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2021 (7) TMI 945 - AT - Income TaxValidity of proceedings u/s 153C - related party transaction with subsidiary companies - satisfaction note for invoking the provisions of section 153C - assessee is a foreign company, thus in the first instance, the AO should have issued a draft assessment which is not done in the instant cases - non - adherence of the provisions of section 144C - HELD THAT - The unchallenged observations of the Ld. CIT(A) clearly establishes that the learned Assessing Officer did not make any enquiry pertaining to the documents seized, no deadly conduct any verification as to the transactions recorded on them with related parties, but on the other hand, as observed by the Ld. CIT(A) he simply placed reliance on certain photostate copies and recorded his satisfaction note in a wholesale consolidated manner pertaining to all the Indian company s and overseas companies Thus so-called satisfaction recorded by the AO to invoke the jurisdiction is not a specific satisfaction with reference to any particular document belonging to the assessee and, therefore, it goes to the root of the matter and vitiates the assumption of jurisdiction by the learned Assessing Officer to reopen the assessment proceedings by issuance of notice under section 153C of the Act. Non-adherence of the provisions of section 144C - The assessee company incorporated in Cyprus as per laws of Cyprus and have been resident of Cyprus. The assessee has been filing the Incometax Return with Cyprus Revenue Authorities. Since the transaction between Focus Energy Ltd. with the assessee was accepted as an international transaction continuously over a period of time, it goes without saying that other party, i.e., the assessee is a foreign company. Any transaction between Indian Company and Indian company cannot be an international transaction and therefore, the international transaction of Focus Energy Ltd. which is an Indian Company, will necessarily be with the foreign company. CIT(A) concluded that it an unmistakable pointer that the assessee is a foreign company and such a fact is admitted by the Assessing Officer while dealing with the transactions of Focus Energy Ltd. with its foreign AEs continuously over a period of time. Basing on these facts, learned CIT(A) concluded that the material on record is more than enough to conclude that the assessee is a foreign company and therefore, under the provisions of section 144C, the Assessing Officer shall, in the first instance, forward a draft order of the proposed assessment to the assessee if he proposes to make any variation which is prejudicial to the interest of assessee. Evidently, no draft order was passed in this case. See CBDT Circular No. 09/2013 dated 19.11.2013 wherein the Assessing Officer is required to forward a draft assessment order to the eligible assessee, if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee It is, therefore, clear that the assessment order is bad for invoking the jurisdiction u/s. 153C without proper satisfaction and also for not passing the draft assessment order as required u/s. 144C. Documents found in search as not incriminating in nature - Also as per decision of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT there is a finding of fact returned by ld. CIT(A) that documents found in search were not incriminating in nature; that the contents of the same were fully explained by the assessee and accepted by the Assessing Officer; and that the seized documents were only referred for ascertaining the residence status of the assessee company in accordance with the provisions of section of the Act and not for detecting any undisclosed income of the assessee as per the provisions of section 153C of the Act, but served the purpose as a foot board to reopen the case of the assessee company for a block period of six years. - Decided against revenue.
Issues Involved:
1. Validity of invoking Section 153C of the Income Tax Act. 2. Requirement of issuing a draft assessment order under Section 144C. 3. Incriminating nature of documents found during the search. 4. Jurisdictional challenge based on the residential status of the assessee. Detailed Analysis: 1. Validity of invoking Section 153C of the Income Tax Act: The Revenue's appeal was based on the validity of invoking Section 153C of the Act against the assessee. The Assessing Officer (AO) recorded satisfaction on 18/11/2013 to issue notice under Section 153C. The assessee argued that no document belonging to them was found during the search, relying on precedents like Pepsi Foods (P) Ltd. v. ACIT and others. The CIT(A) found that the AO did not properly inquire about the seized documents, nor verified transactions with related parties. The AO's satisfaction was recorded in a wholesale manner, without specific reference to documents belonging to the assessee, which vitiates the assumption of jurisdiction under Section 153C. 2. Requirement of issuing a draft assessment order under Section 144C: The assessee, being a foreign company, contended that the AO should have issued a draft assessment order as required under Section 144C. The CIT(A) confirmed the assessee's status as a foreign company, noting that the AO failed to follow the procedure under Section 144C. The Delhi High Court in Turner International India Pvt. Ltd. v. DCIT held that failure to issue a draft assessment order invalidates the final assessment order. The CBDT Circular No. 09/2013 also mandates forwarding a draft assessment order to eligible assessees, which was not done in this case, rendering the assessment order invalid. 3. Incriminating nature of documents found during the search: The CIT(A) found that the documents seized during the search were not incriminating and were fully explained by the assessee. These documents were used only to ascertain the residential status of the assessee, not to determine any undisclosed income. The Delhi High Court in CIT v. Kabul Chawla held that no addition could be made if no incriminating material was found during the search. This further supports the CIT(A)'s decision to quash the assessment. 4. Jurisdictional challenge based on the residential status of the assessee: The assessee argued that they are a foreign company, and the AO should have followed the procedure under Section 144C. The CIT(A) confirmed the assessee's status as a resident of Cyprus, supported by documents and continuous international transactions with Focus Energy Ltd., an Indian company. This status was not challenged by the Revenue. The CIT(A) concluded that the assessee is a foreign company, and the AO's failure to issue a draft assessment order under Section 144C invalidates the assessment. Separate Judgments: The judgment for the assessment years 2011-12 and 2012-13 was delivered together, addressing the same issues. The appeals of the Revenue were dismissed, and the cross-objections filed by the assessee were deemed infructuous and dismissed. Conclusion: The Tribunal upheld the CIT(A)'s order, quashing the assessments for both years due to improper satisfaction under Section 153C and failure to issue a draft assessment order under Section 144C. The Revenue's appeals were dismissed, and the cross-objections by the assessee were also dismissed as infructuous.
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