2020 (3) TMI 1203 - HC - Income Tax

Reopening of assessment u/s 147 - deemed dividend addition u/s 2(22)(e) - gap of more than four years - failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment - second mode of payment envisaged under clause (e) of section 2(22) viz. to any concern in which such shareholder is a member or a partner and in which he has substantial interest. - HELD THAT - In the facts of this case, the petitioner being an individual does not fall in the first category; and since his gross total income is only ₹ 1.48 crores, he also does not fall under the second category of enterprises. Therefore, also there does not appear to be any specific requirement for the petitioner to disclose such transaction. In the aforesaid premises, this court is of the view that on the reasons recorded by the Assessing Officer, he could not have formed the belief that income chargeable to tax has escaped assessment. If the contention of the learned counsel for the respondent that the fact as to whether the petitioner has benefitted from the transaction or not is a matter to be decided at the stage of evaluation of the material during the course of re-assessment were to be accepted, it would amount to allowing the Assessing Officer to make a fishing inquiry to ascertain as to whether or not any income has escaped assessment. For the purpose of invoking section 147 AO has to form a belief that income chargeable to tax has escaped assessment and not that income chargeable to tax may have escaped assessment. In the facts of this case, the petitioner being an individual does not fall in the first category; and since his gross total income is only ₹ 1.48 crores, he also does not fall under the second category of enterprises. Therefore, also there does not appear to be any specific requirement for the petitioner to disclose such transaction. In the aforesaid premises, this court is of the view that on the reasons recorded by the Assessing Officer, he could not have formed the belief that income chargeable to tax has escaped assessment. If the contention of the learned counsel for the respondent that the fact as to whether the petitioner has benefitted from the transaction or not is a matter to be decided at the stage of evaluation of the material during the course of re-assessment were to be accepted, it would amount to allowing the Assessing Officer to make a fishing inquiry to ascertain as to whether or not any income has escaped assessment. In the facts of the present case, it is not the case of the Assessing Officer that the petitioner has received any loan from the loan giver company or that the loans advanced by the loan giver company in which the petitioner had shareholding of not less than 10% of the voting power to the two concerns in which the petitioner had substantial interest was for the benefit of the petitioner. The petitioner had also disclosed the extent of his shareholding in the loan giver as well as loan receiver companies. The reopening of assessment is founded on the premise that the petitioner did not disclose the transactions between the loan giver company in which he had shareholding not less than 10 per cent of the voting power and the loan receiver concerns in which he had substantial interest. However, as discussed earlier, when the amount received by the two concerns from the loan giver company was neither received by the petitioner nor was it for the benefit of the petitioner, such amount cannot be considered as deemed dividend in the hands of the petitioner, and consequently no income accrued to the petitioner from such transactions. In the absence of any finding having been recorded by the Assessing Officer that any income had accrued in favour of the petitioner, it is not possible to say that there was any obligation cast upon him to disclose such transactions. Under the circumstances, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment, the reopening of assessment beyond a period of four years from the relevant assessment is without authority of law. - Decided in favour of assessee.

Issues Involved:
1. Legality of the notice issued under section 148 of the Income Tax Act, 1961 for reopening the assessment.
2. Whether there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment.
3. Applicability of section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
4. Validity of the reasons recorded by the Assessing Officer for reopening the assessment.

Issue-wise Detailed Analysis:

1. Legality of the Notice Issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 27.03.2015 issued under section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for the assessment year 2008-2009. The court noted that the notice was issued beyond a period of four years from the end of the relevant assessment year. Since the original assessment was completed under section 143(3) of the Act, the reopening of the assessment beyond four years required a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The court found that there was no such failure on the part of the petitioner.

2. Whether There Was a Failure on the Part of the Petitioner to Disclose Fully and Truly All Material Facts:
The court examined whether the petitioner had failed to disclose fully and truly all material facts necessary for the assessment. It was argued that the petitioner had disclosed all primary facts, including his shareholding in the relevant companies. The court noted that the petitioner had disclosed the extent of his shareholding in the loan giver as well as loan receiver companies. The court found that there was no obligation on the petitioner to disclose the transactions between the companies as he had not received any benefit from such transactions.

3. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:
Section 2(22)(e) of the Act deals with deemed dividends. The court referred to the Supreme Court's decision in Commissioner of Income Tax v. Mukundray K. Shah, which held that for section 2(22)(e) to apply, two factors must be present: (i) the payment must be a loan, and (ii) there must be accumulated profits on the date of payment. The court found that the reasons recorded by the Assessing Officer did not state that any loan or advance had been received by the petitioner or that the payment was made for the benefit of the petitioner. Therefore, the basic requirements for invoking section 2(22)(e) were not satisfied.

4. Validity of the Reasons Recorded by the Assessing Officer:
The court examined the reasons recorded by the Assessing Officer for reopening the assessment. The reasons mentioned that unsecured loans were extended by M/s. J.P. Infrastructure Pvt. Ltd. to its sister concerns, and the petitioner had substantial shareholding in these companies. However, the reasons did not state that the petitioner had received any benefit from these transactions. The court held that the reasons recorded did not provide a basis for forming the belief that income chargeable to tax had escaped assessment. The court emphasized that for invoking section 147 of the Act, the Assessing Officer must form a belief that income chargeable to tax has escaped assessment, not that it may have escaped assessment.

Conclusion:
The court concluded that the reopening of the assessment was without authority of law as there was no failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment. The impugned notice under section 148 of the Act and all proceedings pursuant thereto were quashed and set aside. The petition was allowed, and the rule was made absolute with no order as to costs.

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