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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’ NEW DELHI
Before: SHRI N.K. BILLAIYA & SHRI K.NARASIMHA CHARY
PER K. NARASIMHA CHARY, JM Aggrieved by the orders dated 12/06/2015 passed in Appeal Nos. 264 & 265/14-15, by the learned Commissioner of Income Tax (Appeals)- XXVII, New Delhi (“Ld. CIT(A)”), in the cases of Newbury Oil Company Ltd. (“the assessee”) for the assessment years 2011-12 and 2012-13, the Revenue preferred these appeals. The assessee has also filed cross- objections against these appeals.
Brief facts of the case to the extent of necessity for disposal of appeals are that the assessee is a company incorporated in Nicosia, Cyprus on 17.02.2005 as a 100% subsidiary of Gynia Holdings Ltd. In Financial Year 2006-07, it became 100% subsidiary of Focus oil Inc., BVI. It had a share capital of 50000 CYP. Company registration number is 157598 and Shri Kul Bhushan Sharma was one of its Directors. Assessee company-company acquired PAN from India bearing No. AADCN3458P and started filing its return of income in India since A.Y. 2011-12. Through a share exchange agreement dated 17.04.2008, it became the subsidiary of Indus Gas Ltd. and through a production sharing agreement dated 18.02.2005, i.e. very next day to its incorporation, it became the owner of 25% participating interest in exploration right of RJ-ON/6 Oil block of Rajasthan allotted to M/s. Focus Energy Ltd.
Pursuant to search and seizure operation u/s. 132 of the Income- tax Act, 1961 (“the Act”) conducted on 22.03.2012 in M/s. Focus Energy Group of cases, satisfaction note for invoking the provisions of section 153C of the Act against the assessee was recorded on 18.11.2013 and notice u/s. 153C was issued to the assessee. Assessee filed return of income declaring a loss of Rs.2,08,79,67,795/- for the assessment year 2011-12 and Rs.19,89,26,549/- for the assessment year 2012-13. But the Assessing Officer concluded the assessment at nil income for both the years by disallowing the losses claimed by assessee and simultaneously, initiated proceedings u/s. 271(1)(c) of the Act.
Aggrieved by the action of the Assessing Officer in assessing the income at Nil instead of losses declared by the assessee, challenging the jurisdiction of the Assessing Officer, the assessee preferred appeals for both the years before CIT(A) and by way of impugned orders, the CIT(A) allowed the appeals, returning a finding that the assessee is a foreign company, viz., the eligible company u/s. 144C(15) of the Act and therefore, in the first instance, the Assessing Officer should have issued a draft assessment which is not done in the instant cases. Learned CIT(A) further observed that no proper satisfaction in the case of assessee qua the material seized is recorded by the Assessing Officer. Ld. CIT(A), accordingly, quashed the assessment, aggrieved by which the Revenue preferred these two appeals.
Assessment year 2011-12: 5. Argument of the ld. AR is three-fold. Firstly, that there is no satisfaction recorded by the Assessing Officer that any document belonging to the assessee was found during the course of search and basing on the decisions in the case of Pepsi Foods (P) Ltd. v. ACIT (2014) 52 taxmann.com 220 (Delhi), Pepsico India Holdings (P) Ltd. vs. ACIT (2014) 50 taxmann.com 299 (Delhi), CIT vs. Arpit Land (P) Ltd. (2017) 78 taxmann.com (Bom), Pr. CIT v. Index Securities (P) Ltd. (2017) 86 taxmann.com 84 (Delhi), PCIT v. Dreamcity Buildwell (P) Ltd. 417 ITR 617 (Del) and Canyon Financial Services Ltd. v. ITO (2017) 84 taxmann.com 74, he argued that the assessment order is liable to quashed. Second limb of the argument is that no incriminating material was found during the search qua the assessment order and the therefore, invoking the jurisdiction by the Assessing Officer is bad. For this purpose, he placed reliance on the decision in the case of Singhad Technical Education Society (2017) 84 taxmann.com 290(SC), Pr. CIT vs. Index Securities (P) Ltd. (2017) 86 taxmann.com 84. Lastly he argued that the assessee is a foreign company and therefore, the Assessing Officer is required to follow the procedure provided under section 144C of the Act by passing the draft assessment order, but such a procedure is not followed by the Assessing Officer and therefore, the assessment order needs to be quashed. Reliance is placed on the decisions in the case of Turner International India Pvt. Ltd. v. DCIT (2017) 398 ITR-177. Learned DR places reliance on the orders of the Assessing Officer. Lastly, it was contended that there was no incriminating material found during the search and, therefore, in view of the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. Kabul Chawla, (2016) 380 ITR 573 (Del), no addition could be made.
6. We have gone through the record in the light of submissions made on either side. It can be seen from the assessment order that the Assessing Officer invoked the provisions of section 6(3) of the Act for bringing to tax the income of the assessee as taxable in India; that the Assessing Officer also invoked the provisions of section 9 of the Act on the ground that during the assessment year 2011-12, the assessee earned profit from companies whose underlying assets were wholly and totally situated in India or otherwise also the revenue was earned only because of underlying assets or source of income is in India; and that as per section 9 of the Act, the income arising on account of profit whose underlying assets are situated in India are to be taxed in India.
On the aspect of non-recording of satisfaction that any particular document belonging to the assessee was found and seized during the course of search, satisfaction of the learned Assessing Officer in his capacity of the learned Assessing Officer of the searched person was recorded on 18/11/2013.
Ld. CIT(A), examined all the material Papers on record indicated by the assessing officer for initiating proceedings under section 153C of the Act, and returned the finding of facts to the effect that the learned Assessing Officer did not make any enquiry pertaining to the seized documents nor verified the transactions recorded on them with the related parties; that no evidence was brought on record by the learned Assessing Officer recording the existence of the original documents, if so, to whom they belonged, and whether to the assessee or to the related parties which had a transaction with the assessee; that in her opinion, learned Assessing Officer should have made a proper enquiry with regard to the different transactions entered into by the assessee with the parties with whom such transactions were carried out; that the Photostat copies have very little evidentiary value and those are admissible as evidence if the original is also produced and that which can only be relied upon as a corroborative piece of evidence; and that the documents which were identified by the Assessing Officer for initiating proceedings under section 153C of the Act were not considered by him for determining the income of the assessee under section 153C of the Act.
She further observed that the documents that were considered by the learned Assessing Officer were not found incriminating in nature and the contents of the same fully explained by the assessee and accepted by the learned Assessing Officer; that such seized documents were only referred for ascertaining the residential status of the assessee company in accordance with the provisions of section 6 of the Act and not for determining any undisclosed income of the assessee as per the provisions of section 153C of the Act, but such documents served the purpose as a foot board to reopen the case of the assessee company for a block period of 6 years.
On the analysis of all the material available before her, Ld. CIT(A) found that the satisfaction note was recorded in wholesale consolidated manner pertaining to all the Indian companies and overseas companies which may have one or the other transaction with M/s Focus Energy Ltd, an Indian Incorporated company, resident in India and were put together, with intermixed, unconnected and unrelated aspects pertaining to the assessee company; that the contents of the seized material were not brought on record translating the same into proper satisfaction note other than just identifying them to utilise for the purpose of reopening the case which was not desirable to be approved. With such observations and finding of facts, Ld. CIT(A) held that there is merit in the contentions of the assessee regarding the unlawful initiation of proceedings under section 153C of the Act.
11. Ld. AR argued before us on the same lines of observations and finding of facts returned by the Ld. CIT(A) and placed reliance on the decisions reported in Pepsi Foods (P.) Ltd.v ACIT [2014] 52 taxmann.com 220 (Delhi) affirmed by the Hon’ble Supreme Court in the case reported in 2017 (12) TMI 588 Supreme Court and Pepsi India Holdings (P) Ltd vs. ACIT (2014) 50 taxmann.com 299 (Delhi) and some other decisions of Bombay and other High Courts.
12. For convenience sake, we refer to the decision of the Hon’ble jurisdictional High Court in the case of Pepsi Foods (P.) Ltd. v ACIT [2014] 52 taxmann.com 220(Delhi) wherein it was held as under :-
On a plain reading of Section 153C, it is evident that the Assessing Officer of the searched person must be "satisfied" that inter alia any document seized or requisitioned "belongs to" a person other than the searched person. It is only then that the Assessing Officer of the searched person can handover such document to the Assessing Officer having jurisdiction over such other person (other than the searched person). Furthermore, it is only after such handing over that the Assessing Officer of such other person can issue a notice to that person and assess or re-assess his income in accordance with the provisions of Section 153A. Therefore, before a notice under Section 153C can be issued two steps have to be taken. The first step is that the Assessing Officer of the person who is searched must arrive at a clear satisfaction that a document seized from him does not belong to him but to some other person. The second step is - after such satisfaction is arrived at - that the document is handed over to the Assessing Officer of the person to whom the said document "belongs". In the present cases it has been urged on behalf of the petitioner that the first step itself has not been fulfilled. For this purpose it would be necessary to examine the provisions of presumptions as indicated above. Section 132(4A)(i) clearly stipulates that when inter alia any document is found in the possession or control of any person in the course of a search it may be presumed that such document belongs to such person. It is similarly provided in Section292C(1)(i). In other words, whenever a document is found from a person who is being searched the normal presumption is that the said document belongs to that person. It is for the Assessing Officer to rebut that presumption and come to a conclusion or "satisfaction" that the document in fact belongs to somebody else. There must be some cogent material available with the Assessing Officer before he/she arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else. Surmise and conjecture cannot take the place of "satisfaction". … … … 11. It is evident from the above satisfaction note that apart from saying that the documents belonged to the petitioner and that the Assessing Officer is satisfied that it is a fit case for issuance of a notice under Section 153C, there is nothing which would indicate as to how the presumptions which are to be normally raised as indicated above, have been rebutted by the Assessing Officer. Mere use or mention of the word "satisfaction" or the words "I am satisfied" in the order or the note would not meet the requirement of the concept of satisfaction as used in Section 153C of the said Act. The satisfaction note itself must display the reasons or basis for the conclusion that the Assessing Officer of the searched person is satisfied that the seized documents belong to a person other than the searched person. We are afraid, that going through the contents of the satisfaction note, we are unable to discern any "satisfaction" of the kind required under Section 153C of the said Act.
12. This being the position the very first step prior to the issuance of a notice under Section153C of the said Act has not been fulfilled. Inasmuch as this condition precedent has not been met, the notices under Section153C are liable to be quashed. It is ordered accordingly. The writ petitions are allowed as above. There shall be no order as to costs.
The aforesaid decision of Hon’ble High Court has since been affirmed by Hon’ble Supreme Court reported at 2017 (12) TMI 588 Supreme Court.
13. 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 photostat copies and recorded his satisfaction note in a wholesale consolidated manner pertaining to all the Indian company’s and overseas companies which may have one or the other transactions with M/s Focus Energy Ltd which is an Indian incorporation and the entire facts and transactions were put together, with intermixed, unconnected and unrelated aspects pertaining to the assessee company. When we look at this fact in the light of the law declared by the Hon’ble jurisdictional High Court as extracted (supra), it is clear that the so-called satisfaction recorded by the learned Assessing Officer 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.
14. Now we come to the next contention of the assessee that for non- adherence of the provisions of section 144C of the Act, the assessment is bad in law, the first contention of the assessee is that they are foreign company and therefore, falls within the expression “eligible assessee” u/s. 144C of the Act. On this aspect it could be seen from the record that the assessee company incorporated in Cyprus as per laws of Cyprus and have been resident of Cyprus. The assessee has been filing the Income- tax Return with Cyprus Revenue Authorities. Copies of ITRs are also provided by FT & TR Division to the Assessing Officer. On examining these documents, Ld. CIT(A) recorded finding of fact that the information with the Ld. Assessing Officer amply and evidently substantiate as a pointer to the assessee’s contention that it is a resident of Cyprus. Learned CIT(A) further referred to the observations of the Assessing Officer of the assessee in Cyprus that the assessee was registered outside India in accordance with the laws of Cyprus and such location was not challenged. CIT(A) found that the submissions made by the assessee tallied with the information and documents provided by FT & TR, more particularly at paragraph No. 5.9 of such an assessment order.
15. There is no challenge to the observation of the CIT(A) that the assessee is a resident in Cyprus. Learned CIT(A) examined the material available before her in the light of the provisions of section 6(3) of the Act and also the orders passed by TPO in the case of Focus Energy Ltd for the assessment years 2006-07 to 2012-13. All these materials had shown that M/s. Focus Energy Ltd. had international transactions with the assessee. M/s. Focus Energy Ltd. is undisputedly an Indian Company. It is, therefore, inferred that 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. On this premise also, 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.
16. Evidently, no draft order was passed in this case. Hon’ble Delhi High Court in the case of Turner International India Pvt. Ltd. vs. DCIT (supra) held as under - “10. The short ground on which the aforementioned final assessment orders and the consequent demand notices have been challenged is that there was non-compliance with the mandatory provision contained in Section 144C(1) of the Act requiring the AO to first frame draft assessment orders.
The question whether the final assessment order stands vitiated for failure to adhere to the mandatory requirements of first passing draft assessment order in terms of Section 144C(1) of the Act is no longer res integra. There is a long series of decisions to which reference would be made presently.
In Zuari Cement Ltd. v. ACIT (decision dated 21st February, 2013 in WP(C) No. 5557/2012), the Division Bench (DB) of the Andhra Pradesh High Court categorically held that the failure to pass a draft assessment order under Section 144C (1) of the Act would result in rendering the final assessment order “without jurisdiction, null and void and unenforceable.” In that case, the consequent demand notice was also set aside. The decision of the Andhra Pradesh High Court was affirmed by the Supreme Court by the dismissal of the Revenue's SLP (C) [CC No. 16694/2013] on 27th September, 2013.
In Vijay Television (P) Ltd. v. Dispute Resolution Panel [2014] 369ITR 113 (Mad.), a similar question arose. There, the Revenue sought to rectify a mistake by issuing a corrigendum after the final assessment order was passed. Consequently, not only the final assessment order but also the corrigendum issued thereafter was challenged. Following the decision of the Andhra Pradesh High Court in Zuari Cement Ltd. v. ACIT (supra) and a number of other decisions, the Madras High Court in Vijay Television (P) Ltd. v. Dispute Resolution Panel (supra) quashed the final order of the AO and the demand notice. Interestingly, even as regards the corrigendum issued, the Madras High Court held that it was beyond the time permissible for issuance of such corrigendum and, therefore, it could not be sustained in law.
Recently, this Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie v. Union of Indi [2016] 388 ITR 383 (Del.), following the decision of the Andhra Pradesh High Court in Zuari Cement Ltd. v. ACIT (supra), the Madras High Court in Vijay Television (P) Ltd. v. Dispute Resolution Panel, Chennai (supra) as well as the Bombay High Court in International Air Transport Association v. DCIT (2016) 290 CTR (Bom) 46, came to the same conclusion.
Mr. Dileep Shivpuri, learned counsel for the Revenue sought to contend that the failure to adhere to the mandatory requirement of issuing a draft assessment order under Section 144C (1) of the Act would, at best, be a curable defect. According to him the matter must be restored to the AO to pass a draft assessment order and for the Petitioner, thereafter, to pursue the matter before the DRP.
The Court is unable to accept the above submission. The legal position as explained in the above decisions in unambiguous. The failure by the AO to adhere to the mandatory requirement of Section 144C (1) of the Act and first pass a draft assessment order would result in invalidation of the final assessment order and the consequent demand notices and penalty proceedings.
17. For the aforementioned reasons, the final assessment orders dated 31st March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential demand notices issued by the AO and the initiation of penalty proceedings are hereby set aside.
18. The petitions are allowed in the above terms. No order as to costs.”
Further, reference was made by the ld. AR to the 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.
For the sake of completeness we deem it necessary to extract the contents of CBDT Circular which reads as under :
Section 144C, providing for reference to Dispute Resolution Panel (DRP), was inserted in the Income-tax Act, 1961 by Finance (No.2) Act, 2009. Sub section (1) of section 144C reads as under: “The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft 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.
2. Explanatory Circular for Finance (No.2) Act, 2009 i.e. Circular No. 5 of 2010 dated 03.06.2010, in para 45 has explained the said new section 144C and the consequential amendments made in other sections of Income-tax Act. Para 45.5 of the Circular No.5/2010 dated 03.06.2010 reads as under: “45.5 Applicability: These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. The Dispute Resolution Panel Rules have been notified by S. O. No. 2958 (E) dated 20thNovember, 2009. ” In the above extracted Para 45.5 there has been an inadvertent error in stating the applicability of the provisions of section 144C inserted vide Finance (No.2) Act, 2009 that amendments will apply in relation to the assessment year 2010- 11 and subsequent assessment years. Accordingly, para 45.5 is replaced with the following: “45.5. Applicability: Section 144C has been inserted with effect from 1stApril, 2009. Accordingly, the Assessing Officer is required to forward a draft assessment order to the eligible assessee, if he proposes to make, on or after the 1stday of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. In other words section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009 irrespective of the assessment year to which it pertains. Amendments to other sections of the Income-tax Act referred to in para 45.3 of the circular 5/2010 dated 3 rd June, 2010 shall also apply from 1st October, 2009 ”.
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, and as explained by Hon’ble Delhi High Court.
Now, coming to the last contention based on the decision of Kabul Chawla (supra), 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 section153C 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.
For the reasons stated in the preceding paragraphs, we, therefore, find that the order of the ld. CIT(A) does not suffer any illegality or irregularity and it needs to be upheld. Consequently, we find the grounds of appeal of the Revenue devoid of merit and are liable to be dismissed and accordingly dismissed.
Assessment year 2012-13:
In this year also, the assessment order suffers illegality and irregularity for not following the procedure u/s. 144C of the Act. In the preceding paragraph, we find that for not following the procedure u/s. 144C of the Act, assessment cannot be sustained. Apart from that satisfaction of the Assessing Officer in the capacity of Assessing Officer of the searched person was recorded on 08.11.2013 which falls in the previous year 2013-14 relevant to assessment year 2014-15. Even if we take the earliest date in this respect i.e., 08.11.2013, the immediately preceding six years will be assessment years 2008-09 to 2013-14. Assessment year 2012-13 falls in this block only and therefore, provisions of section 153C of the Act are attracted and not section 143(3) or section 144 of the Act. Assessment order was, however, passed u/s. 144 read with section 142(1) of the Act.
In the case of CIT v RRJ Securities Ltd. (supra), the Hon’ble High Court held as under: -
“24. As discussed hereinbefore, in terms of proviso to Section 153C of the Act, a reference to the date of the search under the second proviso to Section 153A of the Act has to be construed as the date of handing over of assets/documents belonging to the Assessee (being the person other than the one searched) to the AO having jurisdiction to assess the said Assessee. Further proceedings, by virtue of Section 153C(1) of the Act, would have to be in accordance with Section 153A of the Act and the reference to the date of search would have to be construed as the reference to the date of recording of satisfaction. It would follow that the six assessment years for which assessments/reassessments could be made under Section 153C of the Act would also have to be construed with reference to the date of handing over of assets/documents to the AO of the Assessee. In this case, it would be the date of the recording of satisfaction under Section 153C of the Act, i.e., 8th September, 2010. In this view, the assessments made in respect of assessment years 2003-04 and 2004-05 would be beyond the period of six assessment years as reckoned with reference to the date of recording of satisfaction by the AO of the searched person.” 24. In the case of ARN Infrastructure India Ltd v ACIT [20171 81 taxmann.com260 (Delhi) the Hon’ble High Court vide its decision dated 25th April 2017 held as under :-
12. The decision in RRJ Securities Ltd. (supra) is categorical that under Section 153C of the Act, the period of six years as regards the person other than the searched person would commence only from the year in which the satisfaction not is prepared by the AO of the searched person and a notice is issued pursuant thereto. The date of the Satisfaction Note is 21st July, 2014 and the notice under Section 153C of the Act was issued on 23rd July2014. The previous six AYs would therefore be from AY 2009-10 to AY2014-15. This would therefore not include AYs 2007-08 and 2008-09. The decision in RRJ Securities Ltd. (supra) is also an authority for the proposition that for the proceedings under Section 153C to be valid, there had to be a satisfaction note recorded by the AO of the searched person.
Further, in PCIT vs. Sarwar Agency P. Ltd., 397 ITR 400 (Del), Hon’ble Delhi High Court clearly observed that amendment in section 153C(1) which was brought by Finance Act, 2017 w.e.f. 1st April, 2017 is only prospective in nature. Therefore, such an amendment cannot be applied retrospectively to the case of assessee for assessment year 2012- 13. In these circumstances, on this count also, we find that the assessment cannot be sustained and the ld. CIT(A) was perfectly right in allowing the appeal. We, therefore, find that the assessments for the assessment years 2011-12 and 2012-13 are bad in law and cannot be sustained and the ld. CIT(A) rightly held so while allowing the appeals of the assessee. We, accordingly dismiss the appeals of the Revenue.
Learned AR submitted that the cross-objections are only supporting the orders of ld. CIT(A). Since the appeals of the Revenue are dismissed, the cross-objections filed by assessee become infructuous and are dismissed.