The Income Tax Appellate Tribunal, Chennai (‘ITAT’) recently pronounced a decision[1] that strictly interpreted the CBDT’s Circular that all communication issued by the Income Tax Department relating to assessment, appeals, orders, statutory or otherwise issued on or after 1.10.2019 should carry a computer-generated Document Identification Number (DIN) duly quoted in the body of such communication. In this post, I will focus only on the DIN-related arguments and observations of ITAT, though there were a few ancillary issues that were discussed in this case.
Impugned Circular
The impugned CBDT Circular states that while almost all notices and orders of the Income Tax Department are being generated electronically to maintain an audit trail of communication. However, some orders were being issued manually. To prevent instances of manual communication and improve the audit trail, the Circular mandated no communication shall be issued unless a computer-generated DIN is issued and ‘duly quoted in the body of communication.’ The Circular allowed manual communication only in exceptional circumstances with prior approval of the Chief Commissioner/Director General of Income Tax. Paragraph 4 of the Circular was clear about the implication of not following the Circular’s mandate – any communication issued in violation of the mandate would be deemed to have never been issued and shall be treated as invalid.
Brief Facts
The ITAT in the impugned case decided a batch of 54 appeals and only briefly narrated the facts one case. I will do the same. The communication that was the center of controversy was an instruction issued by the Dispute Resolution Panel (‘DRP’), an alternate body of dispute resolution created under the IT Act, 1961. DRP issued instructions to the Assessing Officer (‘AO’) under Section 144C(5) to complete the assessment of the assessee. The said instruction did not cite/contain a DIN in its body. The assessees contended that the instruction was invalid in law for being in contravention of the CDBT’s Circular and thus the subsequent assessment by the AO was also invalid since it was completed beyond the prescribed limitation period. The reason was that under Section 144C(13) the standard time limit for completing assessments by AO are extended to allow the AO to complete the assessment as per the DRP’s instructions. However, the assessees argued that if the DRP’s instructions to AO are invalid – because they did not cite the DIN – then the subsequent assessment completed by AO on such instructions are invalid since they were barred by limitation.
The Income Tax Department adopted various arguments to persuade ITAT that the instructions issued by DRP were valid. The primary arguments were that the DIN of the relevant communication was generated on the same day or the next day and communicated to the relevant parties. The Income Tax Department also tried to defend the lack of DIN by arguing that instruction was an internal communication and thus it was not bound by the Circular’s mandate and further that DRP was not an income tax authority under IT Act, 1961 and only income tax authorities were obligated to follow the instructions contained in the CBDT Circular.
ITAT Decides in Favor of Assessee
The ITAT was not persuaded by any of the Income Tax Department’s arguments. ITAT cited the CBDT Circular and noted that it is undoubtedly clear that any communication issued on or after 01.10.2019 without a valid DIN and quoted in the body of the order is invalid. ITAT noted the Income Tax Department’s argument that in each case before it, the DIN was communicated to the assessee by generating it on the same day or next day. ITAT, however, interpreted the conditions in the CBDT Circular strictly and noted that it contained two conditions: (i) generation of DIN; (ii) quoting the DIN in the body of communication. Thus, making it clear that the Income Tax Department had not complied with the two conditions of the CBDT Circular.
The exception envisaged under the CBDT Circular wherein a manual communication could be issued without generating a DIN needs to state that the communication is being issued without generating a DIN and the approval of Chief Commissioner/Director General of Income Tax and the date of approval also needs to be mentioned. ITAT held that impugned communications did not satisfy the conditions provided in the exception either.
ITAT’s conclusion was unequivocal:
In the present case, there is no dispute with regard to fact that mandatory requirement of generating a computer-based DIN has not been allotted and is duly quoted in the body of the order issued by the AO/DRP. Subsequent generation of DIN either on the same day or next day and intimated to the assessee or other person by way of separate communication does not satisfy the conditions of para 3 & 4 of said circular. Therefore, we are of the considered view that any communication issued by the income-tax authority, in the present case, the AO/DRP without a valid computer-generated DIN and is duly quoted in the body of the order is invalid, non-est and shall be deemed to have never been issued. (para 26)
ITAT also rejected the other arguments of the Income Tax Department that DRP’s instructions are internal communication and that DRP is not an income tax authority. As regards the former, ITAT held that the DRP’s instructions were to help AO complete the assessment and that was objective of the instructions, but the instructions were also communicated to the asssessee negating the argument that they constitute an internal communication. (para 27) For the latter, the ITAT held that DRP constituted a collegium of three Principal Commissioners or Commissioners of Income Tax and all three of them are income tax authorities under IT Act, 1961. Since DRP is an association/group of such income tax authorities, the argument that DRP is not an income tax authority does not hold water. (para 27)
Conclusion
ITAT concluded that once the DRP instructions are held to be bad in law and deemed to have never been issued, the AO could not have passed assessment orders under Section 144C(13) and thus the assessment orders were liable to be quashed. The ITAT adopted a cogent approach in adjudicating the matter and interpreted the conditions contained in CBDT Circular in a straightforward manner. The import of the Circular was clear, i.e., a DIN should be generated before issuing the communication and the same should be quoted in the body of the communication to maintain and enable a proper audit trail. Ex-post generation of DIN and communication of the same to the assessee amounted to ticking the box of communicating the DIN to the assessee, but not in accordance with the CBDT’s Circular.
[1] M/s Sutherland Global Services, Inc. v The ACIT/DCIT, International Taxation Circle 2(2), Chennai TS-287-ITAT-2023CHNY