2025 (6) TMI 72 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - diversion of accumulated profits by way of disguised dividends - HELD THAT - We find that the submission made by the Assessee that the relevant transactions were undertaken during the ordinary course of business has not been tested on account of failure of the Assessee to produced relevant documents/details. At the same time we note that Circular No.19 of 2017 dated 17/06/2017 gives instances where trade advances/commercial transactions were held by the Courts to fall outside the ambit of the provisions contained in Section 2(22)(e) of the Act. During the course of hearing Assessee had pleaded for an opportunity to make out a case on merits by placing reliance upon the documents forming part of Paper-Book. However since the same documents were not placed before CIT(A) we deem it appropriate to restore the issue back to the file of CIT(A) with the directions to adjudicate the same afresh after taking into consideration the documents/details to be furnished by the Assessee. Accordingly the Order passed by the CIT(A) is set aside with the directions to adjudicate the appeal afresh after granting the Assessee a reasonable opportunity of being heard. Appeal preferred by the Assessee is treated as allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the addition made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act, 1961 (the Act) on account of deemed dividend is legally sustainable.
• Whether the provisions of Section 2(22)(e) of the Act are applicable to the transactions in question, specifically the loan/advance extended by one closely held company to another in which the Assessee holds significant shareholding.
• Whether the Assessee was denied adequate opportunity of being heard during the assessment and appellate proceedings, thereby affecting the fairness of the process.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability and Sustainability of Addition under Section 2(22)(e) of the Act

Relevant Legal Framework and Precedents: Section 2(22)(e) of the Act deems certain loans or advances made by a closely held company to its shareholders or their relatives as deemed dividend, taxable in the hands of the recipient. The provision aims to prevent diversion of accumulated profits by way of disguised dividends. However, judicial precedents and Circular No. 19 of 2017 issued by the Central Board of Direct Taxes (CBDT) clarify that commercial transactions in the ordinary course of business are excluded from this deeming provision.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer had invoked Section 2(22)(e) on the basis that a closely held company, Decon Mercantile Pvt. Ltd., had extended a loan/advance of INR 1,33,05,699 to another closely held company, Francis Klein & Co. (Bombay) Pvt. Ltd., during the relevant financial year. The Assessee held significant shares in both companies, thus prima facie attracting the deeming provisions. However, the Tribunal observed that the nature of the transaction - whether it was a regular commercial transaction or a deemed dividend - was not properly examined due to the Assessee's failure to produce relevant documents before the lower authorities.

Key Evidence and Findings: The AO issued notices under Sections 148, 142(1), and a show-cause notice, which the Assessee failed to comply with adequately. Consequently, the AO proceeded ex-parte to make a best judgment assessment. The Assessee contended that the advances were in the ordinary course of business and relied on the Allahabad High Court judgment in Kishori Lal Agrawal's case and CBDT Circular No. 19 of 2017 to support the contention that such commercial loans should not be treated as deemed dividends.

Application of Law to Facts: The Tribunal recognized that the Assessee's failure to submit relevant documents such as loan ledgers, bank statements, or agreements before the AO and CIT(A) prevented a proper examination of the transaction's nature. The Tribunal acknowledged the legal position that trade advances or commercial transactions are excluded from Section 2(22)(e), but since the Assessee did not place these documents before the CIT(A), the issue remained unadjudicated on merits.

Treatment of Competing Arguments: The Department emphasized the Assessee's non-cooperation and non-compliance with notices, asserting that the Assessee was responsible for the adverse inference. The Assessee argued that the documents were available and had been submitted before the Tribunal but not before the CIT(A), and that the transaction was commercial in nature, not attracting Section 2(22)(e).

Conclusions: The Tribunal held that since the documents were not placed before the CIT(A), the issue could not be decided on merits. The Tribunal directed the matter to be restored to the CIT(A) for fresh adjudication after granting the Assessee a reasonable opportunity to produce all relevant documents and make submissions. The Tribunal clarified that failure to cooperate in the appellate proceedings would entitle the CIT(A) to decide the issue on the basis of material on record.

Issue 2: Adequacy of Opportunity of Being Heard

Relevant Legal Framework: The principles of natural justice and fair play require that an assessee be given adequate opportunity to present his case before adverse orders are passed. The issuance of notices and the chance to respond are essential components of such opportunity.

Court's Interpretation and Reasoning: The Assessee contended that adequate opportunity was not granted during the assessment and appellate proceedings, which led to an ex-parte best judgment assessment. The Tribunal noted that although notices were issued under Sections 148, 142(1), and show-cause notices, the Assessee failed to respond or respond adequately. The Department contended that the Assessee was the author of his own predicament by not complying with notices.

Key Evidence and Findings: The record showed multiple notices sent to the Assessee, including during the appellate stage. The Assessee's failure to respond or only piecemeal responses were noted. However, the Tribunal also noted that the Assessee's contention of non-grant of opportunity was partly founded on the fact that documents were not considered by the CIT(A) due to non-filing before that authority.

Application of Law to Facts: The Tribunal balanced the Department's assertion of non-cooperation with the Assessee's plea for an opportunity to place documents on record. The Tribunal found that the failure to consider documents at the CIT(A) stage was a procedural lapse that warranted restoration of the appeal for fresh adjudication with proper opportunity.

Treatment of Competing Arguments: The Department's argument that the Assessee was non-cooperative was accepted to the extent that notices were ignored or inadequately responded to. However, the Tribunal emphasized that procedural fairness requires that the Assessee be given a chance to place relevant documents before the appellate authority.

Conclusions: The Tribunal concluded that the Assessee must be granted a reasonable opportunity of hearing before the CIT(A) and directed the appellate authority to adjudicate afresh after considering all documents and submissions.

3. SIGNIFICANT HOLDINGS

The Tribunal set aside the order of the CIT(A) dated 19/06/2024 and remanded the matter for fresh adjudication with the following key determinations:

• "The submission made by the Assessee that the relevant transactions were undertaken during the ordinary course of business has not been tested on account of failure of the Assessee to produce relevant documents/details."
• "Circular No.19 of 2017, dated 17/06/2017, gives instances where trade advances/commercial transactions were held by the Courts to fall outside the ambit of the provisions contained in Section 2(22)(e) of the Act."
• "Since the same documents were not placed before CIT(A), we deem it appropriate to restore the issue back to the file of CIT(A) with the directions to adjudicate the same afresh after taking into consideration the documents/details to be furnished by the Assessee."
• "The Assessee directed to co-operate in the appellate proceedings and forthwith file details, documents & submission in support of its claims/contentions before the CIT(A). The CIT(A) would consider the same as per law."
• "In case the Assessee fails to enter appearance and/or fails to file details/documents/submission in response to notice of hearing issued by the CIT(A), the CIT(A) shall be at liberty to decide the issues on merits on the basis of material on record."
• "Since, we have not adjudicated the issues raised on merits, all the rights and contentions of both the sides are left open."

Thus, the Tribunal emphasized the importance of procedural fairness and the necessity of adjudicating the merits of the case based on full evidence. The appeal was allowed for statistical purposes, preserving the Assessee's right to contest the addition on merits before the CIT(A).