2011 (3) TMI 1328 - HC - Income Tax

Deemed dividend - Interest free security deposit - Shares instead of cash - Reopening - Held that - No doubt, notice was issued after the expiry of six years, since the assessment was reopened on the basis of directions given by the Appellate authority i.e. the CIT(A), Rohtak, the limitation period, as prescribed under Section 149 of the Act was not applicable, having regard to the provisions of Section 150(1) of the Act. Facts demonstrated above would clearly reveal that admittedly as on 16th March, 1998 when the transaction of lease was entered into between the assessee and the Company, the share holding of the assessee in the Company was much less than 10% herefore, by no stretch of imagination can qualify as deemed income - Decided in favor of the assessee

Summary

Issues:
Assessment year 1998-99 - Deemed dividend under Section 2(22)(e) of the Income Tax Act - Reopening of assessment beyond the limitation period.

Analysis:
The case involved the assessment year 1998-99 where the assessee declared income of Rs. 1,14,000. The issue arose when the Assessing Officer sought to reopen the assessment based on the CIT(A), Rohtak's directions regarding the deemed dividend treatment of a security deposit of Rs. 75 lakhs under Section 2(22)(e) of the Act. The assessee contended that the notice for reassessment was time-barred as it was issued after six years from the end of the assessment year. The CIT(A) accepted both the limitation and merit contentions raised by the assessee, thereby deleting the addition made by the Assessing Officer.

Regarding the question of limitation, the Department argued that the notice was issued based on directions from the CIT(A), Rohtak, and hence, not subject to the six-year limitation period under Section 149. However, the CIT(A) held that the CIT(A) of Rohtak did not have jurisdiction over the present assessee, and the directions given could not be considered as valid for reopening the assessment beyond the limitation period.

On the merits of the case, the assessee argued that the provisions of Section 2(22)(e) were not attracted as the deemed dividend was credited when the assessee had less than 10% beneficial interest in the Company. The CIT(A) agreed with this contention, emphasizing that the legal fiction created by Section 2(22)(e) must be strictly construed. As the assessee did not have more than 10% beneficial interest at the time of the transaction, the amount could not be treated as deemed income under the provision.

The Revenue challenged the CIT(A)'s decision at the Income Tax Appellate Tribunal (ITAT) solely on the grounds of deletion of the addition made by the Assessing Officer. The ITAT, however, dismissed the appeal, stating that since the notice for reassessment was time-barred, the question of deciding the addition on merit did not arise. The High Court upheld the decision of the ITAT, dismissing the appeal and stating that no substantial question of law arose for consideration, as the assessee had succeeded on merits.

In conclusion, the High Court upheld the CIT(A)'s decision to delete the addition of deemed dividend under Section 2(22)(e) in the hands of the assessee for the assessment year 1998-99, emphasizing that the legal provisions must be strictly complied with, and no substantial question of law arose for consideration in this case.