2025 (5) TMI 1298 - AT - Income Tax

Disallowance on account of transfer expenses claimed by appellant under the head Capital Gains - AR argued that the transactions of cancellation charges are duly recorded and are genuine being through banking channel therefore these are allowable as deduction while calculating the claim of assessee under Capital Gains - HELD THAT - We observe that alleged agreements are executed within the group entities in absence of any corroborative evidence to prove the genuineness of such transactions / agreements such as registered agreements no actual payment of advance for executing the agreement or payment of compensation for cancellation of agreement only ledger adjustments are made. We find substance in the finding of AO which is further approved by the CIT(A) and rightly so for the reason that 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 devise which is not permissible within the framework of law. We thus approve the decision of Ld. CIT(A) on merits. In result Ground no. 1 of the assessee s appeal stands dismissed. Proceedings of assessment u/s 143(3) as transferred from DCIT-2(1) to DCIT-1(1) Raipur - mandatory order u/s 127 was not passed and therefore the same was stated to be not traceable on records by the revenue - The decision in the case of Roop Das 2024 (4) TMI 1151 - ITAT RAIPUR have a strong bearing on the identical facts in the present case consequently 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 i.e. DCIT-1(1) Raipur who had framed the assessment which was initiated by DCIT-2(1) Raipur was not validly transferred. As the impugned order u/s 143(3) dated 11.12.2017 was framed by Ld. AO i.e. DCIT-1(1) Raipur in absence of vested assumption of jurisdiction thus respectfully we hold that the impugned assessment order cannot survive for the want of valid assumption of jurisdiction the same therefore stands quashed. Assessment framed by the AO i.e. DCIT-1(1) Raipur u/s 143(3) of the Act quashed.

Summary

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.