2023 (12) TMI 408 - AT - Income Tax

Revision u/s 263 - Deemed dividend u/s 2(22)(e) - loans received from another company - beneficial ownership - HELD THAT - Since as per the finding of the CIT himself, the assessee s beneficial ownership of the shares in MAP Ltd. alongwith voting power fall below the criteria specified for invocation of section 2(22)(e) of the Act, the said section was not applicable to the facts of the present case. Therefore, finding of error by the CIT in the assessment order for non-invocation of section 2(22)(e) of the Act on the loans received by the assessee from MAP Ltd. palpably fails on facts recorded by the Ld.PCIT himself. Accordingly, we hold that considering the facts noted by the ld.Pr.CIT himself, provisions of section 2(22)(e) of the Act were not attracted to the transaction of amounts/loan received by the assessee from MAP Ltd, and finding of the error by the ld.PCIT in this regard is, therefore, held to be not sustainable. Finding of error by the ld.Pr.CIT with regard to the loans received from MAP Cotton P.Ltd. qualifying as deemed dividend under section 2(22)(e) of the Act is against the principles of natural justice enshrined in section 263 of the Act itself, which categorically requires the assessee to be heard on the errors noted by the ld.Pr.CIT in the assessment orders for valid exercise of revisionary jurisdiction u/s 263 of the Act. Section 263(1) of the Act requiring powers of revision to be exercised by PCIT s/CIT s after giving opportunity of hearing to the assessee is reproduced - the finding of the error by the ld.Pr.CIT of non-invocation of section 2(22)(e) of the Act to the transaction of loan received by the assessee from MAP Cotton Ltd.is also held not sustainable in law. Assessee appeal allowed.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Validity of the order under Section 263 of the Income Tax Act, 1961.
3. Invocation of Section 2(22)(e) of the Income Tax Act, 1961 (Deemed Dividend).

Summary of Judgment:

1. Condonation of Delay:
The appeal filed by the assessee was delayed by 315 days. However, due to the COVID-19 pandemic, the Hon'ble Supreme Court extended the limitation period for filing appeals. Consequently, the delay was condoned, and the appeal was admitted for hearing on merits.

2. Validity of the Order under Section 263:
The assessee challenged the order passed by the Pr. Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961, which set aside the assessment order on the grounds of being erroneous and prejudicial to the interests of the revenue. The Pr. CIT invoked Section 263 due to the omission by the Assessing Officer (AO) to apply the provisions of Section 2(22)(e) concerning deemed dividends.

3. Invocation of Section 2(22)(e) (Deemed Dividend):

a. Loans from MAP Ltd.:
The Pr. CIT found that the loans received by the assessee from MAP Ltd. qualified as deemed dividends under Section 2(22)(e). However, the Tribunal noted that the assessee held only 6.63% of the voting rights in MAP Ltd., which is below the 10% threshold required for invoking Section 2(22)(e). Thus, the Tribunal held that the provisions of Section 2(22)(e) were not applicable to the loans received from MAP Ltd., and the Pr. CIT's finding was unsustainable.

b. Loans from MAP Cotton Pvt. Ltd.:
The Pr. CIT also identified loans received from MAP Cotton Pvt. Ltd. as deemed dividends. However, this issue was not confronted to the assessee during the revisionary proceedings. The Tribunal emphasized that Section 263 mandates giving the assessee an opportunity of being heard. Since this principle of natural justice was violated, the Tribunal held that the Pr. CIT's finding regarding loans from MAP Cotton Pvt. Ltd. was also unsustainable.

Conclusion:
Both errors noted by the Pr. CIT were found unsustainable in law. The Tribunal set aside the order of the Pr. CIT and allowed the appeal of the assessee.

Result:
The appeal of the assessee was allowed.

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