2024 (1) TMI 1461 - AT - Income Tax

Assessment u/s 153A - TP adjustment made by the AO/TPO without appreciating the fact that no incriminating material was found during the search - HELD THAT - In the case on hand no material whatsoever was found or seized from the premises of the assessee based on which any income could have been assessed or reference to TPO could have been made. We also note that the AO/TPO also did not refer to any material which was found from the premises of the assessee. As such the copy of MOA between assessee s AE and Kalsubai Shipping Offshore Pvt Ltd. referred and relied on by the TPO for making downward adjustment to the value of import of capital assets was found from the premises of third party in an independent search. Accordingly we hold that the completed assessment cannot be disturbed under section 153A of the Act in the absence of incriminating material found from the premises of the assessee. Utilization of material found during the search proceeding at third party premises - We hold that the revenue has to follow the procedures laid down under the provisions of section 153C of the Act in a situation where the documents were found from the premises of the 3rd party irrespective of the fact that the other party was also subject to the search. In other words the process as provided under section 153C of the Act has to be followed by the revenue for the purpose of making the addition or disturbing completed assessment years based on the documents found in the course of search at the premises of the 3rd party. Documents relied on or based on which adjustment was made by the TPO in TP order are found at the premises of third parties. Therefore the same cannot be utilized against the assessee in the proceedings under section 153A of the Act for the reasons as discussed above. There was no allegation of the AO/TPO that any incriminating document found from the premises of assessee company based on reference under section 92CA(3) was made and finally adjustment was made by the TPO. The AO to utilize the material found from the premises of third party was required to initiate proceeding under section 153C of the Act after complying with the procedure as specified under section 153C of the Act. We hereby quash the assessment order framed by the AO under section 153A r.w.s. 143(3) of the Act as void ab initio as the same was made without there being any incriminating material found in the search at the assessee s premises. Hence the ground of appeal raised by the assessee regarding validity of the assessment is hereby allowed. Value of capital assets being TUGS for the purpose of allowance of depreciation - HELD THAT - We find that assessment order framed by the AO for AY 2018-19 under the provisions of section 153A of the Act wherein the value of TUGS has been downgraded has been quashed by us supra. The relevant findings of the same are given in paragraph 9 of this order. Once the assessment order of the earlier year based on which the AO made disallowance of the depreciation in the current year itself was quashed as invalid then the disallowance made in the current year on such invalid assessment of earlier year cannot be sustained. Therefore we hereby set aside the finding of the learned CIT(A) and directed the AO to allow the depreciation on TUGS at the value claimed by the assessee. Hence the grounds of appeal of the assessee are hereby allowed.

Summary

The core legal questions considered by the Appellate Tribunal in these appeals arising under the Income Tax Act, 1961 pertain primarily to the validity and jurisdiction of assessment orders passed under section 153A read with section 143(3) of the Act following search proceedings. Specifically, the issues include:

1. Whether the assessment orders passed under section 153A r.w.s. 143(3) are valid and within jurisdiction when no incriminating material was found during the search at the assessee's premises.

2. Whether the order under section 127 for centralisation of the case from Mumbai to Ahmedabad was valid and complied with principles of natural justice.

3. Whether the downward adjustment made by the Transfer Pricing Officer (TPO) on the value of capital assets (three TUGS) purchased from an associated enterprise (AE) and consequent disallowance of depreciation in the subsequent assessment year was justified.

4. Ancillary issues relating to procedural and technical grounds raised by the assessee, including the power to amend or withdraw grounds during the appeal process.

Issue-wise Detailed Analysis:

1. Validity and Jurisdiction of Assessment under Section 153A in Absence of Incriminating Material

Legal Framework and Precedents: Section 153A of the Income Tax Act mandates assessment or reassessment of income for six preceding assessment years when a search or requisition is conducted under section 132 or 132A. However, it is settled law that such assessments can only be disturbed or additions made if incriminating material is found during the search at the premises of the assessee. This principle was affirmed by the Gujarat High Court in the case of Saumaya Construction Pvt. Ltd. and subsequently by the Supreme Court in a batch of cases including PCIT, Central-3 v. Abhisar Buildwell Pvt. Ltd. (2023), which clarified that completed or unabated assessments cannot be disturbed under section 153A without incriminating material found during search or requisition.

Court's Interpretation and Reasoning: The Tribunal noted that the search was conducted at the assessee's premises and proceedings under section 153A were initiated for six years. However, no incriminating material was found from the assessee's premises. The AO and TPO relied on documents (including a Memorandum of Agreement) found during search at third-party premises to make downward adjustments in transfer pricing and corresponding additions. The Tribunal held that such material found at third-party premises cannot be used to disturb completed assessments under section 153A without following the procedure under section 153C of the Act, which requires recording of satisfaction notes and issuance of notices to the third party whose documents were seized.

Key Evidence and Findings: The MOA and other documents relied upon by the TPO were found at the premises of third parties during independent search actions. The AO did not record any satisfaction or issue notices under section 153C to the assessee based on this third-party material. The Tribunal referred to detailed case law including decisions of the Delhi High Court in CIT v. Kabul Chawla and others, which emphasize that additions under section 153A must be based on incriminating material found on the searched person's premises and not on third-party material unless section 153C procedures are followed.

Application of Law to Facts: Applying these principles, the Tribunal concluded that the assessment under section 153A r.w.s. 143(3) was void ab initio as no incriminating material was found from the assessee's premises. The use of third-party material without following section 153C procedures was impermissible. Thus, the downward adjustments and additions made on that basis could not stand.

Treatment of Competing Arguments: The Revenue relied on various decisions supporting the validity of assessments under section 153A. However, the Tribunal observed that these decisions were not in harmony with the binding precedents of the Supreme Court and the jurisdictional Gujarat High Court, which have precedence. The Tribunal declined to follow non-jurisdictional High Court decisions inconsistent with the binding ratio.

Conclusion: The Tribunal quashed the assessment order under section 153A r.w.s. 143(3) as void for lack of jurisdiction and absence of incriminating material found at the assessee's premises. The ground raised by the assessee on this issue was allowed.

2. Validity of Centralisation Order under Section 127

This ground pertained to the alleged lack of opportunity to be heard before transferring the case from Mumbai to Ahmedabad. The Tribunal, having quashed the assessment on substantive grounds, found this issue redundant and declined to adjudicate it separately.

3. Downward Adjustment of Value of Capital Assets and Disallowance of Depreciation

Legal Framework and Precedents: The value of capital assets for depreciation purposes is governed by the Income Tax Act and transfer pricing provisions, particularly section 92CA, which requires arm's length pricing of international transactions. The TPO's role is to determine the arm's length price (ALP) using appropriate methods such as CUP or TNMM.

Court's Interpretation and Reasoning: The AO and TPO made a downward adjustment to the value of three TUGS purchased from an AE based on the TNMM method, rejecting the assessee's CUP method valuation. This adjustment led to disallowance of depreciation in the subsequent year. However, since the Tribunal quashed the assessment for AY 2018-19 on jurisdictional grounds, the basis for the downward adjustment ceased to exist. Consequently, the disallowance of depreciation for AY 2019-20 was also unsustainable.

Key Evidence and Findings: The assessee claimed depreciation on the purchase price of the TUGS as declared. The AO/TPO's downward valuation was invalidated by the quashing of the earlier assessment. The Tribunal found no independent basis to uphold the disallowance.

Application of Law to Facts: The Tribunal set aside the disallowance of depreciation and directed the AO to allow depreciation on the value claimed by the assessee.

Treatment of Competing Arguments: The Revenue argued for sustaining the disallowance based on the TPO's findings. The Tribunal rejected this in light of the invalidity of the earlier assessment order.

Conclusion: The Tribunal allowed the appeal on this ground and directed the AO to permit depreciation on the original value claimed.

4. Other Procedural and Technical Grounds

Given the quashing of the assessment on the primary jurisdictional ground, other grounds raised by the assessee, including those relating to natural justice and procedural irregularities, were held to be infructuous and not adjudicated.

Significant Holdings:

"In the absence of any incriminating material found from the premises of the assessee, the completed assessment cannot be disturbed under section 153A of the Act."

"Material found during search proceedings at the premises of a third party cannot be used against the assessee in proceedings under section 153A unless the procedure under section 153C is followed, including recording of satisfaction and issuance of notice."

"The assessment order passed under section 153A r.w.s. 143(3) without incriminating material from the assessee's premises is void ab initio."

"Downward adjustment made by TPO in an assessment year which is quashed cannot serve as a basis for disallowance of depreciation in subsequent years."

The Tribunal reaffirmed the principle that assessments under section 153A must be strictly linked to incriminating material found during the search at the assessee's premises, and third-party material must be dealt with under section 153C. The Tribunal also emphasized adherence to binding precedents from the Supreme Court and jurisdictional High Court over non-jurisdictional decisions.

In conclusion, the Tribunal partly allowed the appeals by quashing the assessment orders under section 153A for AY 2018-19 as void and setting aside the consequential disallowance of depreciation in AY 2019-20, directing the AO to allow depreciation on the value claimed by the assessee. Other grounds were dismissed as redundant.