Initiation of Proceedings u/s 153A not valid if no incriminating material found during search

Brief of the case:

In the case of INTAS pharmaceuticals Ltd. Vs. DCIT Ahmedabad Bench of ITAT have held that initiation of proceedings u/s 153A in absence of any incriminating material found in search conducted after finalization of regular assessments is not sustainable. In making above observation ITAT followed direction prescribed by special bench of ITAT in All India Cargo Logistics (DCIT 137 ITD 287).

Facts of the case:

• The assessee company manufactures and trades in pharmaceutical products.
• Assessee filed its returns relating to the impugned four assessment years from 2002-03 to 2005-06 respectively.
• AO granted refund in first AY and remaining returns are processed after making some additions, most common being those of staff welfare expenses and deductions u/s. 80G/80HHC and interest etc.
• Appeals were filed before CIT (A) which were partly allowed. Against which appeal were pending before ITAT.
• In the mean time department conducted search in case of INTAS group of companies.
• Notices u/s 153A were issued and in reply to those assessee filed separate returns.
• AO framed consequential search assessments on 30.12.2009 inter alia making the above stated disallowances/additions.
• In AYs 2007-08 and 2008-09 AO disallowed weighted deduction u/s. 35(2AB) in respect of clinical trial expenses of Rs.2,12,93,375/- and Rs.4,67,57,759/- respectively.
• The assessee has also raised a corresponding ground in AY 2007-08 relating to the very issue of weighted deduction of Rs.3,07,245/- disallowed in the course of assessment and the same being sustained in the CIT(A)’s order.
• The authorities below have invoke the above disallowance for want of DSIR approval.
• A further ground in AY 2008-09 challenges lower appellate order upholding assessment of book profit u/s.115JB at Rs.19,28,66,436/- as per original return instead of the revised one stating it as Rs.18,81,50,391/-. This claim was rejected by CIT (A) on the ground that intimation of revised return was given to AO after completion of assessment. Hence, no cognizance was taken by the AO in respect of this return as the same was filed after the assessment order was passed.

Contention of the assessee:

• Once no incriminating material or any undisclosed assets had been discovered during the search, the impugned Section 153A jurisdiction could not have been assumed. AO nowhere mentioned all or any such material in his assessment orders.
• None of the above stated assessments were pending as on the date of search so as to abate u/s.153A 2nd proviso thereto.
• Expenses for clinical trials were made for the purpose of pharmaceuticals purposes.

Contention of the revenue:

• Assessing authority can initiate Section 153A proceedings by reopening all assessments pertaining to the preceding six assessment years after search and assess income afresh as per law.
• Reliance was placed on case law of (2014) 49 taxmann.com 98 (Karnataka) Canara Housing Development Co. vs. DCIT, [2014] 52 taxmann.com 172 (Allahabad) CIT vs. Raj Kumar Arora, [2014] 49 taxmann.com 465.

Held by ITAT:

• The question that arises for consideration is as to whether the Assessing Officer has rightly assumed Section 153A jurisdiction or not in these four assessment years.
• A perusal of statutory provision u/s 153A reveals that pending assessments on the date of search in respect of preceeding six assessment years abate as per the 2nd provision.
• However, the same does not include those assessments which have already attained finality or wherein , assessment orders have already been passed.
• Assessment was completed in all these four AYs i.e. 2002-03 to 2005-06 much before the search was conducted.
• Special bench of the ITAT All India Cargo Logistics (DCIT 137 ITD 287) held that only pending assessments abate in case of a search being conducted and an Assessing Officer retains the original jurisdiction as well as the one conferred on him u/s.153A for which assessments shall be made for each of the six assessment years separately.
• Special Bench thereafter in regard to 2^nd provison held that the assessment therein u/s.153A will be made on the basis of books of account or other documents not produced in the course of original assessment but found in the course of search and undisclosed income or property discovered in the course of search.
• No such material is placed on record that the search in question unearthed any such undisclosed material in assessee’s case.
• The Special bench’s decision squarely covers the assessee’s case. The Hon’ble Bombay high court in CIT vs. Continental Warehousing Corporation (Nhava Sheva ) Ltd. [Case law of (2015) 58 taxmann.com 78 (Bombay)] affirms the said decision by holding that the same does not suffer from any infirmity.
• Initiation of proceedings u/s 153A in this set of four assessment years in absence of any incriminating material found in search conducted after finalization of regular assessments is not sustainable.
• The case law of Raj Kumar Arora (supra) deals with scope of a Section 153A assessment and not that of assumption of jurisdiction which stands on a different footing.
• The assessee’s appeals AYs 2002-03 to 05-06 are allowed. The Revenue’s corresponding appeals on merits are dismissed as having been rendered infructuous.
• It is an admitted fact that assessee has incurred the amount in respect to clinical trials on specified purposes only.
• ITAT find that the hon’ble jurisdictional high court in case of CIT vs. Cadila Healthcare Ltd. [2013] 31 taxmann.com 300 (Gujarat) takes into account explanation to Section 35(2AB)(1) introduced by the Finance Act, 2001 w.e.f. 01.04.2002 and holds that where an assessee company incurs expenses on clinical trials for developing its pharmaceutical products outside a lab facility approved by the prescribed authority (the DSIR), the impugned weighted deduction has to be granted as purpose of this beneficial provision is to encourage scientific research.
• The Revenue does not point out any distinction on facts and law. Nor does it highlight any factual infirmity in assessee’s claim that the impugned sum has not been incurred on clinical research.
• A coordinate bench in the ITA No. 3569/Ahd/2004 ACIT vs. Torrent Pharmaceuticals Ltd. decided on 13.11.2009 dealt with an identical issue and held that when an Assessing Officer treats such a building repair and maintenance sum as revenue expenditure, the same is also allowable u/s.35(2AB) of the Act as well.
• The Revenue fails to quote any case law to the contrary. Hence, this ground was accepted.
• The same grounds in AY 2008-09 were accepted in the light to observation made in AY 2007-08 in regard to section 35 (2AB).
• Assessee’s revised return seeking to re-compute its book profit deserves to be examined as per law. Hence, it is set aside to the file of AO for afresh consideration in the light of Goetze (India) Ltd. Vs. CIT [2006] 284 ITR 323 (SC) where it was held that entertaining a plea in absence of a revised return does not bar any appellate authority from exercising its jurisdiction.

• NF