42 of the Act. The ld. Counsel submitted that similar expenditure was allowed in the past. We deem it appropriate to restore the issue back to AO to examine if similar expenditure was allowed to the assessee in preceding assessment year we see no reason to take a different view in the impugned assessment year. Hence the ground no. 6 of appeal is allowed for statistical purpose.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this appeal against the assessment order under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ("the Act") for the assessment year 2018-19 are as follows:

1. Whether the assessing officer erred in completing the assessment at a significantly higher income than the returned income declared by the assessee.

2. Whether the assessment order is liable to be quashed due to non-service of the draft assessment order on the correct email address as mandated by section 282 of the Act and Rule 127 of the Income Tax Rules, 1962.

3. Whether the assessing officer erred by making additions without providing sufficient opportunity of being heard (ground not pressed by the assessee).

4. Whether the Dispute Resolution Panel (DRP) erred in affirming the disallowance of cess paid by the assessee under section 40(a)(ii) of the Act.

5. Whether the assessing officer erred in treating certain business and community development expenditures as Corporate Social Responsibility (CSR) expenses and disallowing them.

6. Whether the assessing officer erred in treating expenditure on Seismic, Geological, and Reservoir Studies as capital expenditure instead of revenue expenditure.

7. Whether the interest charged under sections 234A, 234B, 234C, and 234D of the Act was justified.

Additional Ground: Whether the assessment proceedings under section 144C were valid, given that the assessee was not an 'eligible assessee' as defined under section 144C(15)(b) of the Act.

Issue-wise Detailed Analysis

Validity of Assessment Proceedings under Section 144C (Additional Ground)

Legal Framework and Precedents: Section 144C(15)(b) defines 'eligible assessee' as either (i) any person in whose case variation arises due to an order of the Transfer Pricing Officer (TPO) under section 92CA(3), or (ii) any foreign company. The interpretation of this provision was considered by the Hon'ble Delhi High Court in Honda Car India Ltd. vs. DCIT, which clarified that these are two distinct categories and not cumulative conditions.

Court's Interpretation and Reasoning: The Tribunal examined the definition and held that the two sub-clauses are alternative categories, not conjunctive conditions. Hence, an assessee qualifies as an 'eligible assessee' if it falls under either category.

Application to Facts: The assessee is a foreign company; therefore, it falls under category (ii) irrespective of the absence of a TPO order. The Tribunal rejected the assessee's contention that both conditions must be satisfied simultaneously.

Conclusion: The additional ground challenging the jurisdiction of the assessing officer under section 144C was dismissed as lacking merit.

Service of Draft Assessment Order (Ground No. 2)

Legal Framework: Section 282 of the Act and Rule 127 of the Income Tax Rules, 1962 prescribe the modes and addresses for service of notices and orders, including electronic communication via email. The Supreme Court's ruling in CIT vs. Laxman Das Khandelwal, emphasizing section 292BB, holds that participation in proceedings amounts to deemed service of notice.

Court's Interpretation and Reasoning: The assessee contended that the draft assessment order was sent to an incorrect and non-operational email ID, not the email ID furnished in the return of income, thus invalidating service. The Tribunal noted that the assessee had received the notice under section 143(2) at the correct email ID and had actively participated in the assessment and DRP proceedings, filing objections within the prescribed time.

The Tribunal relied on the principle that once the assessee participates in proceedings after receiving notice, any defect in service of subsequent notices or orders does not invalidate the proceedings.

Application to Facts: Since the assessee had knowledge of the draft order and participated in the process, no prejudice was caused by the alleged defective service.

Conclusion: The ground was dismissed; the assessment proceedings were held valid despite the email service issue.

Disallowance of Cess Paid under Section 40(a)(ii) (Ground No. 4)

Legal Framework: Section 40(a)(ii) disallows expenditure in respect of tax or cess unless tax is deducted at source. The nature of cess and whether it qualifies as a tax or a business expense is central.

Court's Interpretation and Reasoning: The assessee paid cess under a Production Sharing Contract (PSC) with the Government of India, which stipulated payment of royalty and cess at fixed rates per ton of crude oil. The AO disallowed the cess as tax, and the DRP upheld this, apparently misconstruing the cess as education cess.

The Tribunal noted the PSC's Article 16.2, which clearly defines the cess as a contractual payment akin to a business expense rather than a statutory tax. The Tribunal observed that the AO and DRP's findings were cryptic and did not adequately consider the nature of the cess.

Application to Facts: The Tribunal restored the issue to the AO to verify whether the cess had been allowed as business expenditure in preceding years, invoking the principle of consistency.

Conclusion: Ground allowed for statistical purposes; the issue remanded for reconsideration.

Treatment of Other Business & Community Development Expenditures as CSR Expenses (Ground No. 5)

Legal Framework: Section 37(1) allows deduction of business expenditure except those specifically disallowed. Explanation 2 excludes CSR expenditure under section 135 of the Companies Act, 2013 from allowable business expenses.

Court's Interpretation and Reasoning: The assessee incurred expenditures under Article 13 of the PSC to remedy environmental damage caused by extraction activities. The AO and DRP disallowed these as CSR expenses, not eligible for deduction.

The Tribunal noted that the PSC imposes a contractual obligation to undertake such expenditures, which are distinct from CSR obligations under the Companies Act. The assessee is a loss-making company, not liable to CSR under the Act, and has historically claimed these expenses as allowable.

Application to Facts: The Tribunal found no material to show how these expenses were treated previously and remanded the issue to the AO to examine past treatment, applying the principle of consistency.

Conclusion: Ground allowed for statistical purposes; issue remanded for fresh consideration.

Treatment of Seismic, Geological, and Reservoir Studies Expenditure (Ground No. 6)

Legal Framework: Capital expenditure is generally not deductible as revenue expense under the Act. Whether expenditure is capital or revenue depends on its nature and purpose. Accounting policies and prior treatment are relevant.

Court's Interpretation and Reasoning: The AO and DRP treated the expenditure as capital, disallowing it. The assessee contended that these are routine exploration expenses incurred for production, allowable under section 42 of the Act, and similar expenses were allowed in preceding years.

The Tribunal observed that the DRP directed the AO to reconsider the submissions, but the AO merely reiterated the draft order findings without a speaking order. The Tribunal also noted the expenditure related to an arbitral award, with the matter sub judice before the High Court.

Application to Facts: The Tribunal restored the issue to the AO to examine prior treatment and pass a reasoned order.

Conclusion: Ground allowed for statistical purposes; issue remanded for reconsideration.

Interest under Sections 234A, 234B, 234C, and 234D (Ground No. 7)

Legal Framework: Levy of interest under these sections is mandatory and consequential upon default or delay in payment of tax.

Court's Interpretation and Reasoning: The Tribunal held that since these interest provisions are mandatory, no separate adjudication on merits is warranted.

Conclusion: Ground dismissed.

General Addition of Income (Ground No. 1)

The ground was general and did not require separate adjudication.

Opportunity of Hearing (Ground No. 3)

The assessee did not press this ground and it was dismissed accordingly.

Significant Holdings

"A bare perusal of above definition would show that these are not two conditions which are to be satisfied to fall within the definition of eligible assessee. In fact these are two categories of persons, who are held to be eligible assessee's. The word 'means' followed by sub clauses (i) and (ii) clearly indicates that these are the two categories and not the conditions to be satisfied to fall within the meaning of eligible assessee."

"Once the draft assessment order comes to the knowledge of the assessee and the assessee has taken further steps to seek remedy against the said order within the period of limitation, any infirmity in service of notice or order would not impede the validity of proceedings arising from improper service of notice/order in any manner if the assessee has participated in further proceedings."

"The rule of consistency demands that the same should be allowed to the assessee in the impugned assessment year, as well."

"Levy of interest under aforesaid sections is mandatory and consequential."

The Tribunal's final determinations were:

• The additional ground challenging jurisdiction under section 144C was dismissed.
• The ground challenging service of draft assessment order was dismissed.
• The general ground of addition and ground on opportunity of hearing were dismissed/not pressed.
• The disallowance of cess paid, CSR-related expenditure, and seismic/geological studies expenditure were remanded to the AO for reconsideration consistent with past treatment.
• The interest charged under sections 234A, 234B, 234C, and 234D was upheld.
• The appeal was partly allowed for statistical purposes.