2014 (7) TMI 214 - AT - Income Tax

Tribunal upholds search proceedings but quashes assessments due to time-barred order

The Tribunal upheld the validity of the search proceedings and order under section 153C, dismissing the contention that the order was invalid due to ... Issuance of notice passed u/s 153C of the Act - Whether the DRP was justified in issuing its directions beyond the time limit specified u/s 144C (12) of the Act and whether the final assessment order passed by the AO u/s 153C of the Act based on the time barred directions of the DRP was tenable in law – Held that:- The issuance of a notice u/s 153C of the Act was in accordance with and according to intent and purpose of the Act - If there were to be any lacunae in the issuance of such notice u/s 153C of the Act, the provisions of section 292B of the Act will take care of the same - there was no any infirmity in the search proceedings and order made u/s 153C of the Act – Decided against Assessee. Validity of reference to TPO – No pending assessment on the date of search/requisition - No incriminating material found during search – Held that:- Since no incriminating materials were found in the course of search/requisition, the AO was not justified in making a reference to the TPO and the transfer pricing adjustment made for assessment years 2003-04 to 2008- 09 are invalid - This contention of the assessee, according to us, is too far-fetched - in view of 2nd proviso to section 153A, normal assessment pending during the proceedings u/s 153A or 153C will abate and only single assessment is to be made both for disclosed and undisclosed income. If the contention of the assessee is accepted, it will lead to absurd situation whereby even reported income in a return of income could not be taxed when the same abate on account of initiation of proceedings u/s 153A or 153C. Such a situation can never be in the contemplation of Legislature and we, out rightly reject the main contention of the assessee - The findings of DRP were not correct as no documents were seized during the search conducted by the Police at the premises of Mr Hisham - Only cash was seized - When an assessment u/s 143(3) has already been made prior to the search proceedings, then such completed proceedings are final and they do not abate - No addition can be made in an assessment u/s 153C in the absence of any incriminating material. What is the scope of assessment or re-assessment of total income u/s 153A (1) (b) and the first proviso – Held that:- If any books of accounts or other documents relevant to the assessment had not been produced in the course of original assessment and found in the course of search in our humble opinion such books of accounts or other documents have to be taken into account while making assessment or reassessment of total income under the aforesaid provision - as per the Circular No.3 of 2012 dated 12.6.2012 which was the supplementary memorandum explaining the Official amendments moved in the Finance Bill, 2012 as reflected in the Finance Act, 2012, it has been made explicit that “The date of effectivity of the provision mentioned in clause 63 of the Finance Bill, 2012 and the Notes on clauses (clause 60) thereof is 1st April, 2009, i.e., the provision would apply to all cases filed before the DRP on or after 1st April, 2009, irrespective of the assessment year - the DRP was within its domain and also justified in exercising the powers conferred under Explanation to s. 144C (8) of the Act - the DRP has no power to treat transactions in respect of which either no adjustment was proposed by the learned TPO or such transaction does not form part of the report u/s 92E - in view of Explanation to s. 144C(8), it is clear that DRP is empowered to take cognizance of any new issue which comes to the notice of the panel during the course of proceedings before it – Decided in favour of Revenue. Jurisdiction of the DRP in considering new grounds – Held that:- The expenditure on AMP was not part of report by the assessee in its 3CEB report - When the issue of expenditure on AMP brought to the notice of DRP, in its fairness, the DRP directed the TPO to look into the issue and submit a report, on the basis of which, the TPO had determined the ALP on AMP expenditure too - Such being the situation, the assessee cannot take a stand that the view expressed by the TPO on a specific direction by the DRP, would amount to review - the non-declaration of AMP expenditure in 3CEB report of the assessee and subsequent difference/grievance with the AO/DRP, the determination of ALP on AMP expenditure on remand from the DRP by the TPO, in our view, was within the sphere of s. 92CA of the Act – Decided against Assessee. Order u/s 153C of the Act was barred by time as per section 153B of the Act – Held that:- Section 153B lays down the time-limit for making an assessment order u/s 153C of the Act. The search was conducted at the premises of Tamiz on 5.8.2008 - The last of the authorization for requisition was executed during August 2008 - the only asset that has been seized was cash of ₹ 9.7 crores - During the course of assessment proceedings u/s 153C, a reference u/s 92CA (1) was made - an order u/s 92CA was passed on 31.10.2011 - the applicable provision which deals with the time-limit for making an assessment order u/s 153C was the fifth proviso to s. 153B(1) prior to its amendment by Finance Act, 2012. Section 144C (13) has been amended by Finance Act, 2012 to provide that the notwithstanding effect shall extend to s. 153B - The extended period of limitation is applicable only to those cases where the normal period of limitation u/s 153B to make assessment u/s 153C has not expired on the date on which the Finance Act, 2012 received the President’s assent. The Finance Act, 2012 received the President’s assent on 28.5.2012 - the period of limitation to pass an order u/s 153C had already expired on 31.12.2011 which was much earlier to the date on which the Finance Act, 2012 received the President’s assent and, hence, the re-assessment orders u/s 153C were barred by limitation. Relying upon S.S. Gadgil v. Lal & Co [1964 (4) TMI 19 - SUPREME Court] - the time within which notice could be issued against a person deemed to be an agent of a non-resident was extended to two years from the end of the assessment year - Now the notice issued on 27th March, 1957 was clearly within a period of two years from the end of the AY 1954-55 and if the amended provision applied, the notice would be a valid notice - the notice was not a valid notice inasmuch as the right of the ITO to re-open the assessment of the assessee under the un-amended provision became barred on 31st March, 1956, and the amended provision did not operate against him so as to authorise the ITO to commence proceedings for re-opening the assessment of the assessee in a case where before the amended provision came into force, the proceedings had become barred under the amended provision. It was intended to make the amendment to remove any omission or flaws in the Statute and as such, it was neither clarificatory nor procedural in nature - there was no trace of any mention in the Memorandum to illustrate that it applies to objection/application filed on or after 1.10.2009 - the time-limit to pass the orders u/s 153C r.w.s. 153B of the Act has expired on 31.12.2011 itself and that the Finance Act, 2012 received the President’s nod (assent) only on 28.5.2012 - the re-assessments orders passed u/s 153C of the Act on 29.10.2012 were barred by limitation - the re-assessment orders for all the AY is to be set aside – Decided in favor of Assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether directions issued by the Dispute Resolution Panel (DRP) beyond nine months from the end of the month in which the draft assessment order was forwarded (s.144C(12)) are time-barred and render subsequent assessment under s.153C invalid. 2. Whether the search/requisition proceedings and issuance of notice under s.153C were invalid for want of requisite satisfaction, handing over of seized/requisitioned assets, or lack of application of mind by the assessing officer. 3. Whether a reference to the Transfer Pricing Officer (TPO) and resulting transfer pricing adjustments under s.92CA can be made where (a) no incriminating material relevant to the issue was found during search/requisition, or (b) assessments for the years in question had attained finality before handing over of seized assets. 4. Whether the DRP exceeded jurisdiction by directing additional transfer pricing adjustment in respect of AMP expenditure that was not part of the original TPO report or the draft order. 5. Whether the DRP (and consequent remand to TPO) may consider new grounds or remit matters to the TPO to determine ALP for international transactions not reported in the taxpayer's Form 3CEB (interaction of s.144C(8), Explanation and s.92CA(2B)). 6. Whether assessments made under s.153C were barred by time under s.153B as interpreted with s.144C(13) (i.e., whether amendments/clarificatory provisions or s.144C(13) extension operate retrospectively to save time-barred assessments). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Time-limit for DRP directions under s.144C(12) Legal framework: s.144C(2),(5),(12) - assessee may file objections to draft order; DRP issues directions 'for guidance of the assessing officer to enable him to complete the assessment'; 'No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee.' Income-tax (Dispute Resolution Panel) Rules 2009, Rule 11: DRP shall communicate directions to assessee and assessing officer. Precedent treatment: Parties relied on authorities interpreting 'issue'/'serve' and mandatory time-limits in tax procedure; divergent precedent on meaning of 'issue' for statutory notices. Discussion considered decisions treating 'issue' as loss of control once dispatched/placed for service. Interpretation and reasoning: The Court examined chronology: draft order forwarded 22.11.2011; DRP directions dated 16.8.2012; DRP dispatched directions to assessee by speed post on 30.8.2012 (within nine-month cut-off) but directions were placed in inter-office tappal to AO on 04.09.2012 and received by AO on 06.09.2012. The Court accepted that 'issue' entails placing the instrument beyond the control of the issuing office (so it cannot be altered) and can be evidenced by dispatch to the assessee (speed post) or placing for service. Rule 11 contemplates DRP issues directions and then communicates to parties; thus issuance occurs when DRP loses control by dispatch. DRP's Corrigendum and tappal records support issuance within cut-off. The Court rejected a narrow construction that 'issue' contemplates only communication to the AO, holding that issuance to the assessee within time complied with s.144C(12). Ratio vs. Obiter: Ratio - 'issue' under s.144C(12) is satisfied when DRP places directions beyond its control (e.g., dispatch to assessee by speed post) and not necessarily only when AO physically receives directions; communications regime under DRP Rules 2009 supports this construction. Obiter - discussion of conflicting authorities on 'issue' vs 'serve'. Conclusion: DRP directions were not time-barred; Ground No.III(1) dismissed; assessment under s.153C based on DRP directions in that regard is tenable. Issue 2 - Validity of search/requisition proceedings and notice under s.153C Legal framework: s.132/132A (search/requisition), s.153A-153C - requisitioned/seized assets, satisfaction requirement, handing over and power to assess 'other person'; s.292B (curability of defect in notice). Precedent treatment: Parties cited authorities requiring independent satisfaction by AO of searched person and cases on mandatory recording of reasons; counter-authority holds sufficiency of appraisal and that when AO of searched person and other person are same, handing over may be academic. Interpretation and reasoning: The Court reviewed facts: statement of requisitioned person admitting that major portion of cash belonged to the taxpayer; admissions by taxpayer's CFO and director in sworn statements corroborated ownership. The AO recorded satisfaction that cash belonged to another person and issued notice under s.153C. Where AO for requisitioned person and other person is same, separate physical handing over is not necessary and no separate satisfaction requirement applies beyond recording the requisite satisfaction; reliance on tribunal decisions supporting that no separate satisfaction is needed when same AO covers both persons. The Court found notice was not a mechanical formality; material on record supported application of mind. Any formal defects, if any, would be curable by s.292B. Ratio vs. Obiter: Ratio - where statements and corroborative material establish that requisitioned assets belong to another person and the same AO has jurisdiction over both, s.153C proceedings are maintainable; lack of separate physical handing over or re-recording of satisfaction is not fatal. Obiter - expansive commentary urging careful application to avoid abuse of search powers. Conclusion: Search/requisition and s.153C notice were valid on facts; Ground II(1) dismissed. Issue 3 - Reference to TPO and TP adjustments where no incriminating material or assessments were final Legal framework: s.153A/153C scheme (single assessment concept replacing Chapter XIV-B), s.153B time-limits, scope of assessment post-search/requisition; Special Bench authority on scope (All Cargo) distinguishing abated vs non-abated assessments; s.92CA/TPO reference; Form 3CEB reporting obligations. Precedent treatment: Tribunal Special Bench (All Cargo) and High Court decisions held that (i) pending assessments abate; (ii) for non-abated (completed) assessments additions can be made only on basis of incriminating material found in search; other authorities addressed whether s.153A/153C permit broad re-opening absent incriminating documents. Interpretation and reasoning: The Court held that where assessments for certain years had attained finality before handing over of seized assets, those completed assessments do not abate and cannot be reopened de hors incriminating material discovered in search/requisition. The Court accepted the Special Bench reasoning: for non-abated (completed) assessments, additions in s.153A/153C proceedings must be founded on incriminating material found in course of search/requisition. On the facts, no incriminating material relevant to transfer pricing for AYs 2003-04 to 2006-07 was found; hence reference to TPO and TP adjustments for those years were invalid. The Court rejected Revenue's broader contention that s.153A/153C permit full re-opening of completed assessments merely because search/requisition was initiated in respect of a related person. The Court also noted that remedies (e.g., notice under s.148) remain available where appropriate. Ratio vs. Obiter: Ratio - s.153A/153C do not permit disturbing findings in completed assessments for non-abated years unless incriminating material relevant to those findings is discovered in the search/requisition; reference to TPO and resultant TP adjustments in such circumstances are invalid. Obiter - discussion on interplay with s.148 and procedural remedies. Conclusion: Reference to TPO and TP adjustments for assessment years which were final and where no incriminating material was found were invalid; Ground XVI partly allowed; assessments for those years quashed insofar as TP adjustments proceeded beyond permissible scope. Issue 4 - DRP's power to enhance variations and to direct AMP expenditure adjustment (s.144C(8) Explanation) Legal framework: s.144C(8) permits DRP to confirm, reduce or enhance variations in draft order; Explanation (Finance Act amendment) clarifies DRP power to consider 'any matter arising out of the assessment proceedings relating to the draft order'; DRP Rules (communication to parties); Circular/Notes clarifying retrospective operation to proceedings before DRP on or after 1.4.2009. Precedent treatment: Earlier authorities limited DRP to issues raised in draft order; post-amendment regime and circular clarified broader DRP jurisdiction; question of retrospective/prospective effect of Explanation and whether it empowers DRP to remit to TPO for transactions not earlier considered. Interpretation and reasoning: The Court accepted the clarificatory Circular that the Explanation to s.144C(8) applies to all proceedings before DRP on or after 1.4.2009 irrespective of assessment year and that DRP has power to consider new issues arising out of assessment proceedings and to remit matters to TPO for fresh ALP determination where the transaction was not previously reported (e.g., AMP expenditure omitted from Form 3CEB). The Court found that remand to TPO to examine AMP expenditure (not in original TPO report) did not amount to unlawful review of TPO order because the TPO had not earlier determined ALP on that item; remand therefore was within statutory power and consistent with s.92CA(2B) (as amended) permitting TPO to determine ALP for unreported international transactions noticed during proceedings. Ratio vs. Obiter: Ratio - DRP can consider matters beyond issues in draft order and remit to TPO for ALP determination of international transactions not earlier reported, where DRP proceedings fall within the temporal ambit of the Explanation and circular. Obiter - commentary on legislative intent and limits to DRP power where statutory protections for taxpayers exist. Conclusion: DRP did not exceed jurisdiction by directing AMP expenditure to TPO; Grounds V(2) and V(1) dismissed. Issue 5 - Jurisdiction of DRP to consider new grounds (remand to TPO; review concerns) Legal framework: s.144C (parimateria with appellate powers), s.92CA and amendments (empowering TPO to examine unreported international transactions), statutory limits on review powers. Precedent treatment: Authorities on absence of inherent review power unless statutorily conferred; precedents on scope of TPO's jurisdiction after amendment. Interpretation and reasoning: The Court reasoned that DRP's function is analogous to appellate/revisional functions and under Explanation to s.144C(8) DRP may consider any matter arising from assessment proceedings. Where a transaction (AMP expenditure) was not reported in 3CEB and therefore not earlier considered by TPO, a direction to TPO to examine that transaction is not review of an earlier TPO decision but an exercise of power to determine an unreported international transaction. The Court found amendment to s.92CA applicable and not a forbidden retrospective conferment of review power; procedural application to pending matters was appropriate. Ratio vs. Obiter: Ratio - Direction to TPO to examine unreported international transactions arising during DRP proceedings is within statutory powers; absence of earlier TPO consideration precludes characterization as prohibited 'review.' Obiter - reference to statutory safeguards and limits. Conclusion: DRP's remand to TPO on AMP expenditure and consideration of new grounds was within jurisdiction; Ground V(1) dismissed. Issue 6 - Limitation under s.153B and effect of s.144C(13)/Finance Act amendments Legal framework: s.153B/153C time limits (including proviso providing 33/21 months windows as then worded), s.144C(13) (assessing officer to complete assessment in conformity with DRP directions 'notwithstanding anything to the contrary contained in section 153'), subsequent amendment/clarification in Finance Act 2012 extending notwithstanding effect to s.153B and explanatory notes/CBDT circular on retrospective application to proceedings before DRP on or after 1.10.2009/1.4.2009. Precedent treatment: Authorities on non-retroactivity of substantive amendments when limitation has already expired (S.S. Gadgil principle), and on scope of amendments clarificatory vs substantive. Interpretation and reasoning: The Court applied the pre-amendment fifth proviso to s.153B: last authorisation for requisition was deemed executed in FY 2008-09 ? 33-month period expired 31.12.2011. The DRP directions were received/communicated in 2012 and final assessment passed 29.10.2012. The Finance Act 2012 (and any extension under s.144C(13) as amended) received Presidential assent on 28.5.2012, after the statutory limitation had already expired. Applying S.S. Gadgil principle, an amendment extending limitation cannot revive a right to reassess where period had already run out before the amending Act took effect unless the amendment is purely clarificatory and expressly made retrospective to a date prior to expiry. The Court found the memorandum/circular did not supply sufficient basis to treat the amendment as operating to revive already barred proceedings; therefore assessments under s.153C dated 29.10.2012 were time-barred. Ratio vs. Obiter: Ratio - Where statutory time-limit for s.153C assessment as per s.153B has expired before the Finance Act amending/clarifying s.144C(13) came into force, the amending provision cannot be invoked to validate subsequent assessments; S.S. Gadgil principle applies. Obiter - discussion on scope of circulars and explanatory memoranda for interpreting retrospective effect. Conclusion: Assessments under s.153C passed on 29.10.2012 were barred by limitation under s.153B as applicable prior to the Finance Act 2012; Ground III(2)&(3) allowed; consequent reassessments for AYs 2003-04 to 2008-09 were quashed. FINAL DISPOSITION (as to jurisdictional grounds) - DRP time-limit objection (s.144C(12)): dismissed. - Validity of search/requisition and s.153C notice: dismissed. - Reference to TPO for years where no incriminating material and assessments finalized: partly allowed (those assessments invalid); resulting TP adjustments quashed for affected years. - DRP jurisdiction to consider AMP expenditure/new grounds and remit to TPO: dismissed. - DRP's consideration of new grounds/remand to TPO: dismissed. - Limitation under s.153B (timeliness of assessments): allowed; assessments of disputed years quashed as time-barred where limitation expired prior to amending provisions.