Delhi High Court Invalidates Assessment Orders Based on Obsolete CBDT Circular

Court directs fresh assessment for Mitsubishi Corporation, allowing consideration of additional grounds previously dismissed by the Assessing Officer.
The Delhi High Court has quashed the final assessment orders issued by the Assessing Officer (AO) against Mitsubishi Corporation, directing a fresh assessment in compliance with the Tribunal’s remand order. The court held that the AO’s reliance on CBDT Circular No. 549 from 1989 was misplaced, as the legal provisions under Section 143(3) of the Income Tax Act had undergone significant amendments since then.
Mitsubishi Corporation, a tax resident of Japan, filed its Return of Income for the Assessment Year (AY) 2005-06, initially declaring an income of INR 4.18 crore, which was later revised to INR 61.05 crore. This revision was primarily due to income attributed to activities of its Liaison Office (LO) in India. The AO, however, framed an assessment order rejecting these declarations based on an obsolete CBDT Circular and a Supreme Court judgment in Commissioner of Income Tax vs. Sun Engineering Works.
The court noted that the AO’s reliance on the 1989 CBDT Circular was incorrect given the amendments in Section 143(3) of the Income Tax Act, which now allows for refunds upon the culmination of an assessment. “The statutory amendments render the reliance on the 1989 Circular redundant,” the bench observed, emphasizing the evolved legal landscape.
The Tribunal had previously remanded the case, instructing the AO to consider additional grounds raised by Mitsubishi Corporation. These grounds included issues regarding the taxation of purchases, exclusion of turnover from exports, and the non-recognition of the Indian subsidiary as a Permanent Establishment (PE). However, the AO dismissed these claims, adhering to the outdated Circular.
The court highlighted the Tribunal’s plenary powers under Section 254 of the Income Tax Act, which allows it to admit and decide on new grounds raised during appeals. The judgment underscored that the AO is bound to comply with the Tribunal’s directions during reassessment, irrespective of the claims made in the original return. “The insistence on a revised return is unnecessary when reassessment is directed by a judicial or quasi-judicial body,” the court asserted.
Justice Yashwant Varma, delivering the judgment, stated, “The amendments in Section 143(3) explicitly contemplate refunds, thereby nullifying the applicability of the 1989 Circular. The AO’s failure to recognize this change constitutes a misapplication of the law.”

Conclusion: The Delhi High Court’s decision mandates the AO to reassess Mitsubishi Corporation’s income for AY 2005-06, considering all additional grounds raised. This judgment reinforces the necessity for tax authorities to stay updated with legislative amendments and judicial directives. By invalidating the application of an outdated Circular, the court ensures a fair reassessment process, potentially setting a precedent for similar cases in the future.

Date of Decision: July 30, 2024
Mitsubishi Corporation vs. Assistant Commissioner of Income Tax, Circle International Tax (2)(2)(1) Delhi & Anr.