Section 263 Revision Based on External Dictation Quashed; Interest-Free Loan to Overseas Subsidiary Held Quasi-Equity and Purchases Made for Commercial Expediency Allowed

“2. As already submittedfrom time to time, the above case was selected for CIT’s monitoring as per CIT, Rohtak’s letter F.No. CIT/Tech/CIT’s monitor/DCIT/GGN 1999-2000 8266, dated 4/5-10-1999. The case was discussed with the then CIT Rohtak from time to time and after his approval, the order was passed on 31-3-2000 under section 143(3). Thereafter assessment was cancelled under section 263 on 31-10-2000 by the CIT, Rohtak. The said assessment is pending.”

“20.5. Therefore, ‘all records’ as interpreted by the assessee to include inter-departmental correspondence (including CBDT) in respect of assessment proceedings u/S 153A / 143(3); and the inter-departmental correspondence (including CBDT) in respect of proceedings u/s 263 of the Act does not come within the ambit of directions given by the Hon’ble High Court.

Hon’ble High Court has only referred to assessment records and the records relating to proceedings u/S 263 for the relevant assessment year. It is pertinent to note that neither Tribunal nor Hon’ble High Court referred to above correspondences and confidential records inspite of specific prayer to that effect by assessee.

20.6 . Thus “all records”, as mentioned in the Tribunal’s order dated 06.07.2010, have been clarified by Hon’ble High Court in its order dated 03.08.2012 by observing that Tribunal cannot be faulted in directing to produce the assessment record and the records relating to proceedings u/S 263.”

“20 ….. in the present case, we find that all the interdepartmental correspondences required by the assessee, primarily in the nature of administrative actions being taken by the department had been shown to assessee and department is claiming confidentiality on rest of the documents.

5.5. Therefore, ‘all records’ as interpreted by the assessee to include inter-departmental correspondence (including CBDT) in respect of assessment proceedings u/S 153A / 143(3); and the inter-departmental correspondence (including CBDT) in respect of proceedings u/s 263 of the Act does not come within the ambit of directions given by the Hon’ble High Court. Hon’ble High Court has only referred to assessment records and the records relating to proceedings u/S 263 for the relevant assessment year. It is pertinent to note that neither Tribunal nor Hon’ble High Court referred to above correspondences and confidential records inspite of specific prayer to that effect by assessee.

5.6. Thus “all records”, as mentioned in the Tribunal’s order dated 06.07.2010, have been clarified by Hon’ble High Court in its order dated 03.08.2012 by observing that Tribunal cannot be faulted in directing to produce the assessment record and the records relating to proceedings u/S 263.

5.7. The observations in the case of Dr. Pratap Singh (supra) and other decisions relied upon by the learned Special Counsel, noted above, conclusively lay down the law that the department is not obliged to produce

confidential records. We, therefore, are of the considered opinion that the department has fully complied with the directions of the Tribunal regarding the production of all records.

21.2. In this case, the issue was regarding the recording of satisfaction as per the statutory requirements in search proceedings and, therefore, the assessee had the right to ask for the same. However, this proposition cannot be extended to confidential administrative correspondences, which do not even form part of the “record” under Section 263. Such correspondence can be examined by the Court to arrive at a proper conclusion but need not be disclosed to the other party. We, therefore, hold that the decision relied upon by the learned Counsel is of little assistance in the present context.

21.3. The proceedings cannot be brought to a standstill on account of repeated pleas by the assessee regarding confidential records not being provided, which have not even been directed by the Hon’ble High Court to be shown to the assessee, and on which privilege is being claimed by the department, particularly when substantial details have already been made available to the assessee.”

“20.10. …We have examined the compilation filed by department in sealed cover, which is mainly from file nos. i,78,8,^a,io,ii and 12. The entire correspondence relates to 2006 and 2007 i.e., prior to the passing of the first order of the Ld. CIT which was set aside by Hon’ble High Court and not thereafter. Therefore, in any case, this correspondence, which is purely administrative in nature, is not relevant for the present proceedings.”

“1… Wide this order, he has formed the opinion that the assessment order dated 01.06.2006 passed by the Assessing Officer (AO) under Section 143(3) 1153^A °f ^A e Act in respect of assessment year 1999-2000 is erroneous and prejudicial to the interest of the Revenue because of the reason that certain issues, highlighted in the said order, were not considered at the time of framing of the issues. Consequently, the assessment order has been setaside with direction to the AO to frame the assessment afresh after affording the assessee an opportunity of being heard and after making proper enquiries and verifications. According to the petitioner, this order is illegal and mala fide.

2. As far as the other writ petitions are concerned, only show-cause notice under Section 263 of the Act in respect of different assessment years, i.e., from assessment years 2000-01 to 2003-06 have been issued, which are challenged, but admittedly no orders under Section 263 of the Act have been passed so far. In these circumstances, it is but proper to first deal with W.P.(C) No. 4722/2008 on merits as the consequences from the outcome of this writ petition will determine the fate of other petitions as well.”

‘2l. … At the same time, we make it clear that the present Commissioner/respondent No. 4, while exercising his powers under Section 263 of the Act, shall look into the matter with an independent mind, without being influenced by the observations made in the impugned order.

“24. Insofar as these writ petitions are concerned, no order under Section 263 of the Act has been passed so far, and only a show-cause notice has been issued. Needless to mention, in these cases as well, which relate to different assessment years, the Commissioner shall be governed by the same parameters delineated above, and these petitions stand disposed of in these terms.”

” Accordingly, fresh review proceedings were initiated by the undersigned. The records of M/s NUT Ltd. along with the Appraisal Report and seized material was called for and examined. As a result, a show cause notice as per the provisions of section 263 was issued to the assessee on 05/02/2010.”

(iv) In 263 proceedings, the show cause notice and the order passed by the Id. Commissioner both cannot survive once the order has been set aside. The show cause notice and the order passed by the Id. Commissioner are part and parcel of the same order and, therefore, when the order passed by Id. Commissioner has been set aside, then it cannot be said that though the order does not survive, but the show cause notice does survive. This will be contrary to the very nature of proceedings under section 263.”

“In the impugned order, we make it clear that in Para 24, where it is stated that the issue of limitation would not be raised by the petitioners, the same is in the context of passing of the orders under Section 263 of the Act as well.”

34. We have considered the rival submissions and perused the record of the case. Section 153A lays down the procedure for assessment as a consequence of search. As per this section, where a search has been initiated u/s 132 or requisition is made u/s 132A of the Act, the AO shall assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search was conducted or requisition was made. Ld. Spl. Counsel has rightly pointed out that in terms of section 132 of the Act, search can be conducted only on satisfaction of certain pre-requisite conditions prescribed under that section. He has pointed out that search can be conducted on a person only if the prescribed income-tax authority has reason to believe that –

34.1 . Thus, the trigger point of such assessment is search, which, in turn, can be conducted only where the incometax authority has reason to believe that the assessee is in possession of certain undisclosed assets or documents suggesting earning of undisclosed income by the assessee. The purpose of making assessment u/s 153 A of the Act is not to verify the return, as such, but to make assessment primarily on the basis of the material found during the course of search. There cannot be any quarrel with these submissions made by the Id. counsel for the assessee. In this regard we may refer to the decision of Hon’ble Jurisdictional High Court in the case of Chetan Das Laxman Das (supra), in which Hon’ble Jurisdictional High Court observed that though there is no condition in section 153A that addition should be strictly made on the basis of evidence found in the course of search or other post-search material or information available with the AO which can be related to the evidence found, but that does not mean that assessment u/s 153A can be arbitrary or made without any relevance or nexus with the seized material.”

“114. Court may presume existence of certain facts. –

The Court may presume the existence of any fact which it thinks likeiy to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.

The Court may presume-

(e) that judicial and official acts have been regularly performed;.”

“24.

(1) From a combined reading of both the orders of the Hon’ble High Court, it is evident that the assessee is entitled to raise all pleas relating to jurisdictional issues on the grounds that the order under Section 263 is being passed at the dictates of higher authorities and, secondly, that the order under Sections 153/^A /143(3) was passed under the monitoring of the learned Commissioner If we accept the contention of the learned counsel for the assessee that the show cause notice dated 23.07.2007 survives despite the set-aside order of the Hon’ble High Court dated 11.12.2009,^ft would imply that the initiation of proceedings under Section 263 is valid and that all events occurring prior to the issuance of notice dated 23.07.2007 cannot be examined. This cannot be the true import of the directions of the Hon’ble High Court and would also result in an unintended consequence of the argument advanced by the learned counsel for the assessee, namely, that the impugned order passed under Section 263 dated 11.03.2010 still suffers from the same jurisdictional defect as was canvassed by the assessee in respect of the proceedings initiated through the show cause notice dated 23.07.2007.

24-1. In view of the above detailed discussion, ground Nos. 3 to 5 are dismissed.”

“…C/T, Centra/-//, would be well advised. to file rejoinders to the appeals in the ITAT and not resort to revision of orders as per Section

“The allegation is totally baseless. Routine correspondence and the submission of reports by the Assessing Officer (AO) to senior authorities do not imply that the assessment was completed under their direction. No approval was sought by the AO, nor were any directions issued by the CIT or CBDT regarding specific additions or disallowances.”

“The Range Addl./Joint CIT shall send a progress report in all search and seizure cases at intervals of every three months to the CIT.”

In these circumstances, the appropriate cause is to restore the matter back to the AO to enable him to follow the prescribed procedure. It is submitted that long before the amendment in section 263, this was an established procedure. Not following a prescribed procedure tenders the order as erroneous and prejudicial to the interest of revenue.

xi. Wherever there is a major deviation between the income proposed to be assessed and the income estimated in the appraisal report, the matter should be discussed between the Assessment Wing and the Investigation Wing, and minutes of the same should be recorded.”

“8. It is clear from the above, that interference by the Commissioner of Income-tax was not merely on the ground that a different view could be taken but on the

ground that there was failure to follow the established norms and there being non-application of mind. The reasons given by the Commissioner including the one that there was unusual jump of prices from Rs. 6 per share to Rs. 200 per share within a span of 13 months which could not be held to be explained without examining the sellers and buyers and making further enquiries is not shown to be irrelevant. The Tribunal committed an error of law in ignoring this aspect. In the facts and circumstances of the case, the Tribunal was not justified in holding that the exercise of jurisdiction by the revisional authority was not permissible under section 263 of the Act.”

1. Category 1 (Ground Nos. 11-17): – These grounds pertain to issues where direct incriminating material was seized during the search. While Grounds 1113 were covered in the previous year, Grounds 1417 are fresh grounds involving incriminating material of a similar nature, which the AO conspicuously failed to investigate, thereby satisfying the jurisdictional requirements of Section 263.

2. Category 2 (Ground Nos. 18-26): – These grounds involve issues where there is no email correspondence.

3. All these issues were decided against the Assessee in the previous year while confirming the action under Section 263 challenge.

14. In view of the above and for the reasons stated above, it is concluded as under:

“…the AO would assume jurisdiction to assess or reassess the total income even in case of completed/unabated assessments. the AO has the power to reassess the return of the assessee not only for the undisclosed income. but also with regard to material that was available at the time of original assessment.”

“1. Whether in the facts and circumstances of the case, the assessment u/s 153A of the Act in the case of unabated I completed year(s) is to be completed only on the basis of incriminating material found during the search, or, once some incriminating materials are found during the course of search, the Assessing Officer is empowered to also take into account any “other material” which may be available with the Assessing Officer and/or information as available from the return of income as well; keeping in view the ratio of decision of Hon’ble Supreme Court in the case of Pr. CIT v. Abhisar Buildwell (P.) Ltd.  (SC) ?”

RE: Ground 23 – Sham import of ENOM software from M/s Convergent Group USA.

“10. We have carefully considered the submissions and perused the records. The primary contention before us, as submitted by the Id. Counsel of the assessee is that it was commercially expedient for assessee to advance interest free loans to the AEs and that since no interest has actually been charged, there is no real income exigible to tax. As observed by the Id. CIT(A) the agreements show that these are loan amounts given by the assessee to Associated Enterprises (AEs). This in fact is an admitted position. There is no case that any special feature in the contract make the transaction as capital in nature. It is also an admitted proposition that the assessee has extended the loan to its AE’s who are 100 per cent subsidiaries. The assessee’s case is that it has actually not earned any interest and it was commercially expedient to extend these interest free loans. Now it is noted that this is not a case of ordinary business transaction. The question relates to scrutiny of international transaction to determine whether or not the same it as arm’s length. The principle of transfer pricing aims at determining the pricing in the situations of cross border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between unrelated parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. The case laws from the Apex Court cited by the Id. Counsel of the assessee are in the context of the proposition that only the real income has to be taxed and interest free advances can be given by companies (domestic) to their subsidiaries on the ground of commercial expediency. But these decisions are not in the context of Chapter-X of the IT Act which relates to special provision relating to computation of income from international having regard to arm’s length price. Other case laws cited by the assessee are not germane to the facts of this case. Hence in our considered opinion they do not help the case of the assessee.”