AO Is Required To Apply His Mind To Facts Of Case And Then Pass Reasoned Assessment: Ahmedabad ITAT Calls For Adjudication Afresh

The Bench of the ITAT comprising of T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) observed that, “The AO was required to apply his mind to the facts of the case and then pass an assessment order on the issue. It is not that the CIT in his order passed u/s 263 of the Act had categorically and specifically held that the arbitral award of Rs.990 lakhs was taxable and be taxed by the AO in the impugned year. What he had held and directed in paragraph No.5 of his order was that the AO was to pass a fresh assessment order following the decision of the Apex Court in the case of Gajapathy Naidu which, he noted, held that when the assessee had accrued the right to receive, it should be included or accounted for in that year. There is no factual finding by the CIT that the amount of arbitral award of Rs.990 lakhs accrued as right to receive to the assessee in the impugned year. The entire order of the CIT does not contain any such finding” (Para 22)

As per the brief facts of the case, the Assessee's return was selected for scrutiny, wherein AO accepted the returned income. The CIT on examining the case records noted error in the assessment order which was prejudicial to the interest of the revenue. He noted that the assessee had not accounted for the amount receivable by it from the Government of Rajasthan as per the Arbitral Tribunal Award in respect of loss of toll collection in connection with construction of Bharatpur bye pass road. Accordingly, a show-cause notice was issued to the assessee u/s 263 and the order passed by CIT directing the AO to pass a fresh assessment order taxing the award on accrual basis in accordance with the Mercantile System of Accounting. Thereafter, the order giving effect to the order of the CIT passed u/s 263 was passed by the AO the very next day, added the amount of arbitral award to the income of the assessee.

The CIT(A) dismissed the assessee's appeal holding it non-maintainable since the order passed by the AO was simply to give effect to the findings of the CIT and, as per the CIT(A), no appeal lay against such appeal effect order passed by the AO.

The Bench noted that the CIT in his order passed u/s 263 had found the amount of arbitral award granted to the assessee as taxable on the grant of award.

The Bench further noted that the assessee had pleaded before CIT that since the award had been contested by the Government of Rajasthan, therefore, until it attained finality the assessee had no right to receive the same. Therefore, it had not offered to tax and also believed the same to be taxable only on the award attaining finality.

The Bench observed that the CIT found that the assessee had not returned to tax the award given to it by the Arbitral Tribunal on account of loss of toll collection in connection with the construction of Bharatpur bye pass road.

The Bench further observed that in proceedings u/s 263 initiated by the CIT noted that the AO had not considered this aspect while accepting the assessee's returned income, the assessee was asked to furnish copy of the Tribunal Award.

The Bench also found that since the assessee had pleaded that the Government of Rajasthan had gone in appeal against the Tribunal Award, the assessee was also asked to furnish the copy of affidavit and application filed in appeal by the Rajasthan Govt. Since the assessee failed to furnish either of the aforementioned documents, the CIT held that the assessment order was erroneous.

The Bench observed that since the AO had failed to make necessary inquiries relating to the issue, he directed the AO to pass a fresh order in accordance with the decision of the Supreme Court in the case of CIT Vs. Gajapathy Naidu, 53 ITR 114 (SC) wherein, he noted that, it was held that in mercantile accounting system when the right to receive accrued to the assessee it ought to be included in his income for that year.

The Bench also noted that when the assessee filed appeal against the order of the AO, the CIT(A) held the appeal to be non-maintainable since the AO's order was simply to give effect to the findings of the CIT and against which no appeal lay.

Therefore, ITAT allowed the assessee's appeal for statistical purposes.

Counsel for Appellant/Taxpayer: S.N. Soparkar

Counsel for Respondent/Department: Saumya Pandey Jain,

Case Title: MSK Project (India) JV Ltd. verses ACIT

Case Number: ITA No. 498/Ahd/2019

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