Transfer expense deduction denied for lack of genuineness but assessment quashed due to jurisdictional defect under section 127

ITAT Raipur dismissed appellant's claim for transfer expenses deduction under Capital Gains, finding the cancellation charges between group entities lacked genuineness. The agreements were unregistered, involved only ledger adjustments without actual payments, and constituted self-made evidence for tax evasion through colourable device. However, the assessment order u/s 143(3) was quashed due to jurisdictional defect - the case was transferred from DCIT-2(1) to DCIT-1(1) without mandatory order u/s 127, invalidating the assessing officer's jurisdiction to frame the assessment.

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The core legal questions considered in this appeal are:

1. Whether the disallowance of Rs. 2,68,00,000/- claimed as transfer expenses (cancellation charges of sale agreements) under the head Capital Gains was justified.

2. Whether the assessment order passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 (the Act) is valid, given that no notice under section 143(2) was issued by the jurisdictional AO.

3. Whether the AO who framed the assessment had valid jurisdiction, in light of the absence of any order under section 127 of the Act transferring the case from one AO to another, and consequently, whether the assessment order is liable to be quashed for lack of jurisdiction.

4. Ancillary issues related to the amendment or modification of grounds of appeal by the assessee.

Issue 1: Disallowance of Transfer Expenses of Rs. 2,68,00,000/- Claimed under Capital Gains

Relevant Legal Framework and Precedents: The claim of transfer expenses as deduction from capital gains is permissible under the Income Tax Act provided such expenses are genuine and substantiated. The Supreme Court has held that tax planning is legitimate only within the framework of law and that colorable devices or dubious methods to evade tax are impermissible.

Court's Interpretation and Reasoning: The AO disallowed the claim on grounds that the agreements for sale and their subsequent cancellation were made with group companies having common directors and shareholders, indicating a device to divert profits and evade tax. The agreements were unregistered, on plain paper, and lacked corroborative evidence such as advance payments or actual compensation paid; only ledger adjustments were made. The CIT(A) upheld this disallowance, emphasizing the absence of notarization, lack of actual payments, and the familial and directorial connections between the parties involved, which pointed to a colorable device rather than genuine transactions.

Key Evidence and Findings: The agreements dated 18.09.2007 and 20.11.2007 were not notarized; no advance payments were made; cancellation compensation was recorded only through ledger adjustments. The directors of the buyer and seller companies were related and held directorships across multiple group companies, indicating common control. The land was eventually sold for a significantly higher price, and the cancellation compensation was claimed as a deduction by the assessee but included as income by the buyer companies.

Application of Law to Facts: The Court found that the arrangement was a colorable device to avoid tax liability. The absence of registered agreements, actual payments, and the common control of the entities involved led to the conclusion that the claimed transfer expenses were not genuine.

Treatment of Competing Arguments: The assessee argued the genuineness of the transactions, supported by board resolutions and bank channel payments. However, the Court found these insufficient to overcome the evidence of common control and lack of actual monetary transactions.

Conclusion: The disallowance of Rs. 2,68,00,000/- was justified and confirmed.

Issue 2 and 3: Validity of Assessment Order and Jurisdiction of AO in Absence of Transfer Order under Section 127

Relevant Legal Framework and Precedents: Section 127 of the Income Tax Act mandates that transfer of cases between Assessing Officers (AOs) subordinate to the same Commissioner or Principal Commissioner requires an order recording reasons and, where possible, giving the assessee an opportunity of being heard. Subsection (3) of section 127 exempts the requirement of hearing if the transfer is within the same city, locality, or place but does not dispense with the requirement of recording reasons and issuing an order. The Supreme Court and various High Courts have held that the recording and communication of reasons for transfer under section 127 is mandatory and failure to comply renders the transfer invalid. The judgment in Kusum Goyal vs. ITO (Calcutta High Court) and Ajanta Industries vs. CBDT (Supreme Court) are authoritative on this point. The ITAT Raipur SMC Bench decision in Roop Das vs. ITO is also directly applicable.

Court's Interpretation and Reasoning: The assessee contended that the assessment framed by DCIT-1(1), Raipur was invalid as no order under section 127 was passed transferring the case from DCIT-2(1), Raipur, who had issued the original notice under section 143(2). The AO's report admitted that no such order could be traced, and the PAN transfer dates cited by the revenue post-dated the assessment order. The Court found that the transfer of jurisdiction simpliciter by letter without a formal order recording reasons under section 127(1) was invalid. The Court also rejected the revenue's reliance on the Odisha High Court decision in Vedanta Resources Ltd., which involved different facts and where transfer under section 120 was considered, noting that no such order under section 120 was produced in the present case.

Key Evidence and Findings: The absence of any order under section 127 on record; the PAN transfer orders post-dating the assessment order; the letter transferring the case without statutory authority; and the legal precedents requiring mandatory recording of reasons and issuance of transfer orders.

Application of Law to Facts: The Court applied the settled legal principle that transfer of cases between AOs requires compliance with section 127 and that failure to do so vitiates the jurisdiction of the AO who framed the assessment. Since the AO who framed the assessment lacked valid jurisdiction, the assessment order was invalid.

Treatment of Competing Arguments: The revenue argued the transfer was valid under section 120 and that both AOs were under the same PCIT, so no section 127 order was necessary. The Court distinguished the facts and found no evidence of any valid section 120 order. The Court also applied the principle of liberal construction in favor of the assessee, as laid down by the Supreme Court in CIT vs. Vegetable Products, holding that in case of ambiguity, the interpretation favoring the assessee must be adopted.

Conclusion: The assessment order passed by the AO without a valid transfer order under section 127 was quashed for want of jurisdiction. Consequently, the Court refrained from adjudicating on the merits of the additions made in the assessment.

Significant Holdings:

"We are clearly of opinion that the requirement of recording reasons under section 127(1) is a mandatory direction under the law and noncommunication thereof is not saved by showing that the reasons exist in the file although not communicated to the assessee."

"The entire exercise to prepare an unregistered agreement on a plain paper, resolution and ledger entries for payments of cancellation charges are just an afterthought in the form of self-made evidence for evasion of legitimate taxes though colourable device which is not permissible within the framework of law."

"The impugned order dated 11.12.2017, dehors an order of transfer u/s 127, cannot survive, as the validity of jurisdiction assumed by Ld. AO who had framed the assessment was not validly transferred."

"If two reasonable constructions of a taxing provision are possible that construction which favours the assessee must be adopted."

Core Principles Established:

- Transfer of cases between Assessing Officers under the Income Tax Act requires a valid order under section 127 recording reasons and, where possible, giving the assessee an opportunity of being heard.

- Absence of such transfer order vitiates the jurisdiction of the AO who frames the assessment, rendering the assessment order invalid and liable to be quashed.

- Transactions among group companies must be genuine and supported by credible evidence such as registered agreements and actual payments to be allowed as deductions; artificial arrangements to evade tax are liable to be disallowed.

- Colorable devices and self-created evidence to avoid tax are impermissible and cannot be accepted as legitimate tax planning.

- In case of ambiguity in taxing provisions, the interpretation favoring the assessee must be adopted.

Final Determinations:

1. The disallowance of Rs. 2,68,00,000/- claimed as transfer expenses under capital gains was upheld as justified and lawful.

2. The assessment order dated 11.12.2017 passed by DCIT-1(1), Raipur was quashed for want of valid assumption of jurisdiction due to absence of a transfer order under section 127 of the Act.

3. The grounds challenging the merits of additions in the assessment were left open for adjudication in proceedings initiated by the valid jurisdictional AO.

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