2017 (9) TMI 1415 - HC - Income Tax

Reopening of assessment - deemed dividend addition u/s 2(22)(e) - independent application of mind by AO - Held that - There is nothing on record to suggest that the Assessing Officer was acting as per the directives of the audit party or any other officer or authority. Merely because the relevant material was brought to his notice by an Assessing Officer of another assessee would not perse vitiate his satisfaction that income chargeable to tax has escaped assessment. This aspect of law is sufficiently clear. The issue of applicability of section 2(22)(e) of the Act when the recipient of loan or advance by the company is not a shareholder but is a concern in which the shareholders are having substantial interest, is not free from any doubt. The judgment of Delhi High Court is not accepted by the department and is in challenge before the Supreme Court. The Supreme Court itself in the later judgment in case of Gopal and Sons (HUF) (2017 (1) TMI 331 - SUPREME COURT), had opened a new dimension to the whole controversy. The return of the petitioner was accepted under section 143(1) without scrutiny. Considering such facts, we cannot hold that the reasons recorded by the Assessing Officer for issuing notice of reopening lack validity so that the notice for reopening can be terminated at this stage itself on such ground. - Decided against assessee.

Issues Involved:
1. Validity of the notice for reopening the assessment under Section 148 of the Income Tax Act.
2. Applicability of Section 2(22)(e) regarding deemed dividend.
3. Whether the Assessing Officer's satisfaction was based on borrowed information or his own belief.
4. Whether the reopening notice was issued within the permissible time frame and with proper approval.

Detailed Analysis:

1. Validity of the notice for reopening the assessment under Section 148 of the Income Tax Act:

The petitioner challenged the reopening notice dated 31.3.2016, issued by the Assessing Officer (AO) for the assessment year 2009-2010. The AO recorded that the petitioner did not file its return of income for AY 2009-10 as per the ITD system and received ?14,85,16,000 from M/s. C.D. Integrated Services Ltd, which should be taxed as deemed income under Section 2(22)(e). The petitioner argued that the reasons lacked validity and cited various High Court decisions. The AO dismissed the objections, stating that the original assessment was not scrutinized, and relied on Supreme Court decisions in Rajesh Jhaveri Stock Brokers P. Ltd and Zuari Estate Development and Investment Company Ltd.

2. Applicability of Section 2(22)(e) regarding deemed dividend:

The petitioner contended that the amount received could not be treated as deemed dividend under Section 2(22)(e) because the petitioner was not a shareholder of the payee company. They cited decisions from the Delhi High Court in Ankitech P. Ltd. and the Gujarat High Court in Daisy Packers P. Ltd., which held that the deeming fiction applies only to shareholders. The respondent's counsel argued that the return was accepted without scrutiny, and the AO only needed a bona fide belief that income had escaped assessment. The Delhi High Court's decision in National Travel Services and the Supreme Court's judgment in Gopal and Sons (HUF) were cited to support that Section 2(22)(e) can apply even to non-shareholders.

3. Whether the Assessing Officer's satisfaction was based on borrowed information or his own belief:

The petitioner argued that the AO's satisfaction was based on information from another AO, constituting borrowed satisfaction. The court found no evidence suggesting the AO acted under directives from an audit party or another officer, referencing the Supreme Court decision in P.V.S. Beedies Pvt. Ltd. The court held that merely receiving information from another AO does not invalidate the AO's satisfaction.

4. Whether the reopening notice was issued within the permissible time frame and with proper approval:

The court noted that the original return was accepted under Section 143(1) without scrutiny. The AO had not formed any opinion on the issues. The Supreme Court in Rajesh Jhaveri Stock Brokers P. Ltd. clarified that at the initiation stage, what is required is "reason to believe," not conclusive proof of income escapement. The AO noted that the petitioner received ?14.85 crores, which should be taxed under Section 2(22)(e) but was not offered to tax. The court found the AO's reasons valid for issuing the reopening notice.

Conclusion:

The court dismissed the petition, holding that the reasons recorded by the AO for reopening the assessment were valid. The issue of applicability of Section 2(22)(e) when the recipient is not a shareholder is not free from doubt, and the Supreme Court's decision in Gopal and Sons (HUF) opened a new dimension to the controversy. The petition was dismissed, and the interim relief was vacated.

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