2020 (5) TMI 263 - HC - Income Tax

Reopening of assessment u/s 147 - Reliance on audit objections - deemed dividend addition u/s 2(22)(e) - HELD THAT - It is obligatory on the part of the Assessing Officer to record reasons for the purpose of believing that the income had escaped assessment AND in the light of the judgment rendered by the Division Bench of Delhi High Court in United Electrical Co. P.Ltd. v. Commissioner of Income Tax and Others 2002 (10) TMI 86 - DELHI HIGH COURT it is open to the Court to examine whether there was some material available for the Assessing Officer to form the requisite belief and further recorded a finding that even the Additional Commissioner had accorded approval for action under Section 147 of IT Act mechanically. Reasons recorded in the notice dated 31.03.2014 as to the income escaping assessment and the order of assessment dated 31.03.2015 passed under Section 143(3) r/w. Section 147 of the IT Act are unsustainable on facts as well on law. CIT (Appeals) has also ordered deletion on the ground that the provision of Sec.2(22)(e) of IT Act do not apply and the reasons for arriving such a conclusion is sustainable in law. The findings recorded by the ITAT, in the impugned common order as to the non-application of mind on the part of the Assessing Officer to apply his mind independently for the purpose of reopening of assessment is also sustainable for the reason that the very same official, namely Mr.S.Krishna Kumar, in response to the audit objection dated 31.01.2015, had taken into consideration all the materials placed and requested for dropping of the audit objection and therefore, passing of second order of assessment dated 31.03.2015 by him amounts to change of opinion on the very same set of facts. This Court, on an independent application of mind and on thorough consideration of material aspects and legal position, is of the considered view that there is no error or infirmity in the reasons assigned by the ITAT in dismissing the appeal filed by the Revenue - Decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act, 1961 based on audit objections.
2. Validity of treating the loan amount as deemed dividend under Section 2(22)(e) of the IT Act.

Detailed Analysis:

1. Reopening of Assessment under Section 147 of the IT Act Based on Audit Objections:
The primary issue was whether the assessment could be reopened under Section 147 of the Income Tax Act, 1961, based on audit objections pointing out factual omissions in the original assessment order.

The court noted that the case was reopened under Section 148 of the IT Act on 31.03.2014 after an audit objection pointed out that the assessee debited only the expenditure incurred without any profit or commission, suggesting a system to reduce tax liability. The Tribunal found that the Assessing Officer (AO) did not independently satisfy himself about the escapement of income and issued the notice under Section 148 based on audit objections alone, which is not permissible under law.

The court referred to several precedents, including Lakshmani Mewal Das [(1976) Vol. 103 ITR 437 (SC)], which established that the AO must have reason to believe that income had escaped assessment due to the assessee's omission or failure to disclose fully and truly all material facts necessary for the assessment. It was emphasized that a mere change of opinion does not justify reopening an assessment.

The court also cited United Electrical Co. P. Ltd. v. Commissioner of Income-Tax and Others [2002 Vol.258 ITR 317 (Delhi)], which held that the AO must record reasons for reopening an assessment and that such reasons must be based on tangible material.

In this case, the court found that the AO had initially responded to the audit objections by defending the original assessment and requesting the dropping of the audit objections. However, the AO later reopened the assessment without any new tangible material, indicating a change of opinion rather than a valid reason to believe that income had escaped assessment.

2. Validity of Treating the Loan Amount as Deemed Dividend under Section 2(22)(e) of the IT Act:
The second issue was whether the loan amount received by the assessee from its sister concern could be treated as deemed dividend under Section 2(22)(e) of the IT Act.

The AO treated the credit balance of ?5,30,99,960/- as deemed dividend in the hands of the assessee. The assessee contended that the amount was advanced for commercial transactions and supported by an agreement, thus not attracting Section 2(22)(e).

The Commissioner of Income Tax (Appeals) [CIT (A)] allowed the assessee's appeal, directing the deletion of the addition made under Section 2(22)(e), which was upheld by the Tribunal. The court found that the AO's reopening of the assessment and the subsequent addition under Section 2(22)(e) were based on the same set of facts that had been previously considered, amounting to a change of opinion.

The court concluded that the AO's reasons for reopening the assessment and treating the loan amount as deemed dividend were unsustainable both on facts and in law. The Tribunal's findings that the AO did not apply his mind independently and that the reopening of the assessment was based on a change of opinion were upheld.

Conclusion:
The court dismissed the appeals filed by the Revenue, affirming that the reopening of the assessment under Section 147 based on audit objections was not justified and that the addition under Section 2(22)(e) as deemed dividend was unsustainable. The substantial question of law was answered in the negative, favoring the assessee.