2015 (6) TMI 134 - HC - Income Tax

Deemed dividend u/s 2(22) - CIT(A) deleted the addition - Held that - CIT(A) while examining the material and substance brought on record, particularly the statement of the Executive Director of Ludhiana Stock Exchange, who in unambiguous terms stated that the forms bearing Sr.No.64001 to 68000 and 68001 to 72000 were sent to the Registrar of Companies on 29.1.2007 and 6.2.2010 respectively. Admittedly, the share transfer forms bearing No.65672 and 65673 were issued in the lot dated 29.1.2007 and, therefore, the erroneous and perverse opinion formed by the Assessing Officer, to the effect that the said share transfer forms were submitted in February, 2010, does not have any basis much less any substance once the provisions of the Companies Act permit the Company to file a revised annual report, Income Tax authorities cannot sit over the statutory provisions which permit the Company to file a revised annual report and form a different opinion that too on the basis of suspicion. CIT(A) and as well as ITAT correctly found that the Assessing Officer did not comply with the statutory provisions of law, inasmuch, as that the assessee was not given sufficient opportunity to rebut the report of the Assessing Officer. Not only this, even the assessee was not confronted with letter obtained from the office of Ludhiana Stock Exchange in order to enable him to rebut or lead evidence in support of his stand, particularly when it has come on record that the forms were issued during the relevant period when the annual returns were filed on 3.3.2007, on a duly stamped form, submitted by the Registrar of Companies on 29.1.2007. The effect of the same was also duly recorded in the board meeting of the Company held on 10.3.2007. There was no occasion for the Assessing Officer to disbelieve the explanation submitted by the assessee before the Assessing Officer. The clarification sought from the office of the Ludhiana Stock Exchange during the appellate proceedings leaves no manner of doubt that the entire transaction by the Company was done in accordance with the provisions of the Companies Act and there was no deviation from the Act, which could have led the Income Tax authorities to form an opinion different from the decision of the Registrar of Companies. The Commissioner of Income Tax (Appeals) in its order also extracted the statement Mrs.Pooja Kohli, Executive Director of the Ludhiana Stock Exchange which leaves no manner of doubt that the share transfer forms were purchased and submitted on 29.1.2007 and the share holding pattern was effected on 3.3.2007, which was duly approved by the Company on 10.3.2007 in the meeting of the Board of the Directors. - Decided against the revenue.

Summary

Issues Involved:
1. Justification of the ITAT in upholding the order of CIT(A) deleting the addition made by the A.O under Section 2(22)(e) of the Income Tax Act.
2. Consideration of the facts brought on record by the A.O regarding the shareholding pattern.
3. Non-appreciation of the ratio of decisions from the Supreme Court and Punjab & Haryana High Court by the ITAT.

Issue-wise Detailed Analysis:

1. Justification of the ITAT in upholding the order of CIT(A) deleting the addition made by the A.O under Section 2(22)(e) of the Income Tax Act:

The revenue challenged the ITAT's decision to uphold the CIT(A)'s order, which deleted an addition of Rs. 52,46,062/- made by the A.O under Section 2(22)(e) of the Income Tax Act. The A.O had treated this amount as deemed income, arguing that the assessee had received loans from M/s Frontier Cycles Pvt. Ltd., where he held a significant shareholding. The assessee contended that the shares had been transferred to his wife and son before the relevant assessment year, reducing his shareholding to 8.8%, below the threshold for deemed dividend under Section 2(22)(e). The CIT(A) and ITAT found that the share transfer forms were indeed submitted in 2007, and the annual returns were revised in 2010 as permitted under Section 162 of the Companies Act. The ITAT dismissed the revenue's appeal, agreeing with the CIT(A) that the A.O's addition was based on erroneous assumptions.

2. Consideration of the facts brought on record by the A.O regarding the shareholding pattern:

The A.O had argued that the revised annual returns showing the reduced shareholding were an afterthought, as the original returns indicated a 38.8% shareholding. The A.O downloaded the original returns from the Registrar of Companies' website and found that the revised returns were filed only in February 2010. The CIT(A) and ITAT, however, found that the share transfer forms were purchased and stamped in January 2007, and the transfer was approved in a board meeting in March 2007. The CIT(A) directed the A.O to verify the authenticity of the share transfer forms from the Ludhiana Stock Exchange, which confirmed that the forms were issued in January 2007. Therefore, the CIT(A) concluded that the revised returns were legitimate and the A.O's addition was unwarranted.

3. Non-appreciation of the ratio of decisions from the Supreme Court and Punjab & Haryana High Court by the ITAT:

The revenue argued that the ITAT failed to consider the ratio of the Supreme Court's decision in Durga Parsad More (82 ITR 540) and the Punjab & Haryana High Court's decision in Som Nath Maini (306 ITR 414), which were relied upon by the A.O. The ITAT and CIT(A) found that these decisions were not applicable to the present case because the assessee was not given an opportunity to rebut the evidence obtained from the Ludhiana Stock Exchange. The CIT(A) noted that the A.O did not comply with the statutory provisions of law, particularly Section 144A of the Income Tax Act, which requires giving the assessee an opportunity to be heard before issuing directions prejudicial to the assessee. The ITAT upheld the CIT(A)'s findings that the A.O's addition was based on suspicion and not on concrete evidence.

Conclusion:

The High Court dismissed the revenue's appeal, agreeing with the CIT(A) and ITAT that the addition made by the A.O under Section 2(22)(e) was not justified. The court found that the share transfer forms were legitimately submitted in 2007, and the revised annual returns were permissible under the Companies Act. The court also noted that the A.O did not provide the assessee with an opportunity to rebut the evidence, violating Section 144A of the Income Tax Act. The court concluded that the CIT(A) and ITAT's findings were based on a proper appreciation of facts and law, and there was no reason to interfere with their decisions.