Granite Gate Properties Pvt. Ltd. Vs ACIT (ITAT Delhi)
Summary: The Income Tax Appellate Tribunal, Delhi Bench, allowed three appeals filed by Granite Gate Properties Pvt. Ltd. for assessment years 2009-10, 2010-11 and 2011-12, holding that additions made under Section 153A of the Income Tax Act, 1961, in respect of interest on Fully and Compulsorily Convertible Debentures (FCCDs) were unsustainable in the absence of incriminating material discovered during search proceedings. A search under Section 132 was conducted on 29 October 2013 in the Three C group, covering the assessee. Subsequently, the Assessing Officer referred the assessee’s international transactions involving FCCDs issued to its associated enterprise to the Transfer Pricing Officer.
The assessee had paid interest at 16% per annum, calculated with reference to the State Bank of India Prime Lending Rate and an additional 300 basis points to account for the risks associated with unsecured hybrid debt-equity instruments. The TPO restricted the arm’s length interest rate to 12.25% and proposed a transfer pricing adjustment of Rs. 1,27,76,315. The Dispute Resolution Panel sustained the adjustment. Before the Tribunal, the assessee raised additional jurisdictional grounds contending that the original assessment proceedings had concluded before the search and that no incriminating material relating to the FCCD transaction had been found. Relying upon the Supreme Court decisions in NTPC Ltd. Vs CIT and CIT Vs Sinhgad Technical Education Society, the Tribunal admitted these additional legal grounds. It observed that the return for assessment year 2009-10 had been processed under Section 143(1) on 5 September 2010 and the time limit for issuing notice under Section 143(2) had expired before the search.
The FCCD transactions were already recorded in the regular books of account. Applying the principles established in CIT Vs Kabul Chawla, CIT Vs IBC Knowledge Park P. Ltd., Pr. CIT Vs Meeta Gutgutia, Pr. CIT Vs Dipak Jashvantlal Panchal and Pr. CIT Vs Ram Avtar Verma, the Tribunal held that completed assessments could not be disturbed under Section 153A without incriminating search material. Independently examining the merits, the Tribunal accepted that FCCDs were unsecured hybrid or quasi-equity instruments carrying risks different from ordinary loans. It considered the SBI PLR plus 300 basis points reasonable and at arm’s length, particularly because the rate was permissible under the applicable foreign exchange control regulations.
The difference between the assessee’s interest rate of 16% and the TPO’s rate of 12.25% was 3.75 percentage points, which the Tribunal treated as falling within the 5% tolerance applicable under the second proviso to Section 92C(2) for the relevant period. Consequently, the adjustment was deleted on merits as well. For assessment years 2010-11 and 2011-12, the original assessments had been completed under Section 143(3) before the search, and no incriminating material was discovered. The Tribunal applied its findings to those years and allowed all three appeals.
Cases Discussed
- Pr. CIT Vs Meeta Gutgutia, Proprietor of M/s Ferns ‘N’ Petals, (2017) 395 ITR 526 (Delhi High Court) — The Tribunal relied upon the principle that additions in search assessments require incriminating material relating to the relevant assessment year.
- Pr. CIT Vs Dipak Jashvantlal Panchal, (2017) 397 ITR 153 (Gujarat High Court) — Relied upon for the requirement that additions under Section 153A must have a nexus with material discovered during search.
- CIT Vs Sinhgad Technical Education Society, (2017) 397 ITR 344 (Supreme Court) — Considered for admission of additional jurisdictional grounds based on facts already available on record.
- Pr. CIT Vs Ram Avtar Verma, (2017) 395 ITR 252 (Delhi High Court) — Relied upon for the proposition that completed assessments cannot be disturbed without incriminating search material.
- CIT Vs IBC Knowledge Park P. Ltd., (2016) 385 ITR 346 (Karnataka High Court) — Considered in relation to completed assessments, intimations under Section 143(1), and the requirement of incriminating material.
- CIT Vs Kabul Chawla, (2016) 380 ITR 573 (Delhi High Court) — Relied upon for the distinction between pending and completed assessments under Section 153A and the requirement of incriminating material for disturbing completed assessments.
- NTPC Ltd. Vs CIT, (1998) 229 ITR 383 (Supreme Court) — Relied upon for the Tribunal’s power to admit additional questions of law arising from facts already on record.
- Honda Motorcycles and Scooters India Pvt. Ltd. Vs ACIT, ITA No. 1379/Del/2011 (ITAT Delhi) — Cited by the assessee in support of its argument concerning transfer pricing adjustment where interest expenditure had been capitalised.
FULL TEXT OF THE ORDER OF ITAT DELHI
These three appeals by the assessee are directed against the separate orders each dated 30.10.2017 passed by the AO u/s 144C(13) r.w.s. 153A of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Since, the issues involved are common in all these appeals which were heard together so these are being disposed off by this common order for the sake of convenience and brevity.
3. The grounds raised in ITA No. 7022/Del/2017 read as under:
1. That the respective orders passed by the Ld. Assessing Officer (AO), Ld. Transfer Pricing Officer (TPO) and the Hon’ble Dispute Resolution Panel (DRP) are arbitrary, unjust and illegal on various factual and legal grounds including the following:
(i) by making an addition/disallowance/adjustment of Rs. 1,27,76,315/- out of interest payable/paid by the Appellant on Fully & Compulsorily Convertible Debentures (FCCD’s) as issued by it to its Associated Enterprise (AE);
(ii) by ignoring the fact that interest @16 % per annum on such FCCD’s as per Security Holders Agreement entered into by the Appellant and the AE was at arm’s length price/rate;
(iii) in not accepting or ignoring the detailed transfer pricing study/economic analysis as undertaken by the Appellant for justifying the interest @16 % per annum to be at arm’s length price;
(iv) in not appreciating the fact that FCCD’s being hybrid instruments i.e. a mix of debt and equity, carried a higher risk and hence could not be compared with plain vanilla loan or bond instruments/arrangements;
(v) in not considering or ignoring the fact that interest @16 % per annum on FCCD’s by adopting PLR of SBI plus 300 basis points was in accordance with FEMA regulations; and
(vi) by inappropriately restricting the interest rate to @12.25 % per annum by not fully considering / appreciating the facts / submissions / evidence produced made/filed before them;
2. That the Ld. AO, TPO and the Hon’ble DRP have erred on facts and under the law in ignoring the specific provision of the Income Tax Act, 1961 (Act) as per which transfer pricing adjustment could not be made if the variation of interest rate on FCCD’s between the arm’s length price/rate so determined and the price/rate at which the international transaction has actually been undertaken does not exceed 5 %.
3. That in the absence of Appellant having claimed any deduction on account of interest on FCCD’s, there was absolutely no justification on the part of the Ld. AO, TPO and the Hon’ble DRP to have made transfer pricing adjustment out of such interest and making an addition/disallowance of Rs.1,27,76,315/- to the income as declared.
4. That without prejudice to Ground No, 1 to 3 above, the order of Hon’ble DRP as passed alongwith consequential orders of the authorities below are non-speaking orders since they have not recorded any reasons for the various submissions/contentions as made by the Appellant before them and therefore, the same deserve to be cancelled/set aside.
5. That without prejudice to above grounds, transfer pricing adjustment of Rs.1,27,76,315/- as made to the income as declared is very excessive.
6. That the penalty proceedings u/s 271(1)(c) of IT. Act as initiated on the basis of TP Adjustment are illegal.
7. That the Appellant Co. reserves its right to add, amend/modify the grounds of appeal.
4. The assessee also moved an application for admission of the additional ground under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 stating therein as under:
Sir,
It is submitted that the appeal against order u/s 144C r.w.s. 153A of I.T. Act dated 23.10.2017 for assessment year 2009-10 in the above matter was filed by the assessee on 23.11.2017 for which ITA No. 7022/Del/2017 has been allotted.
Five this application, Appellant seeks your permission to raise following additional grounds of appeal:
1. That on the facts and circumstances of the case, the Ld. AO has erred in law in making a transfer pricing adjustment/addition of Rs.1,27,76,315 out of interest paid/payable by the Appellant on Fully & Compulsorily Convertible Debentures (FCCDs) as issued by it to its Associated Enterprise (AE) vide order passed under section 144C(13) r.w.s. 153A of IT. Act dated 23/10/2017 since such addition as made is not based on any incriminating material found during the course of search and further no assessment for such year was pending on the date of search.
2. That in the absence of any incriminating material found during the course of search relating to international transaction as undertaken with the AE, no reference u/s 92CA(1) of I.T. Act could have legally been made by the AO to the TPO particularly since no assessment for such year was pending on the date of search.
The above additional grounds are based on the facts of the case of the Appellant where no incriminating material was found during search proceedings relating to the international transaction as undertaken by it with the AE. Moreover, the assessment for the year under consideration having been completed on 05/09/2010 vide intimation passed u/s 143(1), therefore, on the date of search as conducted on 29/10/2013, no assessment for such year was pending.
As per ground No. 1 as already raised in the memo of appeal, the Appellant has already challenged the illegality of the above addition and the additional grounds are being raised in order to make them more specific. Moreover, as per Ground No. 7 as raised the Appellant is entitled to raise additional grounds of appeal. The omission to raise the aforesaid grounds of appeal was merely inadvertent and was neither willful nor deliberate. Moreover, the above grounds being purely legal grounds deserve to be entertained and adjudicated upon for which reliance is placed on the Hon’ble Supreme Court judgment in the case of NTPC Ltd. reported in 229 ITR 383.
As the above additional grounds go to the root of the matter, therefore, the same may kindly be entertained while deciding the above appeal.
5. During the course of hearing, the ld. Counsel for the assessee reiterated the contents of the aforesaid application and requested for admission of the additional grounds and stated that the relevant material is already available on record. Therefore, the additional grounds which are purely legal grounds may be admitted. The reliance was placed on the judgment of the Hon’ble Supreme Court in the case of NTPC Vs CIT reported at 229 ITR 383.
6. In his rival submissions, the ld. Sr. DR opposed the admission of the additional grounds but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
7. We have considered the submissions of both the parties and perused the material available on the record. In our opinion, the additional grounds raised by the assessee are purely legal grounds which go to the root of the matter. As regards to the admission of the additional ground, the Hon’ble Supreme Court in the case of NTPC Vs CIT 229 ITR 383 (supra) held as under:
Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. The Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner (Appeals) is too narrow a view to take of the powers of the Tribunal.
It has been further held as under:
Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
8. Similarly, the Hon’ble Apex Court in the case of CIT Vs Sinhgad Technical Education Society (2017) 397 ITR 344 (supra) held as under:
That the Tribunal permitted the assessee to raise the additional ground on the ground that it was a jurisdictional issue taken up on the basis of facts already on record, that under section 153C of the Act, incriminating material which was seized had to pertain to the assessment years in question, and that the documents which were seized did not establish any co-relation, document-wise, with these four assessment years. The Tribunal found that the material disclosed in the satisfaction note belonged to assessment year 2004-05 or thereafter. The Tribunal rightly permitted this additional ground to be raised and correctly dealt with the ground on the merits as well. The High Court was right in affirming this view of the Tribunal.
9. In the present case also, the assessee raised the additional grounds which were on a jurisdictional issue on the basis of facts already on record. Therefore, the same deserve to be admitted. In view of the above, the legal grounds raised by the assessee are admitted.
10. Vide aforesaid additional grounds, the assessee challenged the validity of the assessment framed u/s 153A of the Act in the absence of any incriminating material found during the course of search.
11. The facts related to this issue in brief are that a search and seizure operation u/s 132 of the Act was carried out on Three C group by the Investigation Wing, New Delhi on 29.10.2013 and the assessee was also covered in the search. The AO issued the notice u/s 153A of the Act on 11.11.2014 and also issued notices u/s 142(1) of the Act on various dates, mentioned in the assessment order. In compliance to the said notice, the assessee filed the return of income declaring a loss of Rs.1,89,993/-. The AO referred the matter to the TPO u/s 92CA(1) of the Act by observing that the assessee had issued fully and Compulsory Convertible Debentures (FCCDs) and that the international transactions with an associated enterprises were involved.
12. The TPO observed that the assessee had paid interest on FCCDs as per the investment agreement. In terms of which, the assessee was required to pay interest @ 16% which included SBI PLR and 300 basis point to cover the risk, cost of funds and administration cost which depend upon the credit rating of FCCDs. The assessee submitted that it had taken SBI PLR as arm’s length interest rate because no one could lend at less than this rate. It was also stated that the assessee had not incurred any extraordinary effort. However, the TPO was of the view that the AE was making huge investment in assessee’s business and was undertaking big risk, therefore, 300 basis points over and above the base rate PLR must be disallowed. The TPO considered the rate of interest of 12.25% at arm’s length instead of interest paid at 16% by the assessee. Accordingly, an adjustment of Rs.1,27,76,315/- was proposed. The AO passed the draft assessment order proposing the adjustment of the aforesaid amount.
13. Being aggrieved the assessee raised objections before the ld. DRP and submitted that for the purposes of benchmarking the international transaction of interest on FCCDs, Comparable Uncontrolled Price Method (CUP Method) was applied as the most appropriate method and that at the time of issuance of FCCDs to Twilzon Ltd., the State Bank of India Prime Lending Rate was 13%, therefore, as per limit provided under the foreign exchange control regulations, the maximum rate of interest that could be paid on FCCDs subscribed by associated enterprise would be 16% per annum (13% plus 300 basis points) which could be considered as proposed price at which transaction could happen. It was stated that FCCDs were hybrid instrument which exhibited features of both debt as well as equity, therefore, merely using the SBI PLR for benchmarking the transaction of payment of interest on FCCDs was not appropriate. It was also stated that entire amount of interest of Rs.5,45,12,277/- paid by the assessee during the relevant previous year was capitalized in the books of the assessee and was not claimed as expenditure. Therefore, no adjustment on account of international transaction of payment of interest was warranted in the case of the assessee. Reliance was placed on the decision of the ITAT Delhi Bench in the case of Honda Motorcycles and Scooters India Pvt. Ltd. Vs ACIT (ITA No. 1379/Del/2011). It was pointed out that the ld. DRP vide order dated 21.11.2014 in the case of M/s Gujarat Guardian Ltd. for the assessment year 2010-11 deleted the Transfer Pricing addition holding that the engineering fees paid by the assessee had been capitalized during the year. It was accordingly submitted that no transfer pricing adjustment was even otherwise warranted in the case of the assessee.
14. The ld. DRP, however, directed to sustain the adjustment by observing as under:
The contentions of the TPO and the applicant have been carefully examined and considered. After careful perusal of the facts, the DRP is of the view that no interference is called for in TPO’s decisions and accordingly the act of the TPO is upheld.
15. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the assessee filed the original return of income on 30.09.2009 and assessment was completed by issuing the intimation u/s 143(1) of the Act on 05.09.2010. A reference was made to page nos. 25 to 30 of the assessee’s paper book. It was further submitted that during the subsequent search made on 29.10.2013 no incriminating material was found relating to such international transaction. It was contended that the TPO although held that interest on FCCDs was to be restricted to SBI PLR rate by disallowing 300 basis points above but the same was not based on any incriminating material found during the course of search. It was further contended that the ld. DRP has not given any reason while sustaining the adjustment made by the TPO. It was stated that since the assessment stood completed prior to the date of search and no incriminating material relating to international transaction of interest on FCCDs was found during the course of search, therefore, completed assessment interfered with by the AO/TPO u/s 153A of the Act was not tenable in the eyes of law. The reliance was placed on the following case laws:
> Pr. CIT Vs Meeta Gutgutia Prop. M/s Ferns “N” Petals (2017) 395 ITR 526 (Del.)
> CIT & Anr. Vs IBC Knowledge Park P. Ltd. (2016) 385 ITR 346 (Kar.)
> CIT Vs Sinhgad Technical Education Society (2017) 397 ITR 344 (SC)
> Pr. CIT Vs Dipak Jashvantlal Panchal (2017) 397 ITR 153 (Guj.)
> CIT Vs Kabul Chawla (2016) 380 ITR 573 (Del.)
> Pr. CIT Vs Ram Avtar Verma 395 ITR 252 (Del.)
16. On merit also, it was submitted that the TPO directed to charge the interest @ 12.25% instead of 16% applied by the assessee. Therefore, difference was only of 3.75% which was less than 5% and no adjustment was required to be made as per the proviso to Section 92C of the Act. It was also submitted that the intimation sent u/s 143(1) of the Act was also an assessment. The reliance was placed on the judgment of the Hon’ble Karnataka High Court in the case of CIT Vs IBC Knowledge Park P. Ltd. 385 ITR 346. It was also stated that the TPO/AO incorrectly had taken SBI PLR at 12.25% as prevalent on 01.01.2009 whereas at the time of issue of FCCDs vide Share Subscription Agreement dated 11.12.2008, the correct SBI PLR was 13% as prevalent on 10.11.2008. A reference was made to page nos. 143 & 144 of the assessee’s compilation which is the copy of the SBI PLR rate as extracted from SBI portal. It was accordingly submitted that the TP adjustment/addition which had been made because of the differential in the interest rate was within the acceptable range of 5% as permitted u/s 92C of the Act and that the risk factors on account of such unsecured and hybrid/quasi equity instrument had not been factored by the authorities below while computing the ALP of interest rate. It was also stated that in the absence of the assessee having claimed any deduction on account of interest on FCCDs during the year under consideration, no addition out of interest could have been made to the loss as declared by the assessee.
17. In his rival submissions, the ld. Sr. DR strongly supported the orders of the authorities below and reiterated the observations made by the AO/TPO/DRP in their respective orders. It was stated that the assessee had never raised the issue which now has been raised in the additional ground before the AO/TPO or the ld. DRP. It was also submitted that at the time of framing the original assessment, this fact, as to whether the loans were raised by the assessee or not, was not in the knowledge of the AO and the said fact came to his knowledge only when the search took place.
18. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is an admitted fact that the assessee filed the original return of income for the year under consideration on 30.09.2009 which was processed u/s 143(1) of the Act on 05.09.2010 and the time period to issue the notice u/s 143(2) of the Act had already expired before the search took place on 29.10.2013. During the course of search, no incriminating material was found relating to the FCCDs which were already shown by the assessee in its regular books of accounts. The AO/TPO made the addition on account of differential interest on FCCDs undertaken with the AE, in our opinion, no such adjustment could have been made to the income which was already assessed prior to the date of search.
19. On a similar issue, the Hon’ble Karnataka High Court in the case of CIT & Anr. Vs IBC Knowledge Park P. Ltd. (2016) 385 ITR 346 (supra) held as under:
A search was conducted on Y, Z and IBC on June 17, 2008. One of the offices of the assessee was in the same premises where the search took place. Certain documents belonging to the assessee were seized and the Assessing Officer of the persons in whose cases search was conducted transferred the documents to the Assessing Officer of the assessee under section 153C of the Act. Assessment orders under section 143(3) read with section 153C were passed for the assessment years 2004-05 to 2008-09. In respect of the assessment year 2004-05, the Tribunal noted that as on the date the search was conducted i.e., on June 17, 2008, no assessment proceeding was pending and as no undisclosed income was detected, the assessment made under section 153A read with section 153C of the Act the Tribunal quashed the assessment. For the assessment year 2005-06, though no order under section 143(3) had been passed, an intimation under section 143(1) had been issued. The Tribunal held that for the purpose of section 153A read with section 153C of the Act, an intimation under section 143(1) was also an order of assessment. It upheld the validity of the assessment for the assessment year 2005-06.
It has further been held as under:
That one of the conditions precedent for invoking a block assessment pursuant to a search in respect of a third party under section 158BD of the Act, i.e., recording satisfaction that undisclosed income belongs to the third party, which was detected pursuant to a search had not been complied with. Though documents belonging to the assessee were seized at the time of search operation, there was no incriminating material found leading to undisclosed income. Therefore, assessment of income of the assessee was unwarranted.
20. In the present case also, although the assessment was not framed u/s 143(3) of the Act but an intimation was issued u/s 143(1) of the Act, however, the time to issue the notice u/s 143(2) of the Act has already expired before the search. Therefore, for the purposes of Section 153A r.w.s. 153C of the Act, an intimation u/s 143(1) of the Act was also an order of assessment. In the present case, since no incriminating material was found during the course of search. The addition made by the AO u/s 153A of the Act on account of interest on FCCDs was not justified.
21. Similarly, the Hon’ble Gujarat High Court in the case of Pr. CIT Vs Dipak Jashvantlal Panchal (2017) 397 ITR 153 (supra) held as under:
Section 153A of the Income-tax Act, 1961, bears the heading “assessment in case of search or requisition”. The heading of the section can be regarded as a key to the interpretation of the operative portion of the section and if there is no ambiguity in the language or if it is plain and clear, then the heading used in the section strengthens that meaning. From the heading of the section, the intention of the Legislature is clear, viz., to provide for assessment in case of search and requisition. When the very purpose of the provision is to make assessment in case of search or requisition, it goes without saying that the assessment has to have relation to the search or requisition. In other words, the assessment should be connected with something found during the search or requisition, viz., incriminating material which reveals undisclosed income. Thus, while in view of the mandate of sub-section (1) of section 153A of the Act, in every case where there is a search or requisition, the Assessing Officer is obliged to issue notice to such person to furnish returns of income for the six years preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made, any addition or disallowance can be made only on the basis of material collected during the search or requisition.
22. In the present case, since no incriminating material was found, therefore, the addition made by the AO u/s 153A of the Act was not justified.
23. On an identical issue, the Hon’ble Jurisdictional High Court in the case of CIT Vs Kabul Chawla (2016) 380 ITR 573 (supra) held as under:
The legal position that emerges on a perusal of section 153A and section 132 of the Income-tax Act, 1961, is as under :
(i) Once a search takes place under section 132 of the Act, notice under section 153A(1) will have to be mandatorily issued to the person in respect of whom search was conducted requiring him to file returns for six assessment years immediately preceding the previous year relevant to the assessment year in which the search takes place.
(ii) Assessments and reassessments pending on the date of the search shall abate. The total income for such assessment years will have to be computed by the Assessing Officers as a fresh exercise.
(iii) The Assessing Officer will exercise normal assessment powers in respect of the six years previous to the relevant assessment year in which the search takes place. The Assessing Officer has the power to assess and reassess the “total income” of the six years in separate assessment orders for each of the six years. In other words, there will be only one assessment order in respect of each of the six assessment years in which both the disclosed and the undisclosed income would be brought to tax.
(iv) Although section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously, an assessment has to be made under this section only on the basis of the seized material.
(v) In the absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word “assess” in section 153A is relatable to abated proceedings (i.e., those pending on the date of search) and the word “reassess” to completed assessment proceedings.
(vi) In so far as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under section 153A merges into one. Only one assessment shall be made separately for each assessment year on the basis of the findings of the search and any other material existing or brought on the record of the Assessing Officer.
(vii) Completed assessments can be interfered with by the Assessing Officer while making the assessment under section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment.
24. A similar view has been taken by the Hon’ble Jurisdictional High Court in the case of Pr. CIT Vs Meeta Gutgutia Prop. M/s Ferns “N” Petals (2017) 395 ITR 526 (supra) wherein it has been held as under:
Any and every document cannot be and is not an incriminating document. No addition can be made for a particular assessment year without there being an incriminating material qua that assessment year which would justify such an addition.
25. Similarly, their Lordships of the Hon’ble Jurisdictional High Court in the case of Pr. CIT Vs Ram Avtar Verma (2017) 395 ITR 252 (supra) observed as under:
The Commissioner of Income-tax (Appeals), after considering the record, was of the opinion that the additions could not be justified, and accordingly granted relief, holding that no incriminating material was recovered during the search. The Revenue’s appeal was rejected.
The Income-tax Appellate Tribunal held as follows:
“10. As per the paper book filed by the learned authorized representative showing the Panchnama from where learned Departmental representative could not point out any material found during the course of search which could give even remote possibilities of altering the income of the assessee based on any incriminating documents. Admittedly both the assessment years in these appeals are completed assessments in case of the assessee. The reliance placed upon by the learned authorized representative on the decision of the Hon’ble Delhi High Court in the case of CIT v. Kabul Chawla [2016] 380 ITR 573 (Delhi) where original assessment have been made under section 143(1) of the Act is apt and squarely covers issue in favour of the assessee. The Hon’ble High Court in paragraph No. 37 of that decision has held that no addition can be made in the hands of the assessee in the absence of any incriminating material unearthed during the course of search or requisition of documents. On reading of the order of the Assessing Officer we could not find that there is any incriminating material referred to by the Assessing Officer which is found during the course of search for making these additions. Therefore, respectfully following the decision of the Hon’ble Delhi High Court in the case of CIT v. Kabul Chawla (supra) we confirm the order of the learned Commissioner of Income-tax (Appeals) and dismiss the appeal of the Revenue.”
The Revenue urges that the non obstante clause in section 153A together with section 158BD removes the barrier vis-a-vis restriction upon search assessments being confined to “undisclosed income”. In other words, it is stated that none of the provisions confine the enquiry of the Assessing Officer to evaluating incriminating materials. This aspect, in the opinion of the court, was extensively dealt with in CIT v. Kabul Chawla [2016] 380 ITR 573 (Delhi) which has, by now, been followed consistently in several appeals. The non obstante clause, in the opinion of the court, was necessary, given that there is a departure from the pre-existing provisions, which applied for the previous years and had a different structure where two sets of assessment orders were made by the Assessing Officer during block periods. With the unification of assessment years for the block period, i.e. only one assessment order for each year in the block period, it was necessary for an overriding provision of the kind actually adopted in section 153A. But for such a non obstante clause, the Revenue could possibly have faced hurdles in regard to unadopted/current assessment years as well as reassessment proceedings pending at the time of the search in respect of which proceedings were to be completed under section 153A/153C. Having regard to the above directions, we are of the opinion that the Income-tax Appellate Tribunal’s decision does not call for interference. Both the appeals are accordingly dismissed.
26. We, therefore, by keeping in view the ratio laid down in the aforesaid referred to judicial pronouncements, are of the confirmed view that the impugned addition made by the AO u/s 153A of the Act in the absence of any incriminating material found during the course of search was not justified.
27. On merit also, the AO/TPO made the addition on account of differential rate of interest on FCCDs. The assessee applied the interest rate on the basis of SBI PLR rate plus 300 basis points for the reasons that the FCCDs being unsecured and hybrid/quasi equity instrument as compared to plain vanilla loan instrument. Therefore, the SBI PLR plus 300 basis points over it was reasonable and on the arm’s length, particularly when the same was permissible under Foreign Exchange Control Regulations. The AO/TPO, however, restricted the interest rate to 12.25%. The variance in the rate of interest as per TPO/AO to be adjusted and added was 3.75% which was within the permissible range of 5% as permitted by second proviso to Section 92C(2) of the Act. It is also relevant to point out that the percentage of 3% in the aforesaid proviso has been inserted by the Finance Act, 2012 w.e.f. 01.04.2013 and prior to that amendment, this percentage was at 5%. In the present case, since the difference is less than 5%, therefore, no addition on account of arm’s length price could have been made by the AO/TPO. As such on merit also, no addition could have been made.
28. For the assessment years 2010-11 and 2011-12, the facts are identical. The only difference is that the original assessments were framed u/s 143(3) of the Act much before the search which took place on 29.10.2013, u/s 132 of the Act but no incriminating material was found during the course of search. Therefore, our findings given in the former part of this order shall apply mutatis mutandis.
29. In the result, the appeals of the assessee are allowed.
(Order Pronounced in the Court on 29/05/2018)
