2019 (3) TMI 334 - HC - Income Tax

Reopening of assessment u/s 147 - Deemed dividend addition u/s 2(22)(e) - loan received by the assessee during the relevant accounting period from one M/s Rupani Spinning Mills Private Limited - scrutiny assessment conducted - shareholding pattern reference - audit party report relied upon - HELD THAT - Since the very AO in the immediately preceding assessment year, had examined the loan transaction between the petitioner and the said M/s Rupani Spinning Mills Private Limited with special focus of Section 2(22)(e) by separate order passed today in Writ Petition 2019 (3) TMI 320 - BOMBAY HIGH COURT we had occasion to examine these documents in the context of the petitioner s challenge to the notice of reopening of assessment of the said assessment year. In the scrutiny assessment, the Assessing Officer in the said assessment year had at length collected materials in the context of the possible applicability of Section 2(22)(e). We have no hesitation to come to the conclusion that this issue was duly scrutinized by the Assessing Officer in the original scrutiny assessment. The perusal of the original file would clearly show that the audit party had brought to the notice of the Assessing Officer the possibility of invoking Section 2(22)(e) of the Act in relation to the loan transaction in question. The AO under a detailed reply dated 9th June, 2015 had opposed any such invocation of Section 2(22)(e) of the Act. He had given reasons why in his opinion Section 2(22) (e) of the Act was inapplicable. Despite this, upon further insistence by the audit party, impugned notice came to be issued. It is well settled through series of judgments that the decision to reopen the assessment must be on the basis of the belief found by the Assessing Officer. It may be open for the audit party to bring the relevant aspect to the notice of the Assessing Officer. However, thereafter it must be the independent decision of the Assessing Officer to reopen the assessment upon formation of his belief that income chargeable to tax had escaped assessment. See CIT Vs. Ranjan N. Aswani (2018 (3) TMI 315 - BOMBAY HIGH COURT) - decided in favour of assessee.

Summary

Issues Involved:
1. Legality of reopening the assessment under Section 147 of the Income Tax Act.
2. Examination of deemed dividend under Section 2(22)(e) of the Income Tax Act.
3. Influence of the audit party on the Assessing Officer's decision to issue the notice.

Detailed Analysis:

1. Legality of Reopening the Assessment under Section 147:
The petitioner challenged the notice of reopening the assessment dated 28th March 2018 for the assessment year 2013-14. The original assessment was completed under Section 143(3) on 30th March 2016. The Assessing Officer issued the notice to tax a loan of ?1,02,00,000 received by the petitioner from M/s Rupani Spinning Mills Private Limited as deemed dividend under Section 2(22)(e). The petitioner contended that the grounds for reopening were already examined during the original assessment, and thus, reopening under Section 147 was not justified. The court found that during the original scrutiny, the petitioner had provided detailed information about unsecured loans, shareholding patterns, and other relevant details, indicating that the Assessing Officer had the opportunity to examine the applicability of Section 2(22)(e). Therefore, the reopening of the assessment was deemed unjustified.

2. Examination of Deemed Dividend under Section 2(22)(e):
The Assessing Officer sought to tax the loan of ?1,02,00,000 as deemed dividend under Section 2(22)(e), citing that the shareholder of the petitioner company held substantial interest in both companies involved. During the original assessment, the petitioner had disclosed details of unsecured loans and shareholding patterns. The court noted that the Assessing Officer had previously examined similar transactions for the preceding assessment year, focusing on Section 2(22)(e). Therefore, the court concluded that the issue of deemed dividend under Section 2(22)(e) was duly scrutinized in the original assessment, making the reopening of the assessment on the same grounds invalid.

3. Influence of the Audit Party on the Assessing Officer's Decision:
The petitioner argued that the Assessing Officer issued the notice under the influence of the audit party. The court examined the department's original file and found that the audit party had suggested invoking Section 2(22)(e) for the loan transaction in question. The Assessing Officer initially opposed this suggestion, providing detailed reasons for the inapplicability of Section 2(22)(e). However, the notice was issued after further insistence by the audit party. The court emphasized that the decision to reopen the assessment must be based on the Assessing Officer's independent belief, not the audit party's insistence. Citing the case of Commissioner of Income Tax Vs. Ranjan N. Aswani, the court held that the reopening of the assessment under the audit party's influence was invalid.

Conclusion:
The court quashed the impugned notice, holding that the reopening of the assessment was unjustified as the issue of deemed dividend under Section 2(22)(e) was already scrutinized in the original assessment. Additionally, the decision to reopen was influenced by the audit party, which is not permissible. The petition was allowed, and the notice was quashed.