Assessment Quashed as Jurisdiction Was Transferred Without Mandatory Hearing: ITAT Delhi

Glen Appliances Private Limited Vs ACIT (ITAT Delhi)

Summary: The ITAT Delhi quashed the assessment proceedings after holding that the transfer of jurisdiction under Section 127(2) was invalid because the Principal Commissioner of Income Tax transferred the case from Faridabad to Delhi without providing the assessee a reasonable opportunity of being heard, a mandatory requirement under the Act. The Tribunal observed that notices under Section 143(2) were subsequently issued by Delhi-based officers who lacked valid jurisdiction due to the defective transfer order. Further, the transfer order and corrigendum were later cancelled, restoring jurisdiction to the original Assessing Officer at Faridabad. However, the Assessing Officer who ultimately passed the assessment order failed to issue a valid notice under Section 143(2) after jurisdiction was restored. Since issuance of a valid jurisdictional notice is a prerequisite for a lawful assessment, the Tribunal held that the assessment suffered from a fundamental jurisdictional defect. Consequently, the assessment order was declared invalid and quashed without examining the merits of the transfer pricing and other substantive issues.

Core Issue: Whether an assessment framed under section 143(3) read with section 144C is valid when (i) the transfer of jurisdiction from Faridabad to Delhi under section 127 was made without granting the assessee a reasonable opportunity of being heard as mandated by law, (ii) notices under section 143(2) were issued by officers who did not possess valid jurisdiction, and (iii) the Assessing Officer who ultimately completed the assessment did so without issuing a valid notice under section 143(2).

Facts: The assessee company was originally assessed by DCIT, Central Circle-1, Faridabad. On 17.05.2017, the PCIT (Central), Gurgaon passed an order under section 127(2) transferring jurisdiction from Faridabad to DCIT, Circle-12(1), Delhi. Subsequently, by a corrigendum dated 22.06.2018, jurisdiction was stated to be with DCIT, Circle-10(1), Delhi. Both the transfer order and corrigendum were passed without granting the assessee any opportunity of hearing.

Thereafter, DCIT, Circle-12(1), Delhi issued a notice under section 143(2) dated 21.08.2018. Later, DCIT/ACIT, Circle-10(1), Delhi issued another notice under section 143(2) dated 27.09.2018. The assessee consistently objected to the transfer and asserted that jurisdiction lawfully remained with Faridabad because its registered office was situated there.

Upon considering these objections, the PCIT (Central), Gurgaon passed a fresh order dated 14.03.2019 cancelling both the transfer order dated 17.05.2017 and the corrigendum dated 22.06.2018. Consequently, jurisdiction stood restored to DCIT, Central Circle-1, Faridabad. However, after restoration of jurisdiction, the Faridabad AO completed assessment under section 143(3) read with section 144C on 18.04.2021 without issuing any fresh notice under section 143(2). The assessee challenged the assessment on the ground that there was no valid assumption of jurisdiction at any stage.

Chronology of Events

Assessee’s Contentions: The assessee argued that section 127 expressly mandates a reasonable opportunity of hearing before transferring a case from one jurisdiction to another. Since no hearing was granted, the transfer order itself was void. Once the transfer order was invalid, all subsequent notices issued by Delhi officers became non est in law. Further, after restoration of jurisdiction to Faridabad, the jurisdictional AO could not complete assessment without first issuing a valid notice under section 143(2). Therefore, the entire assessment was void ab initio.

Revenue’s Stand: The Revenue argued that the assessee had participated in the assessment proceedings and therefore could not subsequently challenge the validity of the transfer order or the jurisdiction exercised by the officers.

ITAT Findings: The Tribunal observed that it was an admitted and undisputed fact that no opportunity of hearing was provided to the assessee before passing the transfer order under section 127(2). The language of section 127 specifically requires that before transferring a case from one jurisdiction to another, the competent authority must provide a reasonable opportunity of being heard and record reasons for the transfer.

The Tribunal held that failure to comply with this mandatory requirement rendered the transfer order dated 17.05.2017 invalid. Relying upon the Delhi High Court decision in Melco India (P.) Ltd. and the Supreme Court decision in Ajantha Industries, the Tribunal held that an order under section 127 passed without granting opportunity of hearing is legally unsustainable.

Having held the transfer order invalid, the Tribunal further observed that the Delhi officers who issued notices under section 143(2) never acquired lawful jurisdiction over the assessee’s case. Therefore, the notices dated 21.08.2018 and 27.09.2018 were to be treated as notices issued by non-jurisdictional officers and consequently as no valid notices in the eyes of law.

The Tribunal then examined the effect of the cancellation order dated 14.03.2019. Once the transfer order and corrigendum were cancelled, jurisdiction automatically reverted to the original AO at Faridabad. However, the Faridabad AO proceeded to complete the assessment without issuing any notice under section 143(2). Since issuance of a valid notice under section 143(2) by the jurisdictional AO is a foundational jurisdictional requirement for completing a scrutiny assessment, the assessment order itself suffered from a fatal jurisdictional defect.

The Tribunal concluded that there was never a valid notice under section 143(2) issued by an officer lawfully vested with jurisdiction. Accordingly, the assessment framed under section 143(3) read with section 144C was void and liable to be quashed. Since the appeal was allowed on the jurisdictional issue, all grounds relating to transfer pricing adjustment, section 80-IC deduction and merits of additions were left unadjudicated.

Case Laws Relied Upon:

1. Ajantha Industries vs. CBDT

2. Melco India (P.) Ltd. vs. Commissioner of Income Tax.

Relevant Paras: Paras 7 and 8.

Held: The transfer of jurisdiction from Faridabad to Delhi under section 127 was invalid because no opportunity of hearing was granted to the assessee. Consequently, notices under section 143(2) issued by Delhi officers were without jurisdiction and treated as invalid. After jurisdiction reverted to Faridabad, the jurisdictional AO also failed to issue a valid notice under section 143(2) before completing assessment. Since the assessment lacked a valid jurisdictional foundation, the assessment order was quashed in entirety and the merits of the additions were left undecided

FULL TEXT OF THE ORDER OF ITAT DELHI

The above captioned appeal is preferred by the assessee against the order dated 18.11.2024, passed by ld. Comm. Of Income Tax (Appeals)-3, Gurgaon, (hereinafter referred to as ‘ld. CIT(A)), passed u/s 154 r.w.s. 250(6) of the Income Tax Act, 1961 (hereinafter ‘the Act’) pertaining to Assessment Year 2017-18.

2. The assessee has raised following grounds of appeal:-

“1. That the order passed by the Ld. Commissioner of Income Tax (Appeals)-3, Gurgaon (hereinafter referred to as “the CIT(A)”) dated 30.10.2024 and later on passed under Section 154 rw.s. 250(6) of the Income Tax Act 1961, (hereinafter referred to as “the Act”), dated 18.11.2024, dismissing the appeal of the appellant company against the assessment order passed u/s 143(3) r.w.s. 144C of the Act dated 18.04.2021 and subsequently order u/s 1″54 r.w.s. 143(3) dated 25.04.2022, is erroneous, bad in law and on facts and against the principles of natural justice.

2. That the ld. CIT(A) erred in law and on facts in not quashing the impugned assessment order on the ground of being illegal, bad in law and beyond jurisdiction since the statutory notice u/s 143(3) of the Act was not issued by the ld. jurisdictional Assessing Officer [“ld. AO”) i.e,, the DCIT, Central Circle-L, Faridabad, who had passed the impugned assessment order but by the Assessing Officers (DCIT, Circle 12(1), Delhi on 21.08.2018 and DCIT, Circle 10[1), Delhi on 27.09.2018), who had no jurisdiction over the case of the appellant and thereby rendering the assessment proceedings and the consequent order void ab initio.

2.1 That the Ld. CIT(A), while deciding the aforesaid legal and jurisdictional issue, failed to consider that the order passed by the PCIT (Central), Gurugram under Section 127(2) of the Act dated 17.05.2017, transferring of jurisdiction from the DCIT Central Circle-1, Faridabad to the ACIT Circle 1,2(1), Delhi, followed by the corrigendum dated 22.06.2018 transferring them further to the DCIT Circle 10(1), Delhi, was illegal and contrary to the provisions of Sections 124 and 127 of the Act, which is evident from the subsequent order passed by the PCIT (Central), Gurgaon u/s 127(2) dated 14.03.2019. which cancelled the corrigendum dated 22.06.2018.

2.2 That the ld. CIT(A) grossly erred in treating the notices u/s L43(Z) issued by non-jurisdictional AOs as valid, solely based on the findings in the remand report without applying his independent mind or addressing the legal objections raised by the appellant before the AO as well as the ld. CIT(A) during the course of appellant proceedings

Without prejudice to the above:

3. That the Ld. CITIA) erred in law and on facts in not quashing the order passed by the ld. TPO u/s 92CA(3) of the Act, dated 31.01.2023 later rectified order u/s 154/92C(3) on 18.03.2021, on account of being illegal, bad in law and without jurisdiction, since the ld. TPO determined the ALP for “other transactions” amounting to Rs.115.05 crores (as reported at Sr. Nos. 23(A) of the Form 3CEB), for which no prior approval was obtained from the Competent authority, i.e., the PCIT/CIT, and no valid reference was made by the A0 under Section 92CA 1) of the Act read with the CBDT Instruction No. 3/2016 dated10.03.2016.

3.1 That the ld. CIT(A) grossly erred in holding that the AO did not deviate from the procedure for prior approval and reference to the TPO, as outlined in the CBDT Instruction dated 10.03.2016, solely based on the findings in the remand report, while overlooking the approval obtained on 04.11.2019 and other internal communications between the PCIT, Gurgaon, the TP0, and the AO, which showed that the prior approval was obtained only for the Specified Domestic Transactions [“SDT”) of Rs. 11,08,09,663/-, as reported at Sr. No. 22 of Form 3CEB, covered under clause (i) of Section 92BA of the Act, which was omitted by the Finance Act, 2017, w.e.f. 01.04.2017, and therefore not applicable for the impugned assessment year.

3.2 That the ld. CIT(A) also failed to appreciate that the ld. TPO was not empowered to determine ALP in respect of any other SDT transactions, which came to his notice subsequently as the said power is available only in respect of International Transactions in view of Sub-section (2A) of Section 92CA of the Act.

4. That the Ld. CITIA) erred on the facts and in law in confirming the action of the ld. AO/TPO in reducing the eligible profits by Rs.11,45,12,135/- after computing ALP of such eligible profits, of manufacturing unit at Baddi claiming deduction u/s 80-IC of the Act, which resulted in reduction of the claim of deduction by Rs.3,43,53,640/- being 30% of the TP adjustment made of Rs.11,45,12,135/-

4.1. That the ld. CIT(A) failed to consider that, before determining the ALP of the eligible profits earned from the transfer of goods amounting to Rs.115.05 crores from the eligible unit to non-eligible units, i.e., Associated Enterprises [“AEs”), the ld. AO was required to establish that the impugned transactions failed to meet the test of ALP as per Sections 80- IA(8) or 80-IA(10) read with Section 92BA(v) of the Act.

4.2 The ld. CIT(A) erred in rejecting the appellant’s contention that the AO without fulfilling the conditions under section 92C(3) of the Act referred the matter to the TPO and further TPO erred in not providing proper opportunity to the appellant by not confronting/ clarifying the finally selection of 6 companies, which were already rejected by the appellant.

4.3 That the ld. CIT(A) also grossly erred in rejecting the contention of the appellant that the impugned transactions with the AEs were at the Arm’s length Price as the same were recorded at sale prices ordinarily fetched in open market under uncontrolled conditions and therefore no adjustment was required to such prices and eligible profits earned thereon in terms of Section 92BA (v) read with Section 80-IC(7) r.w.s. Sections 80-IA (8)/ 80-IA(10) of the Act.

4.4 The ld. CIT(A) rejected the aforesaid contention solely based on the TPO’s findings without any material evidence that the eligible unit disclosed higher profits compared to other companies with lower margins, without independently addressing the various contentions raised by the appellant in this regard.

5. That the ld. CITIAJ erred in Iaw and on facts in confirming the action of the ld. AO/TPO in rejecting the “Other Method” prescribed by the CBDT and Rule 10AB, which was adopted by the appellant and instead adopting the TNM Method as the Most Appropriate Method (MAM) for the purpose of undertaking the benchmarking analysis of the impugned SDT transactions carried out with the AEs.

5.1 The ld. CITIAJ erroneously stated that the appellant had adopted TNMM as the MAM, which was accepted by the TPO, solely based on the findings in the TP order, while overlooking the Form 3CEB and reply filed to TPO, which demonstrated that the appellant had adopted the “Other Method” as per Rule L0AB for benchmarking the impugned transactions.

6. That the ld. CIT(A) erred in law and on facts, without analysing the terms of Rule 10B(2)b and confirming the action of the ld. AO/TPO in selecting the six comparables companies by applying inappropriate filters such as.

a. Including functionally dissimilar companies;

b. Failing to apply the turnover filter with an upper limit of Rs. 200 crores and a lower limit of 10%o of the turnover of the appellant company;

c. Including comparable companies facing exceptional circumstances such as demerger, amalgamation, significant fall in turnover, and continuous losses;

d. Including comparable companies showing low profit margins due to interest or other expenses”

7. That the ld. CIT(A) erred in law and on facts in accepting the ld. TPO’s actions:- (i) Using three-year data instead of current-year data, there by violating Rule 10B(4) of the Income Tax Rules; (ii) Calculating incorrect average of the three-year OP/OR and determining the percentile and median of the two at 7.18%.

8. That the ld. CIT(A) also failed to accept the appellant’s submission that in cases where comparable data of other companies for earlier years is unavailable then the appellant’s own data for those years should be considered.

9. That the order passed by the Ld. CIT(A) is a non-speaking order, which was passed without properly considering the facts of the case, the submissions made, the legal precedents relied upon by the appellant for each issue, and without applying an independent application of mind.

10. That on the facts and circumstances of the case and in law the ld. AO erred in initiating penalty proceedings under Section 270A of the Ac! ignoring the provisions of Section 270A(6) of the Income Tax Act, hence, the penalty proceedings be quashed.

3. The first and foremost grievance of the assessee is on assumption of jurisdiction. At the very outset, the ld. Counsel for the assessee pointed out that the jurisdiction in the case of the assessee was transferred from DCIT, CC-1, Faridabad to DCIT, Cricle-12(1), New Delhi by PCIT, Gurgaon vide order dated 17.05.2017 under section 127(2) of the Act. It is contended that the PCIT Gurgaon, passed the order u/s 127(2) without providing any opportunity of hearing to the assessee as mandated under section 127(2). The assessee raised an objection before the PCIT, Gurgaon, contending that jurisdiction lies with Faridabad as its registered office is located there. It is stated that the PCIT, Gurgaon issued a corrigendum to the order dated 17.05.2017, stating that the correct AO is DCIT, Circle 10(1), Delhi (earlier wrongly mentioned as Circle 12(1), Delhi). The corrigendum was also issued without providing an opportunity of hearing.

4. Thereafter, the DCIT, Circle 12(1), Delhi issued a notice under Section 143(2) of the Act dated 21.08.2018 for the relevant assessment year whereupon the assessee filed an objection before DCIT, Circle 12(1), Delhi requesting transfer of the case back to DCIT, CC-1, Faridabad, with a copy to DCIT, CC-1, Faridabad. Subsequently, the ACIT, Circle 10(1), Delhi issued a notice under Section 143(2) of the Act dated 27.09.2018 for the same assessment year.

5. On the basis of objections filed by the assessee to the order passed under Section 127(2) of the Act dated 17.05.2017 and corrigendum dated 22.06.2018, the PCIT, Gurgaon passed an order dated 14.03.2019, cancelling the earlier transfer order dated 17.05.2017 (transferring jurisdiction from DCIT, CC-1, Faridabad to DCIT, Circle 12(1), Delhi) and the corrigendum dated 22.06.2018 (transferring from DCIT, Circle 12(1), Delhi to ACIT, Circle 10(1), Delhi). The assessee informed the ACIT, Circle 10(1), Delhi, of the same. Thereafter, the DCIT, CC-1, Faridabad passed the Assessment Order u/s 143(3) of the Act without assuming jurisdiction by issuing a notice under Section 143(2) of the Act. The short issue, the ld. AR stated that the initial order under section 127(2) of the Act by the PCIT, Gurgaon, dated 17.05.2017 is illegal as the same was passed without providing any opportunity of hearing. The ld. counsel strongly relied on the jurisdictional High Court on the decision of Melco India Pvt. Ltd. (2003) 260 ITR 450, wherein it was held that the order under section 127(2) of the Act will be rendered invalid if opportunity of hearing is not afforded to the assessee. The ld. Counsel for the assessee has relied upon the decision of the Hon’ble Supreme Court in the case of Ajanta Industries vs CBDT 102 ITR 281.

6. Per Contra, the ld. DR stated that the assessee has participated in the proceedings and therefore at this stage, the assessee cannot challenge the order under section 127(2) of the Act.

7. We have heard rival submissions and perused the material available on record. We find that it is an admitted fact that no opportunity was granted by the PCIT, Gurgaon, before passing order under section 127(2) of the Act dated 17.05.2017. Provisions under section 127(2) mandates that when the PCIT is to pass an order for transferring of jurisdiction of a case from one territory to another, then he may, after giving the assessee a reasonable opportunity of being heard, wherever it is possible to do so and after recording his reasons for doing so, pass the order. We find that in the instant case, the ld. PCIT, Gurgaon, has not given any opportunity of being heard to the assessee before transferring the case from Faridabad to Delhi. In such factual matrix of the case, the decision of the Hon’ble jurisdictional High Court in Melco India Pvt. Ltd (supra) squarely applies. We therefore hold that the order u/s 127(2) for transferring the case from Faridabad to Delhi as invalid on account of ld. PCIT’s failure to afford any opportunity to the assessee before transferring the case before passing an order under section 127(2) of the Act. The consequence of the invalid transfer u/s 127(2) of the Act, is that the AO, DCIT Circle 12(1), Delhi and ACIT Circle 10(1), Delhi, who had issued notice/s 143(2) of the Act, were not vested with valid jurisdiction to issue notice u/s 143(2) of the Act and therefore the said notices will be treated as if no notice u/s 143(2) was issued for the impugned assessment year.

8. Further we find that once the PCIT Gurgaon, on 14.03.2019, cancelled the transfer order u/s 127(2) dated 17.05.2017, and the jurisdiction over the case was restored to the original AO, DCIT CC-1, Faridabad. We however, find that the DCIT CC-1, Faridabad, passed the assessment order dated 18.04.2021 without assuming valid jurisdiction by the issuance of notice u/s 143(2) of the Act. Consequently, the assessment order is also rendered invalid as it suffers jurisdictional defect and accordingly quashed. The ground no.2 of the appeal is allowed.

9. As the case has been adjudicated on legal grounds, no adjudication is made on the merits of the case.

In the result, the appeal in ITA 6092/Del/2024 is allowed. Order was pronounced in the open court on 3^rd June, 2026.