2019 (8) TMI 987 - AT - Income Tax

Reopening of assessment u/s 147 - as alleged notice u/s 148 was issued without proper sanction - Borrowed satisfaction - deemed dividend addition u/s 2(22)(e) - HELD THAT - AO has not applied his mind independently while forming the belief that income has escaped assessment but the reopening is based on the information received from the AO wherein a definite opinion or expression by the AO of M/s. Saj Properties Pvt. Ltd. is given then the case falls in the category of borrowed satisfaction as the reasons failed to demonstrate the link between the material and formation of reason to belief that income has escaped assessment. Accordingly, we hold that the initiation of proceedings u/s 148 is not sustainable in law and the same is quashed. Addition of deemed dividend u/s 2(22)(e) - as per assessee advances by the company was for purchase of land - contended that there was no accumulated profits at the time of alleged transaction - HELD THAT - The assessee explained the facts regarding the loan given by the assessee to the company and which was also received during the year under consideration along with the interest, the details of which has been reproduced by the AO at pages 8 9 of the impugned order. Second transaction of payment of ₹ 11.70 crores was shown separately being advance given for purchase of land. Therefore, these are two separate transactions, first one is the loan earlier given by the assessee to the company was repaid during the year under consideration along with the interest and second transaction was the advance given for purchase of land as per the agreement dated 28th October, 2009. Thus when the transaction does not fall in the category of loan or advance in terms of section 2(22)(e) but the same is a business transaction, then the addition made by the AO is not sustainable. Availability of accumulated profits with the company as on the date of alleged transaction and, therefore, in any case the addition made by the AO of the full amount is not sustainable when the AO has not computed the accumulated profits as on date of transaction and then reducing the brought forward losses to the tune of ₹ 2,55,34,499/-. After considering all these relevant aspects if something is still found to be accumulated profits as on the date of transaction, the addition can be made only to the extent of such amount. AO has not conducted any such exercise and thus the assessment was framed in a mechanical manner without even considering the relevant provisions of the Act as well as the binding precedents. Accordingly, in view of the above discussion, the addition made by the AO is not sustainable and liable to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of initiation of reassessment proceedings under section 147/148 of the IT Act.
2. Addition of ?7,48,07,150/- as deemed dividend under section 2(22)(e) of the IT Act.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Reassessment Proceedings under Section 147/148 of the IT Act:

The assessee challenged the initiation of reassessment proceedings on multiple grounds, primarily citing non-compliance with the Supreme Court's directions in the case of GKN Driveshaft India Ltd. vs. ITO and various High Courts. The assessee argued that the notice under section 148 was issued without proper sanction, without any reason to believe, and without any application of mind. The assessee contended that the AO did not allow sufficient time to challenge the order disposing of the objections, thus rendering the reassessment order invalid.

The Revenue countered that the AO disposed of the objections promptly and within the shortest possible time, given that the reassessment order had to be passed before the time-barred date of 31st December 2017. The AO issued the notice under section 148 on 9th March 2017, and the assessee filed the return of income on 25th April 2017. The AO supplied the recorded reasons for reopening the assessment on 18th May 2017, and the objections raised by the assessee on 4th December 2017 were disposed of on 7th December 2017.

The Tribunal held that the delay in raising objections was attributable to the assessee, and the AO had no option but to frame the reassessment before the time-barred date. Hence, there was no violation of directions, and the objection to the reassessment order was found to lack substance and merit.

The second argument by the assessee was that the AO reopened the assessment without any reason to believe and without any application of mind, based on borrowed satisfaction from the information forwarded by the AO of M/s. Saj Properties Pvt. Ltd. The Tribunal noted that the AO formed the belief based on information received and did not conduct any verification or enquiry regarding the nature of the transaction or the accumulated profits of M/s. Saj Properties Pvt. Ltd. The Tribunal found that the reopening was based on borrowed satisfaction and mere suspicion, which is not permissible. The Tribunal quashed the initiation of proceedings under section 148, deeming it unsustainable in law.

2. Addition of ?7,48,07,150/- as Deemed Dividend under Section 2(22)(e) of the IT Act:

The assessee argued that the amount received was an advance under an agreement to sell immovable property to M/s. Saj Properties Pvt. Ltd., which does not fall within the ambit of a loan or advance under section 2(22)(e). The assessee maintained two separate accounts in the company's books: one for interest-bearing advances and another for the advance received against the sale of property. The assessee contended that the AO incorrectly merged these accounts and treated the peak amount as deemed income.

The Revenue argued that the agreement to sell was a self-serving document and an afterthought, as it was not registered, and the land was not transferred to M/s. Saj Properties Pvt. Ltd. The Revenue also pointed out inconsistencies in the assessee's explanations regarding the nature of the ?11.70 crore received.

The Tribunal found that the assessee had a credit balance of ?6,07,75,000/- as on 1st April 2009, which was repaid along with interest during the year. The Tribunal noted that the transaction was a business transaction for the purchase of land and not a loan or advance. The Tribunal relied on various decisions, including Ashok Kumar Agarwal vs. ACIT and CIT vs. Om Prakash Suri, which held that advances for business purposes do not fall under section 2(22)(e). The Tribunal concluded that the addition made by the AO was not sustainable, as the transaction was a business transaction and not a loan or advance. The Tribunal deleted the addition made by the AO.

Conclusion:

The Tribunal quashed the initiation of reassessment proceedings under section 147/148, finding it based on borrowed satisfaction and mere suspicion. The Tribunal also deleted the addition of ?7,48,07,150/- as deemed dividend under section 2(22)(e), holding that the transaction was a business transaction and not a loan or advance.