2023 (1) TMI 269 - AT - Income Tax

Revision u/s 263 by CIT - deemed dividend income u/s. 2(22)(e) on loans and advances - HELD THAT - We find that no enquiry whatsoever has been conducted by the AO on the issue raised in show cause notice u/s. 263 by the PCIT. When the case of the assessee has been selected for scrutiny and all the necessary details were placed before him, but still the AO has not conducted any enquiry on this issue. Even the assessee has been unable to place any detail/record/information or copy of notice u/s. 142(1) or replies thereof filed in compliance to the said notice. It indicates that the ld. AO has not conducted any enquiry on the issue nor asked the assessee to furnish necessary details. It is a purely case of not conducting any enquiry. As far as finding of the PCIT in the impugned order is concerned, we notice that he had conducted sufficient enquiry, which is not controverted by the ld. Counsel for the assessee to the extent of the fact that assessee company holds 12.32% equity share of M/s. RDPL, loans and advances has been received during the year and there is an opening balance of accumulated profits in the balance sheet of M/s. RDPL. Though the assessee company has taken a plea that alleged loan has been taken for commercial expediency during the year and are in the nature of business transaction and interest paid thereon. However, the exception which the assessee has been referring provided under section 2(22)(e) applies in the case where lending of money is a substantial part of the business of the company. Before us no document what so ever has been filed in relation to M/s. RDPL, which could indicate that lending of money is a substantial part of business of M/s. RDPL. We notice that the assessee has referred to the judgment of the Hon ble Jurisdictional Calcutta High Court in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT . Perusal of the said judgment indicates that the same is not applicable on the facts of the instant case and is distinguishable. In the case o f Pradip Kumar Malhotra (supra) the facts were that the assessee was owner of a property, which was used as a collateral security by the company for taking a loan and assessee received credit/loan against the property held with the company. However, in the instant case the facts are not the same and it is purely a case where the assessee is holding 12.22% equity shares in a company having accumulated profits which has given loan to the assessee company. We are of the considered view that since no enquiry has been conducted by the ld.AO on the issue raised in show cause notice u/s. 263, therefore, to this extent the assessment order is rightly held to be erroneous so far as it is prejudicial to the interest of the revenue . Therefore, we fail to find any infirmity in the impugned order of the ld.PCIT. Thus, all the grounds raised by the assessee are dismissed.

Summary

Issues:
1. Jurisdiction of Principal Commissioner under section 263 of the IT Act.
2. Applicability of provisions of section 2(22)(e) of the Act on loan transactions.
3. Adequacy of inquiry conducted by the Assessing Officer during assessment proceedings.

Analysis:

Issue 1: Jurisdiction of Principal Commissioner under section 263 of the IT Act
The appeal pertains to the Assessment Year 2017-18 and challenges the order of the Principal Commissioner of Income-tax (PCIT) dated 24-03-2022. The PCIT invoked Section 263 of the IT Act, stating that the assessing officer failed to examine the applicability of Section 2(22)(e) of the Act during the assessment proceedings. The PCIT set aside the assessment order for verification of issues related to deemed dividend income under Section 2(22)(e) of the Act. The tribunal noted that the PCIT had the authority to revise orders if they are deemed prejudicial to revenue, based on necessary inquiries and giving the assessee an opportunity to be heard.

Issue 2: Applicability of provisions of section 2(22)(e) of the Act on loan transactions
The core issue revolved around the applicability of Section 2(22)(e) of the Act on the loan transactions between the assessee and M/s. Rosedale Developers Pvt. Ltd. (RDPL). The PCIT observed that the loans received by the assessee from RDPL attracted the provisions of deemed dividend income due to accumulated profits at the opening of the financial year. The tribunal found that the assessee failed to prove that the loans were taken for commercial expediency and business purposes. The tribunal upheld the PCIT's decision, stating that no substantial evidence was provided to show that lending money was a substantial part of RDPL's business.

Issue 3: Adequacy of inquiry conducted by the Assessing Officer during assessment proceedings
The tribunal highlighted that the assessing officer did not conduct any inquiry into the issue raised by the PCIT under Section 263. Despite the case being under scrutiny and necessary details being available, the assessing officer did not investigate the matter or request additional information from the assessee. The tribunal agreed with the PCIT's findings that the assessment order was erroneous and prejudicial to revenue due to the lack of inquiry by the assessing officer. The tribunal dismissed the appeal, affirming the PCIT's decision to set aside the assessment order for further verification.

In conclusion, the tribunal upheld the PCIT's decision under Section 263, emphasizing the importance of conducting thorough inquiries during assessment proceedings to ensure compliance with relevant provisions of the IT Act. The appeal of the assessee was dismissed, and the order was pronounced on 02/01/2023.