2018 (5) TMI 1378 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - earnest money paid by the company on behalf of the directors - money was not returned after cancellation of sell agreement - collateral security given by the Director of the company in individual capacity - Held that - Perusal of the correspondence between assessee and Director of M/s. Alpex Exports Pvt. Ltd. & M/s. Karishma Machine Tools apparently shows that the huge amount of ₹ 1,28,52,217/- alleged to have been taken as earnest money by the assessee has been demanded by the Directors of the companies and paid by the assessee leisurely in installments at will under the garb of Agreement to Sell which has been rightly treated as sham and collusive transaction between the assessee and both the companies by the AO. The contention of the assessee that the property in question was being sold to the companies by the assessee as the bank was insisting upon that the same be transferred in the name of the company as it was given as a collateral security at the time of taking loan for running the business of the companies is prima facie not sustainable because when the property in question was already pledged with the bank as collateral security by the Director in her individual capacity, there is no legal ground with the bank to insist upon for transferring the property in the name of the companies. Rather collateral security given by the Director of the company in individual capacity is a potent security with the bank than the properly in the name of the company. So, this plea also is an after-thought and as such, the entire arrangement between the assessee and both the companies falls within the mischief of provisions contained u/s 2(22)(e) of the Act. - Decided in favour of revenue Notice u/s 143 validity - AO jurisdiction to pass the assessment order for want of issuance of valid notice u/s 143 (2) - whether mere proving of dispatch is not enough to prove the service of notice on the assessee which is a mandatory requirement - Held that - No doubt, the ACIT, Circle 46 (1) who has issued the notice u/s 143 (2) dated 12.08.2009 has no jurisdiction and subsequently, the case was transferred to ACIT, Circle 1 (1), New Delhi before whom the assessee continued to attend the proceedings and get the assessment completed without raising any objections. So, in view of the judgment in case of Mega Corporation Ltd. (2017 (2) TMI 1253 - DELHI HIGH COURT), we are of the considered view that now the assessee is not entitled to question the jurisdictional issue. - Decided against assessee.

Summary

Issues Involved:
1. Deletion of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Jurisdictional validity of the assessment order due to alleged non-issuance of mandatory notices under Section 143(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Deemed Dividend under Section 2(22)(e):

The primary issue addressed was whether the amounts of ?97,52,217 and ?31,00,000 received by the assessee from M/s. Alpex Exports Pvt. Ltd. and M/s. Karishma Machine Tools, respectively, should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee claimed these amounts as earnest money for the sale of property, but the Assessing Officer (AO) treated them as advances for investment purposes, thereby classifying them as deemed dividends.

Key findings included:
- The assessee was a significant shareholder and director in both companies.
- The amounts were reflected as receivables in the companies' books, not as earnest money.
- The Agreement to Sell was deemed a sham transaction by the AO, as it was executed during a period when the government had already initiated demolition and ceiling drives, making the sale of the property impractical.
- The companies did not record the amounts as advances for property purchase in their books, further supporting the AO's stance that these were advances and not earnest money.

The Tribunal concluded that the transactions were indeed advances and not earnest money for property sale, thus falling under the purview of Section 2(22)(e). Consequently, the deletion of the deemed dividend by the Commissioner of Income Tax (Appeals) [CIT(A)] was reversed, and the AO's assessment was restored.

2. Jurisdictional Validity of the Assessment Order:

The second issue involved the jurisdictional validity of the assessment order due to the alleged non-issuance of mandatory notices under Section 143(2). The assessee contended that the AO lacked jurisdiction as the statutory notice was not issued within the prescribed period, thus rendering the assessment order void.

Key points discussed:
- The first notice under Section 143(2) was issued by ACIT, Circle 46(1), New Delhi, who did not have jurisdiction over the assessee.
- The case was later transferred to ACIT, Circle 1(1), New Delhi, who issued a second notice after the statutory period.
- The Tribunal noted that the assessee did not object to the jurisdiction during the assessment proceedings and participated in the proceedings.

The Tribunal referred to Section 124(3)(a) of the Income Tax Act, which bars an assessee from questioning the jurisdiction of the AO after one month from the date of service of notice or completion of the assessment, whichever is earlier. The Tribunal also cited relevant case laws, including the decision of the Hon'ble Delhi High Court in "Pr. CIT-06 vs. Mega Corporation Ltd." and the Hon'ble Supreme Court in "Kiran Singh vs. Chaman Paswan," to support its conclusion that the jurisdictional issue cannot be raised after the completion of the assessment without showing any prejudice caused.

The Tribunal upheld the CIT(A)'s decision on the jurisdictional issue, ruling against the assessee, and dismissed the cross-objections.

Conclusion:

The Tribunal allowed the Revenue's appeal, reinstating the addition of ?1,28,52,217 as deemed dividend under Section 2(22)(e), and dismissed the assessee's cross-objections regarding jurisdictional validity. The order was pronounced in open court on May 16, 2018.