Limitation For Revisionary Jurisdiction Runs From The Date Of Assessment Order And Not Reassessment, If Subject Matter Was Not Covered In Reassessment: ITAT Kolkata

The Assessee Alkem Laboratories Limited filed its income tax return, which was selected for scrutiny. Assessment was framed under Section 143(3) of the Income Tax Act. Thereafter, the case of the Assessee was re-opened and re-assessment order was passed by the AO. The Principal Commissioner of Income Tax (PCIT) observed that the AO passed the re-assessment order without making inquiry and verification of the bogus commission paid by the Assessee to M/s. Reynolds Petro Chems Limited. The PCIT issued show-cause notice under Section 263 of the Act as to why the re-assessment framed by the AO should not be revised as being erroneous in so far as it was prejudicial to the interest of the revenue. The PCIT noted that on the basis of information available on record the commission paid by the Assessee to M/s. Reynolds Petro Chems was not genuine and was a sham transaction. The PCIT cancelled and set aside the re-assessment framed under the Act and directed the AO to frame the assessment denovo by making fresh inquiries. The Assessee filed an appeal before the ITAT against the order of the PCIT.

The Counsel for the Assessee Alkem Laboratories submitted before the ITAT that revisionary jurisdiction exercised by the PCIT was beyond the period of limitation prescribed in Section 263(2) of the Act. Also, the Counsel submitted that the reassessment proceedings were initiated by the AO for the limited issue of examining the allowance of deduction under Section 35(2AB) of the Act and the commission paid to M/s. Reynolds Petro Chems was neither the subject matter of re-assessment nor it came to the notice of the AO during the re-assessment proceedings. Therefore, the Counsel contended that revisionary jurisdiction could not be exercised in respect of the reassessment order framed by the AO over an issue which was not the subject matter of reassessment. The Counsel averred that the issue of payment of bogus commission could be examined by the AO only during the course of original assessment proceeding and, therefore the period of limitation of two years had to be reckoned from the end of financial year in which the assessment order under Section 143(3) was passed. Therefore, he contended that the PCIT was barred by limitation, as the show-cause notice under Section 263 of the Act was issued after the limitation period.

The ITAT noted that assessment was reopened by the AO on the ground that there was a reason to believe that income had escaped assessment due to incorrect allowance of deduction under Section 35(2AB) and not in respect of the commission paid to M/s. Reynolds Petro Chems.

The ITAT ruled that the scope of powers of AO in original assessment proceedings and reassessment proceedings are not the same, since the AO has vast powers in the original assessment proceedings whereas in the reassessment proceedings the powers are limited.

The ITAT observed that in the original assessment proceedings the AO had not examined the issue of payment of commission and in the reopened assessment proceedings this issue had not come to the notice of the AO. The ITAT therefore ruled that it was the original assessment order passed under Section 143(3) of the Act which could be considered as erroneous and prejudicial to the interest of the Revenue if the commission paid to M/s. Reynolds Petro Chems was found to be fictitious and bogus, and not the reassessment order.

Therefore, the ITAT ruled that the limitation period for exercising revisionary jurisdiction under Section 263 of the Act ran from the end of the financial year in which the original assessment under Section 143(3) of the Act was framed, which had now expired.

The ITAT held that since the PCIT had set aside and revised the reassessment order, consequently the revisionary jurisdiction of the PCIT could not be sustained.

The ITAT noted that the Supreme Court in the case of CIT versus M/S Alagendran Finance Limited (2007) had ruled that the period of limitation ran from the date of assessment order and not from the date of reassessment order, where the issue in respect of which the order was revised under Section 263 of the Act was not the subject matter of reassessment proceedings.

The ITAT ruled that since the issue of payment of bogus commission was not the subject matter of reassessment proceedings, the period of limitation had to run from the date of assessment order and not the reassessment order. Therefore, the revisionary jurisdiction exercised by the PCIT was barred by limitation.

The ITAT therefore allowed the appeal of the Assessee Alkem Laboratories.

Case Title: Alkem Laboratories Limited versus Principal Commissioner of Income Tax

Dated: 09.03.2022 (ITAT Kolkata)

Representative for the Appellant: Shri A.K. Rastogi , Senior Advocate

Representative for the Respondent: Shri Sanjay Mukherjee, CIT(D.R.)

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