Facts of the Case

MUFG Bank Ltd., the petitioner, challenged an order dated 13 May 2022 passed by the Assessing Officer (AO) denying deduction of ₹9,62,39,916. The impugned order was passed to give effect to a prior decision of the Income Tax Appellate Tribunal (ITAT) relating to Assessment Year 1998-99.

The deduction pertained to salaries paid in foreign currency to expatriate employees working in India and taxes borne by the bank on a tax-on-tax basis. The ITAT had earlier allowed the claim, holding that such expenses were deductible while computing business profits of the Permanent Establishment in India under the Indo-Japan Double Taxation Avoidance Agreement (DTAA).

Issues Involved

  1. Whether the Assessing Officer can refuse to grant deduction allowed by the ITAT while giving effect to its order.
  2. Whether assessed income can be maintained at returned income despite Tribunal directions granting relief.
  3. Scope of the AO’s powers while passing appeal-effect orders under Section 254 of the Income Tax Act, 1961.

Petitioner’s Arguments

The petitioner contended that once the ITAT allowed the deduction, the AO was bound to give full effect to the order. The refusal to grant relief on the basis that assessed income should not fall below returned income was contrary to law.

It was argued that the Tribunal had conclusively adjudicated the issue, and the AO’s role was purely ministerial in implementing the directions. Reliance was placed on judicial precedents establishing that claims allowed by appellate authorities cannot be denied on procedural or technical grounds.

Respondent’s Arguments

The Revenue maintained that the appeal-effect order could not result in assessed income being lower than the returned income. It sought to justify the denial of deduction by invoking the principle that income assessed should not fall below what was voluntarily declared by the assessee.

Court Order / Findings

The Delhi High Court held that the Assessing Officer’s refusal to grant deduction was wholly misconceived and untenable. The Court observed that once the ITAT had allowed the claim, the AO was obligated to implement the decision.

The Court relied on established jurisprudence, including:

  • Goetze (India) Ltd. v. CIT — restriction on fresh claims applies only to the Assessing Officer, not to appellate authorities
  • CIT v. Jai Parabolic Springs Ltd. — Tribunal has wide powers to grant relief even if not claimed in the return
  • Rites Ltd. v. CIT — revisionary authorities can grant relief despite absence of claim in return
  • Wipro Finance Ltd. v. CIT — fresh or inconsistent claims can be entertained by the Tribunal

The Court emphasized that directions of the Tribunal are binding and must be faithfully implemented. The AO cannot sit in appeal over the Tribunal’s order or dilute its effect.

Accordingly, the Court:

  • Quashed the order dated 13 May 2022 insofar as it denied the deduction
  • Directed the AO to grant consequential relief in accordance with the Tribunal’s decision within six weeks

Important Clarification

The judgment clarifies that while an Assessing Officer may ordinarily be constrained by the contents of the return, such limitations do not apply when implementing binding appellate directions. Once relief is granted by the ITAT, the AO must give full and effective implementation, even if it results in assessed income falling below the returned income.

Link to download the order – https://www.mytaxexpert.co.in/uploads/1772176262_MUFGBANKLTDVsASSISTANTCOMMISSIONEROFINCOMETAXCIRCLE221ORS..pdf 

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