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2015 (9) TMI 846 - ITAT DELHI

2015 (9) TMI 846 - ITAT DELHI - TMI - Validity of assessment order - Time limit for passing of the draft order by AO - TPA - challenge to the final assessment order passed by the AO on the ground that the draft order passed by the AO and also the order passed by the Transfer Pricing Officer (TPO) were barred by limitation - DR made contentions that the time limit is to be reckoned from the date on which the information is received by the Principal Commissioner or Commissioner and not the Directo .....

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rder as the time limit for the passing of draft order henceforth, on shifting the time limit for passing of the final assessment order to section 144C(4) or (13), then it would have made necessary changes in section 153 by substituting the term 'draft order' with the term 'order of assessment'. We are unable to read the term 'draft order' interchangeably with the term 'assessment order' in the context of section 153 or practically for any other purpose.

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rmining the time available with the TPO for passing order u/s 92CA(3). Turning to the facts of the instant case, we find that the AO passed the final assessment order on 29.1.2015, which is well within a period of one month from the end of the month in which direction was received from the DRP on 24.12.2014. As such, we hold that the final assessment order passed by the AO is within the time prescribed u/s 144C(13). Further since the draft order has also been passed within a reasonable time, the .....

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ove that the time limit as per section 153(1) read with the third proviso and clause (viii) of the Explanation to the section, comes at 7th June, 2014. Period of 60 days prior to such time limit coming as per section 153, available with the TPO for passing his order, comes to an end on 8th April, 2014. As against this, the order was actually passed by the TPO on 31st May, 2014. Thus, the order passed by the TPO is patently time barred.

Consequences of valid draft order and TPO's time .....

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der was directly passed without routing through draft order or DRP. The Hon'ble Court held it to be a non-curable defect and resultantly the assessment was quashed. It was held that when there is an omission on the part of the AO to follow the mandatory procedure prescribed under the Act, such an omission cannot be termed as a mere procedural irregularity and it cannot be cured. Extantly, we are confronted with a situation in which the draft order has been passed in time but the lapse has come i .....

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t of transfer pricing adjustment arising from the determination of the ALP of the international transactions by the TPO as emanating from his time barred order, would be unsustainable. We hold accordingly and direct the deletion of addition on account of transfer pricing adjustment made in the final assessment order. - Decided in favour of assessee. - ITA No.1132/Del/2015 - Dated:- 15-9-2015 - SHRI R.S. SYAL AND SHRI A.T. VARKEY, JJ. For The Assessee Shri Deepak Chopra & Shri Rohan Khare, Ad .....

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assed by the AO on the ground that the draft order passed by the AO and also the order passed by the Transfer Pricing Officer (TPO) were barred by limitation. The ld. AR argued that since these two orders, culminating into the passing of the final assessment order, were time barred, the resultant assessment order also became null and void. 3. Succinctly, the facts of the case are that the assessee, Honda Trading Corporation, Japan, was established in Japan on 21.3.1972 to act as Trading Corporat .....

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international transactions were reported, being payment of Technical supervision fees, Sale of raw material and Sale of fixed assets to Honda Siel Cars India Ltd.; payment of Technical supervision fees to Rajasthan Prime Steel Processing Centre Pvt. Ltd.; and payment of Technical supervision fees to Honda Motorcycle & Scooter India Pvt. Ltd. All these five international transactions are with three Indian group companies. The AO made reference dated 22.3.2013 to the Transfer Pricing Officer ( .....

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y forwarded such official request to the Japanese Competent authority vide its letter dated 24.1.2014. The desired information was received by the Director of Income-tax on 2.4.2014 vide letter of the Under Secretary dated 24.3.2014. Taking into consideration all the relevant material including the information so received from the Japanese Competent authority, the TPO passed order u/s 92CA (3) on 31.5.2014 proposing transfer pricing adjustment to the tune of ₹ 2,15,36,967. Draft order was .....

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re, which also includes addition of ₹ 2.15 crore on account of transfer pricing adjustment. 4. The assessee has set up a case that the final assessment order be declared null and void on the ground that the draft order of the AO as well as the order passed by the TPO u/s 92CA(3) of the Act, were passed beyond the time limit prescribed under the Act. We will espouse both the contentions one by one for determination. A. Time limit for passing of the draft order by AO 5.1 The ld. AR contended .....

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the expiry of- (a) two years from the end of the assessment year in which the income was first assessable or (b) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, is filed under sub-section (4) or sub-section (5) of section 139, whichever is later : ......" 5.3 It is nobody's case that clause (b) of the above provision is applicable. Going by clause ( .....

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ing on the 1st day of April, 2009 or any subsequent assessment year and during the course of the proceeding for the assessment of total income, a reference under sub-section (1) of section 92CA (i) is made before the 1st day of July, 2012, but an order under sub-section (3) of that section has not been made before such date; or (ii) is made on or after the 1st day of July, 2012, the provisions of clause (a) shall, notwithstanding anything contained in the first proviso, have effect as if for the .....

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hree years from the end of the assessment year in which the income was first assessable. Going by the 3rd proviso read with clause (a) of section 153(1), no order of assessment can be made after the expiry of three years from the end of the assessment year. It means that for the A.Y. 2010-11, an order of assessment can be made up to 31.3.2014. 5.6. Further, Explanation 1 to section 153 provides that in computing the period of limitation for the purposes of this section, the time taken in the cir .....

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requested is last received by the Principal Commissioner or Commissioner or a period of one year, whichever is less, or ……… shall be excluded :' 5.7 This clause mandating the exclusion of time in computing the period of limitation for the purposes of section 153, provides that the period commencing from the date on which a reference or first of the references for exchange of information is made by the Indian competent authority and ending with the date on which the infor .....

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ase under consideration. 5.9 We do not find any substance in this argument. Income-tax authorities have been defined under section 116 of the Act. This section provides that there shall be certain classes of income-tax authorities for the purposes of this Act. Description of the class of income-tax authority given in clause (c) of this section is 'Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals)'. This indicates that Commissioner of Income-t .....

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e by the ld. DR was that the 'period of one year' as stipulated in clause (viii) of the Explanation 1 to section 153, should be considered for the purposes of exclusion and not the period between the date on which first reference was made and the date on which the information was received by the DIT. The reason advanced in support of this argument was that since the Japanese Competent authority sent incomplete information, hence the date of receipt of information by the DIT should be ign .....

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as desired, then did the TPO seek any further information or clarification in this regard from the Japanese competent authority through proper channel, the ld. DR contended that no further information was called for from the Japanese Competent authority but the TPO took upon himself the hazardous task of completing the assessment in such circumstances with the necessary handicap. 5.11 We are unable to countenance the contention of the ld. DR urging the consideration of an extended period of one .....

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the desired information is incomplete in the first go and again a request is made for sending the complete information, which is received later on, then the terminating point will be the date on which the information complete in all respects is last received. Where the TPO gets satisfied with the information supplied by the Competent authority of the other country or if he is unsatisfied with the information but chooses not to further persue the matter with such Competent authority, then the per .....

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only where the process of receiving of last information is not over within a period of one year, that the period of exclusion gets restricted to one year. If the information is received within one year, then it is the actual time consumed in the process which is sought to be considered for the purpose. The argument of the ld. DR for considering a period of one year would have carried weight, if the TPO, not satisfied with the information received from the Japanese Competent authority, had once a .....

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t authority sent the desired information, albeit incomplete as per the version of the Revenue, which was received by the DIT in one go on 2.4.2014. Neither any further information was required nor deficiency in the receipt of the desired information, as argued before us, was further pressed. In such circumstances, there is no warrant for considering the extended period of one year. When we consider the period from 24.1.2014 (being the date on which the Indian Competent authority sought informati .....

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gh the Indian competent authority, the period of limitation for passing of the order is three years from the end of the assessment year as increased by the period commencing from the date on which reference is made by the Indian competent authority for exchange of information ending with the date on which the information requested is last received by the Principal Commissioner or the Commissioner, save and except where such period is more than one year. As the A.Y. under consideration is 2010-11 .....

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he TPO 22.3.2013 Date of TPO seeking information under the Exchange of Information 8.1.2014 Date of Indian competent authority, in turn, seeking information 24.1.2014 Date of receipt of information by the DIT 2.4.2014 Date of passing of the order by the TPO 31.5.2014 Date of passing the draft order 11.7.2014 Date of the direction issued by the DRP 24.12.2014 Date of passing the final assessment order 29.1.2015 5.15 The ld. AR argued that since the draft order in this case was passed by the AO on .....

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er referred to in section 153, that is, whether it is draft order as contended by the ld. AR or the final assessment order as put forth by the ld. DR. We have set out supra the language of section 153, whose title is "Time limit for completion of assessments and reassessments'. Then sub-section (1) of section 153 starts with the words 'No order of assessment shall be made under section 143 or section 144 at any time after the expiry of' two/three years from the end of the assess .....

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ng to the heading and language of section 153, we find that both are in complete harmony with each other. What has been mandated at both the places is the time limit for completion of assessment by means of passing an assessment order. An assessment can be said to be completed when an assessment order is passed determining the total income and also the amount of tax payable or refundable, as the case may be. The Hon'ble Supreme Court in Kalyan Kumar Ray v. CIT [1991] 191 ITR 634 (SC) has hel .....

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said that the stage of completion of assessment has arrived. 5.17 Under the transfer pricing provisions, as they exist for the assessment year under consideration, the AO initially makes a reference to the TPO for the determination of the ALP of the international transactions undertaken by the assessee. Then the TPO passes order u/s 92CA(3) determining the arm's length price of the international transactions. Such order goes to the AO, who passes a draft order in conformity with the ALP of t .....

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ncome or loss returned which is prejudicial to the interest of such assessee'. The above provision not only reveals that a 'draft order' is nothing but 'a draft of the proposed order of assessment', but also that it is forwarded 'in the first instance' if the AO 'proposes to make …. any variation in the income or loss returned which is prejudicial to the interest of such assessee' and further it does not finally determines the tax liability along with t .....

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ations in the income or loss proposed in such draft order with the AO or file objections, if any, to such variations with the DRP and also the AO. Sub-section (3) of section 144C provides that the AO shall complete the assessment on the basis of the draft order, if either the assessee intimates to him the acceptance of variations or no objection is received within the stipulated time. The time limit for passing of the assessment order in such circumstances has been set out in sub-section (4) of .....

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which either the acceptance is received to the proposed variations in the income as per the draft order or the period of filing objections under sub-section (2) expires. When we read sub-section (3) in conjunction with sub-section (4), the position which emerges is that the AO is obliged to pass assessment order within the stipulated time on happening of either of the events, namely, where the assessee accepts variation in the income and conveys the same to the AO or where no objection is filed .....

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ation, there can again be two possibilities, that is either, the assesseee may object to the same before the DRP or choose to follow the route of CIT(Appeals) for the redressal of his grievances. Non-conveying of acceptance to the draft order by the assessee within the stipulated period may be either due to accepting the draft order or not accepting the draft order but choosing the route of CIT(A), instead of filing objections before the DRP. In both such situations, that is, where either the as .....

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the AO is required to pass the final assessment order as per the time allowed under sub-section (13) of section 144C, which provides as under - '(13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the mo .....

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) within one month from the end of the month in which such direction is received in terms of sub-section (13). 5.21 It follows from the above discussion that where a draft order has been passed, then in all the possible options available with the assessee, that is, either accepting draft order or challenging it before the DRP or proposing to challenge the final order before the CIT(A), the final assessment order is invariably required to be passed within the time limit as prescribed under either .....

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ken by the assessee; a draft order passed by the AO can also not be considered as completion of assessment as it is simply 'a draft of the proposed order of assessment'; and the direction issued by the DRP also cannot be equated with the completion of assessment, which simply decides on the disputes raised by the assessee against the draft order. In fact, it is only after these proceedings and with the help of such orders that a final assessment order is passed by the AO, which tantamoun .....

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for the passing of the draft order because there cannot be two simultaneous time limits for the completion of assessment. It was stated that the presence of time limit for completion of assessment u/s 144C would, in the absence of linking the limit given u/s 153 with the draft order, make the time limit u/s 153 as a redundant piece of legislation. We find that the poser of the ld. AR. is definitely important that no provision in the Act can be considered as irrelevant or unnecessary. Every provi .....

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5.23 At this juncture, we note that Chapter -X containing the provisions relating to the computation of income from international transactions having regard to the ALP was inserted by the Finance Act, 2001 w.e.f. 1.4.2002. On such insertion, it became incumbent upon the AO to determine the ALP of the international transactions. For the A.Y. 2002-03, the time limit for completion of assessment, after determining the ALP, as was earlier applicable also, continued to be governed by section 153(1)( .....

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sessment order having regard to the ALP, within the overall time limit permitted by section 153, that is, two years from the end of the relevant assessment year. This position continued till the Finance Act, 2007, when sub-section (3A) to section 92CA was inserted w.e.f. 1.6.2007 providing a distinct time limit for the passing of the order by the TPO, being a period of sixty days prior to the date of completion of assessment as per section 153. Simultaneously, the time limit for passing of order .....

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t order. The provisions of section 144C about 'Reference to the dispute resolution panel', were inserted by the Finance (No.2) Act, 2009 w.r.e.f. 1.4.2009. This led to the ushering in the era of passing the draft order. It means that up to the A.Y. 2008-09, when the mechanism of DRP and the passing of draft order was not in place, the final assessment order pursuant to the order of the TPO was required to be passed within the time limit given in section 153. However, when the institution .....

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o note one salient feature in the time limits enshrined under sub-sections (4) and (13) of section 144C. Such common thread is that the time limits given in both the subsections are 'notwithstanding anything to the contrary contained in section 153 or …'. This transpires that the time limits for completion of assessment as prescribed in sub-sections (4) and (13) of section 144C have been superimposed on the time limit as given under third proviso to section 153(1) for the passing .....

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he time limit for completion of assessment u/s 144C, now it became necessary for the legislature to remove the time limit for completion of assessment as contained in section 153. This could have been possibly done by omitting section 153, which was not possible as this section ab initio contains general time limit for completion of all assessments and reassessments and it is/was never confined only to the orders passed pursuant to the determination of the ALP by the TPO. Then the course open wa .....

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which provides time limit for the passing of the order by the TPO. As per this provision inserted by the Finance Act, 2007 w.e.f. 1.6.2007, the TPO may pass order u/s 92CA(3) 'at any time before sixty days prior to the date on which the period of limitation referred to in section 153,….. for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires'. Since the time limit for passing of the order by the TPO is not direct but i .....

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read as meaningless except for linking it with draft order. In our considered opinion, it is overt that the time limit u/s 153 is not meaningless as the same has been retained for keeping alive the time limit given to the TPO for passing his order. 5.24 We have noticed above that the term 'draft order' has been statutorily coined u/s 144C(1). It means that the term 'draft order' has been recognized as and is actually different in ambit from the term 'assessment order'. Wi .....

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ade necessary changes in section 153 by substituting the term 'draft order' with the term 'order of assessment'. In fact, the term 'draft order' is totally absent in section 153, which indicates that it has been treated as alien to section 153. If we accept the contention of the ld. AR that after the introduction of section 144C, the time limit provided u/s 153 applies only to the draft order, it would amount to re-writing section 153 which falls in the exclusive domain o .....

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the legislature has given unlimited time frame to the AO for passing a draft order. We find that, in fact, no time limit has been prescribed for the passing of the draft order. It is also equally relevant to note that prior to the introduction of sub-section (3A) to section 92CA by the Finance Act, 2007, there was no time limit for the passing of the order by the TPO, though sub-section (3) requiring the passing of order by the TPO, was inserted by the Finance Act, 2002. It means that during the .....

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passed within a reasonable time. Section 201 requires the passing of order under subsection (1) treating a person responsible as an assessee in default in case there is a failure to deduct tax at source or after deduction, there is a failure to pay tax at source. Prior to insertion of sub-section (3) of section 201 by the Finance (No.2) Act, 2009 w.e.f. 1.4.2010, no time limit was prescribed for the passing of such an order. The Honourable High Courts and the benches of the tribunal across the .....

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e absence of the express time limit should be passed within a period of four years. Legislature stepped in by way of insertion of sub-section (3) to section 201 w.e.f. A.Y. 2010-11 providing the time limit for passing of the order deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time within (i) two years from the end of the financial year in which the statement is filed in a case where the statement refer .....

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so required to be passed within a reasonable time. Coming back to the facts of the instant case, we find that the information from the Japanese Competent authority was received by the DIT on 24.1.2014. By no standard, the passing of the draft order on 11.7.2014, that is, within a period of less than six months from the date of such receipt of information, can be construed as having been passed in an unreasonable time. As such, we jettison the view canvassed by the ld. AR that the time limit give .....

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ime available with the TPO for passing order u/s 92CA(3). 5.28 Turning to the facts of the instant case, we find that the AO passed the final assessment order on 29.1.2015, which is well within a period of one month from the end of the month in which direction was received from the DRP on 24.12.2014. As such, we hold that the final assessment order passed by the AO is within the time prescribed u/s 144C(13). Further since the draft order has also been passed within a reasonable time, the same is .....

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n, the ld. DR supported the Revenue's stand. 6.2 We have heard the rival submissions and perused the relevant material on record. It has been noticed above that the provisions of section 92CA requiring the passing of the order by the TPO determining the ALP of the international transactions, came into being by the Finance Act, 2002. As per sub-section (3) of section 92C, the TPO is required to pass the order determining the ALP of the international transactions. No time limit was initially g .....

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en made by the Transfer Pricing Officer before the said date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an order under sub-section (3) may be made at any time before sixty days prior to the date on which the period of limitation referred to in section 153, or as the case may be, in section 153B for making the order of assessment or reassessment or recomputation or fresh assessment, as the case may be, expires.'. 6.3 It transpires from a reading of th .....

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e limitation set out in section 153 indicates that the adherence to this time limit is not mandatory. He contended that even if the order is passed after the period of 60 days from the period of limitation as given u/s 153, still it would be treated as having been passed within time. This argument was countered by the ld. AR. 6.5 There is no doubt that the legislature has used the word 'may' in sub-section (3A) of section 92CA. There is further no doubt that the ambit of the word 'ma .....

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Director General or Chief Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him'. Dispute arose in Sahara .....

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x Act, 1957 deals with the assessment of wealth. Section 16A having marginal note of 'Reference to Valuation Officer' provides through sub-section (1) that 'For the purpose of making an assessment (including an assessment in respect of any assessment year commencing before the date of coming into force of this section) under this Act, where under the provisions of section 7 read with the rules made under this Act or, as the case may be, the rules in Schedule III, the market value of .....

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s returned by more than such percentage of the value of the asset as returned or by more than such amount as may be prescribed in this behalf; or (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do'. In Raj Paul Oswal v. CWT [1988] 171 ITR 489 (P&H), there arose a quarrel as to the meaning of the word 'may' used in section 16A in the context of making reference to the Valuation Officer. Settling the controversy, the Hon .....

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he legislature by prescribing the contingencies, in which, by implication, it would not be necessary to make a reference, also again by necessary implication be taken to have intended that the reference to Valuation Officer was must if the given contingencies did not exist. In this regard, the Hon'ble High Court observed that 'There is no doubt about the fact that the use of expression "may" and "shall" to some extent serves an indicia to the intention of the legislat .....

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xpressed by the Hon'ble Delhi High Court in Sharbati Devi Jhalani v. CWT & Ors. [1986]159 ITR 549 (Del). It is vivid from the above discussion that the use of word 'may' or 'shall' in a provision is not conclusive of its mandatory or directory nature. One needs to go through the text of the provision and the context in which such a word has been used. 6.8 Reverting to section 92CA, we find that the Finance Act, 2007 inserted sub-section (3A) carrying the time limit of six .....

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hat the use of the word 'may' in sub-section (3A) of section 92CA is to be construed as 'shall', thereby making this time limit as mandatory and not directory. As such, it is held that the TPO is bound by the given time limit for passing of his order. 6.9 Having held that the word 'may' in section 92CA(3A) should be read as 'shall', we once again note that prior to the insertion of section 144C by the Finance Act, 2009, the time limit for completion of assessment .....

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ft order also became mandatory, for which we have held above that the same is required to be passed within a reasonable time and it has got no relation with the time limit given in section 153. When the position is such that the draft order has to be passed independent of the time limit given in section 153, there appears some logic in not continuing with the time limit for the passing of the order by the TPO tagged with the time limit given in section 153. It has led to incoherence in the provi .....

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ime limit coming as per section 153, available with the TPO for passing his order, comes to an end on 8th April, 2014. As against this, the order was actually passed by the TPO on 31st May, 2014. Thus, the order passed by the TPO is patently time barred. C. Consequences of valid draft order and TPO's time barred order 7. The ld. AR argued that since the draft order as well as the order of the TPO were time barred, the final assessment order passed by the AO was liable to be set aside. We hav .....

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