2019 (5) TMI 431 - AT - Income Tax

Revision u/s 263 - Deemed dividend addition u/s 2(22)(e) - loan from group company being Non-Banking Financial Company - AO completing the assessments under section 153A/143(3) - assesse was not the share holder - HELD THAT - As rightly contended by the assessee, all the relevant details to ascertain the applicability of section 2(22)(e) to the loan amounts in question taken by the assessee-company during the years under consideration from the other Group Companies thus were either available on the record before the AO or the same were called for by him during the course of assessment proceedings by raising specific queries and after applying his mind to the said details, a conscious decision was taken by him as regards the non-applicability of section 2(22)(e) to the loan amounts in question while completing the assessment under section 153A/143(3) of the Act. In our opinion, it, therefore, cannot be said that there was an error in the orders of the AO in not making any enquiry or verification on the issue of applicability of section 2(22)(e) to the loan amounts in question as alleged by the Principal CIT and the revision under section 263 by the ld. Principal was not called for. AO is not only expected to be aware of such legal position but is also duty-bound to apply the same while completing the assessments, especially when it is propounded by PRADIP KUMAR MALHOTRA VERSUS COMMISSIONER OF INCOME-TAX, WEST BENGAL-V 2011 (8) TMI 16 - CALCUTTA HIGH COURT . In the present case, AO thus had not only made the enquiry or verification as required in the facts of the case to ascertain the applicability of section 2(22)(e) to the loan amounts received by the assessee from the other group companies, but a conscious decision was also taken by him keeping in view the legal position that section 2(22)(e) was not applicable to the loan amounts in question received by the assessee during the years under consideration from the other Group Companies. There was thus no error in the orders of the AO for the years under consideration passed u/s 153A/143(3) as alleged by the Principal CIT and the revision of the same under section 263 by the ld. Principal CIT was not called for. In that view of the matter, we set aside the impugned orders passed by the ld. Principal CIT under section 263 and restore that of the Assessing Officer passed under section 153A/143(3) - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 to unsecured loans received by the assessee.
2. Adequacy of enquiry or verification conducted by the Assessing Officer regarding the applicability of Section 2(22)(e).
3. Justification of the Principal CIT's revision of the Assessing Officer's orders under Section 263.

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:
The Principal CIT observed that the assessee company received unsecured loans from another Group Company, M/s. Govind Promoters Pvt. Limited, which had substantial accumulated profits. The Principal CIT believed these loans should be assessed as deemed dividends under Section 2(22)(e) because common shareholders held substantial shares in both companies. The assessee contended that M/s. Govind Promoters Pvt. Limited, being a Non-Banking Financial Company (NBFC), was excluded from the purview of Section 2(22)(e) as the loans were part of its ordinary business. The assessee cited judicial precedents, including the Delhi ITAT and the Calcutta High Court, to support that loans given in the ordinary course of business by an NBFC are not deemed dividends.

2. Adequacy of Enquiry or Verification by the Assessing Officer:
The Principal CIT argued that the Assessing Officer did not make necessary enquiries or verifications regarding the applicability of Section 2(22)(e) to the loans. However, the assessee demonstrated that the Assessing Officer had called for and received all relevant details during the assessment proceedings. These included loan details, shareholders' information, and the Tax Audit Reports, which reflected the loans and interest paid. The Tribunal noted that the Assessing Officer had sufficient information to make a conscious decision on the non-applicability of Section 2(22)(e). The Tribunal emphasized that the Assessing Officer is expected to be aware of and apply the legal position established by the jurisdictional High Court.

3. Justification of the Principal CIT's Revision under Section 263:
The Principal CIT set aside the Assessing Officer's orders under Section 263, claiming the lack of enquiry made the orders erroneous and prejudicial to the revenue's interest. The Tribunal disagreed, stating that the Assessing Officer had conducted adequate enquiries and applied the legal position correctly. The Tribunal found no error in the Assessing Officer's orders and concluded that the Principal CIT's revision under Section 263 was unwarranted.

Conclusion:
The Tribunal set aside the Principal CIT's orders under Section 263 and restored the Assessing Officer's orders passed under Section 153A/143(3). The appeals of the assessee were allowed, emphasizing that the loans from the NBFC were not deemed dividends under Section 2(22)(e), and the Assessing Officer had conducted appropriate enquiries.