2024 (7) TMI 1085 - AT - Income Tax

Validity of reopening of assessment after expiry of four years -deemed dividend u/s 2(22)(e) - as argued no specific satisfaction was recorded by the AO that there was a failure on the part of the assessee to disclose fully and truly all material facts - HELD THAT -To reopen the case beyond 4 years, must be first established that there was a failure on the part of the assessee to disclose fully and truly all material facts and such failure has not been established either by the AO or by the CIT(A). As regarding the issue of deemed dividend on which the second reopening was done, there can be failure on the part of the assessee only when there is requirement as per law to disclose the deemed dividend in the return of income or in the tax audit report and which has not been complied. It is found that there was no requirement to declare any deemed dividend u/s 2(22)(e) in the ITR or in the Tax Audit Report for this year. These requirements were introduced in the ITR Form and in the Tax Audit Report much later. Under the circumstances, the assessee cannot be charged with any failure to disclose fully or truly all material facts. As explained by the assessee that account with the company was in the nature of current account and as per finding recorded by the Ld. CIT(A), there were 35 transactions during the year. CIT(A) had taken the closing balance only as deemed dividend and the ground taken by the Revenue that the deemed dividend was restricted is not found correct. As per direction of the Ld. CIT(A), only the closing credit balance was required to be verified with reference to accumulated profit of the company. We are of the considered opinion that there was no failure on the part of the assessee to disclose fully and truly all the material facts and, therefore, the jurisdiction of the AO u/s 147 of the Act was not correctly assumed. The fact of any failure on the part of the assessee was neither brought out by the AO nor was evident from the record, which was essential for reopening the case beyond 4 years. Therefore, the reopening done by the AO was incorrect and not in accordance with the 1st Proviso to Section 147 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the second reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Treatment of loan as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
3. Restriction of deemed dividend to the extent of accumulated profits.

Detailed Analysis:

1. Validity of the Second Reopening of Assessment under Section 147:
The core issue was whether the second reopening of the assessment under Section 147, beyond four years from the end of the relevant assessment year, was valid. The assessee argued that the reopening was invalid as there was no failure on their part to disclose fully and truly all material facts necessary for the assessment. The assessee's counsel emphasized that the First Proviso to Section 147 stipulates that no reopening can be done after four years unless the income escaped assessment due to the assessee's failure to disclose material facts.

The Tribunal found that the Assessing Officer (AO) did not record any specific satisfaction regarding the assessee's failure to disclose material facts in the reasons for reopening. The Tribunal noted that the loan from Shri Rang Infrastructure Pvt. Ltd. was already disclosed in the accounts, and there was no requirement for the assessee to disclose the deemed dividend in the return of income or the tax audit report for that year. The Tribunal concluded that there was no failure on the part of the assessee to disclose material facts and, therefore, the reopening was invalid under the First Proviso to Section 147.

2. Treatment of Loan as Deemed Dividend under Section 2(22)(e):
The AO treated the loan of Rs. 3,08,90,000/- taken by the assessee from Shri Rang Infrastructure Pvt. Ltd., where the assessee held more than 10% shares, as deemed dividend under Section 2(22)(e). The CIT(A) restricted the addition to the extent of accumulated profits of the company, which was Rs. 1,03,18,143/-.

The Tribunal observed that the transaction was in the nature of a current account with multiple transactions during the year. The CIT(A) noted that the closing debit balance was Rs. 13,43,075/- and directed the AO to verify the accumulated profits to restrict the deemed dividend accordingly. The Tribunal upheld that the entire loan amount could not be treated as deemed dividend and only the closing balance should be considered after verifying the accumulated profits.

3. Restriction of Deemed Dividend to Accumulated Profits:
The Revenue challenged the CIT(A)'s decision to restrict the deemed dividend to the accumulated profits. The Tribunal found that the CIT(A) correctly directed the AO to verify and restrict the deemed dividend to the closing balance of Rs. 13,43,075/- or the accumulated profits, whichever was lower. The Tribunal noted that the CIT(A) had provided a detailed rationale, considering the nature of transactions and the applicable legal provisions.

Conclusion:
The Tribunal concluded that the second reopening of the assessment under Section 147 was invalid due to the absence of any failure on the part of the assessee to disclose material facts. Consequently, the Tribunal quashed the reopening of the case. As the legal ground was allowed, the Tribunal did not examine the merits of the Revenue's grounds. Thus, the appeal by the Revenue was dismissed.