2025 (4) TMI 724 - AT - Income Tax

Reassessment proceedings - Internal Audit Party observation relied upon - addition u/s 2(22)(e) - disbursement of the money was in the account of that company though the loan was in the name of the assessee but the company was co-applicant - HELD THAT - Loan was sanctioned by the bank in the name of the applicant and co applicant of the loan. The loan was disbursed to the company and in turn was transferred to the assessee and therefore the source needs to be considered. It is not the loan out of the accumulated profit of that company it was the loan wherein the assessee is applicant and the other three were co-applicant. This aspect as argued were not considered even though all the material to that effect was placed on record. The assessment in this case was completed thereafter based on the Internal Audit Party observation the case was re-opened by issue of notice u/s. 148 of the Act and thereby the same was abated on account of the search. The addition so made in the case was on the transaction already on record and not based on any incriminating material found in the search and therefore considering that aspect of the material also no addition is maintainable considering the decision of case of search assessment addition can only be made based on the incriminating material found. Addition u/s. 2(22)(e) - assessee argued that even the sustained addition to the extent of the profit of the company is required to be deleted because the assessee has received that money on account of the bank loan applied - As is evident from the above bank statement that money so credited in the account of the company on 17.11.2011 is the credit represented by cheque which is reflected in the sanction letter in the name of assessee. Thus when the money so given to the assessee from the account of the company Millenium Technocraft Colonisers Private Limited is not out of the accumulated profit and thereby it does not attract the provision of section 2(22)(e) of the Act. Therefore we see no reason to sustain the addition even to the extent of accumulated profit as observed by ld. CIT(A). Based on that observation ground raised by the assessee is allowed. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the reassessment proceedings initiated under Section 148 of the Income Tax Act, based on an audit objection, were valid.
• Whether the addition of Rs. 44,62,938/- under Section 2(22)(e) of the Income Tax Act, treating certain transactions as deemed dividend, was justified.
• Whether the CIT(A) erred in sustaining the said addition without duly considering the submissions made by the appellant.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reassessment Proceedings under Section 148

• Legal Framework: Section 148 of the Income Tax Act allows for reassessment if income has escaped assessment, with the requirement that the Assessing Officer (AO) must record reasons for such belief. The involvement of an audit objection as a basis for reassessment was scrutinized.
• Court's Interpretation: The Tribunal noted that while audit objections can constitute "information" under Section 147(b), the AO must independently apply his mind to the materials flagged by the audit party.
• Key Evidence and Findings: The AO issued the notice under Section 148 based on an audit objection without further inquiry or independent examination of facts, which the Tribunal found insufficient for reassessment.
• Application of Law to Facts: The Tribunal found that the AO did not independently verify the audit objection, and thus, the reassessment proceedings were not validly initiated.
• Treatment of Competing Arguments: The Tribunal considered the Revenue's argument that the AO had applied his mind, but found no evidence supporting independent verification by the AO.
• Conclusion: The reassessment proceedings were deemed invalid due to lack of independent application of mind by the AO.

Issue 2: Addition Under Section 2(22)(e) as Deemed Dividend

• Legal Framework: Section 2(22)(e) treats certain loans or advances to shareholders as deemed dividends, provided the shareholder has substantial interest in the company.
• Court's Interpretation: The Tribunal examined whether the loans in question were genuinely business transactions or should be treated as deemed dividends.
• Key Evidence and Findings: The Tribunal found that the loans were sanctioned by ICICI Bank in the name of the assessee, with the company as a co-applicant, and not out of accumulated profits.
• Application of Law to Facts: The Tribunal determined that since the funds were sourced from a bank loan and not the company's accumulated profits, the provisions of Section 2(22)(e) were not applicable.
• Treatment of Competing Arguments: The Tribunal considered the Revenue's argument that the transactions were recorded as loans in the company's books, but emphasized the substance over form, focusing on the actual nature of the transactions.
• Conclusion: The addition under Section 2(22)(e) was not justified, as the funds were not from accumulated profits but from a bank loan.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The reassessment proceedings were deemed invalid due to lack of independent application of mind by the AO."
• Core principles established: The Tribunal emphasized the necessity of independent verification by the AO when relying on audit objections for reassessment and the importance of the actual source of funds in determining the applicability of Section 2(22)(e).
• Final determinations on each issue: The reassessment proceedings were invalid, and the addition under Section 2(22)(e) was not justified. The appeal of the assessee was allowed.