2018 (2) TMI 1293 - HC - Income Tax

Reopening of assessment - capital gain tax - Deemed dividend u/s 2(22)(a) - Held that - This entire transaction of transfer of shares by the petitioner to M/s.Nerka Chemicals Pvt. Ltd. came up for scrutiny by the AO during the original assessment proceedings. Of course the assessee s contention revolved around the issue whether such transaction would invite capital gain tax in the hands of the assessee or not. Nevertheless this transaction was scrutinized and eventually when the order of original assessment was passed no additions were made. AO was of the opinion that even though capital gain cannot be charged the transfer being in the nature of payment of dividend the assessee had to pay dividend distribution tax he had to express such opinion in the order of assessment. He cannot have second innings to examine the same transaction from a different angle by resorting to reopening of assessment. The permissibility of change of opinion so resoundingly rejected by the in case of CIT vs. Kelvinator of India Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA even post the amendment of section 147 with effect from 01.04.1989 would bar the Assessing Officer from carrying out such fresh scrutiny. - Decided in favour of assessee

Issues Involved:
1. Validity of the notice of reopening of assessment.
2. Liability for capital gains tax on the transfer of shares.
3. Applicability of dividend distribution tax under section 2(22)(a) of the Income Tax Act.
4. Allegation of failure to disclose material facts fully and truly.

Detailed Analysis:

1. Validity of the notice of reopening of assessment:
The petitioner challenged the notice of reopening dated 31.03.2017 for the assessment year 2010-11. The petitioner argued that the reasons for reopening lacked validity and there was no basis for the Assessing Officer to form a belief that income chargeable to tax had escaped assessment. The court noted that the entire transaction of transfer of shares had been scrutinized during the original assessment proceedings, and no additions were made then. The court held that the Assessing Officer cannot have a second innings to examine the same transaction from a different angle by reopening the assessment, as this would constitute a change of opinion, which is impermissible as per the Supreme Court’s ruling in CIT vs. Kelvinator of India Ltd.

2. Liability for capital gains tax on the transfer of shares:
The Assessing Officer believed that the transfer of 6.63 crore shares without consideration to M/s. Nerka Chemicals Pvt. Ltd. should attract capital gains tax. The court referred to its earlier judgment in the case of M/s. Prakriya Pharmachem, where it was held that such a transfer under a gift does not invite capital gains tax as per sections 45 and 47(iii) of the Income Tax Act. The court reiterated that section 47(iii) excludes the applicability of section 45 in the case of transfers under a gift, and thus, no capital gains tax is applicable.

3. Applicability of dividend distribution tax under section 2(22)(a) of the Income Tax Act:
The Assessing Officer also contended that the transfer amounted to payment of dividend under section 2(22)(a) of the Act, making the petitioner liable for dividend distribution tax. The petitioner argued that the transferee company was not a shareholder of the petitioner company, and hence, no dividend payment was involved. The court found that the Assessing Officer had already scrutinized the transaction during the original assessment and did not raise this issue then. Therefore, reopening the assessment on this ground was not permissible.

4. Allegation of failure to disclose material facts fully and truly:
The Assessing Officer claimed that the petitioner had failed to disclose fully and truly all material facts necessary for the assessment, invoking explanation 2(c) to section 147 of the Act. However, the court observed that the petitioner had provided detailed information about the transfer of shares during the original assessment, including a letter dated 06.11.2012, which contained full details of the gift of shares and supporting documents. The court concluded that there was no failure to disclose material facts, and the reopening of the assessment was not justified.

Conclusion:
The court set aside the impugned notice of reopening, stating that the reasons recorded by the Assessing Officer lacked validity. The petition was allowed and disposed of, preventing the assessment from proceeding on the basis of the impugned notice.

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