2025 (7) TMI 905 - HC - Income Tax

Reopening of assessment u/s 147 - Deemed dividend addition u/s 22(2)(e) - HELD THAT - What is coming from the record is that disputed amount was not an unsecured loan but credit balance of Accounts which included F O trading payment receipts margin and interest on margin due to which an amount was received. It is a settled position of law that trade advances are not subject to Provision of Section 2(22)(e) as per Circular N.19/2017 dated 12.6.2017. Revenue was not in a position to dismiss this factual and legal position. Even this aspect is clarified by decision of this Court in case of GSEC Ltd. 2023 (11) TMI 127 - GUJARAT HIGH COURT held that where loans and advances are given in the normal course of business and transaction in question benefits both i.e. the payer and the payee companies the provisions of Sec.2(22)(e) cannot be invoked. It is well settled in the case of CIT vs. Kelvinator of India Ltd 2010 (1) TMI 11 - SUPREME COURT that reason must have a link with the formation of the belief. Thus the notice issued u/s 148 is hereby quashed and set aside. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

• Whether the notice issued under Section 148 of the Income Tax Act, 1961, reopening the assessment for the Assessment Year 2016-17, was valid and justified.
• Whether the transaction involving receipt of an amount of Rs. 6,08,17,054/- by the petitioner company from Relitrade Stockbroking Pvt. Ltd. qualifies as an unsecured loan attracting the provisions of Section 2(22)(e) of the Income Tax Act, thereby constituting deemed dividend income.
• Whether the reopening of the assessment was based on a change of opinion or on fresh material justifying reassessment.
• The applicability and interpretation of Section 2(22)(e) of the Income Tax Act in the context of inter-corporate transactions involving trade advances or deposits.
• The legal effect and relevance of Circular No. 19/2017 dated 12.6.2017 issued by the CBDT clarifying that trade advances are not subject to the provisions of Section 2(22)(e).

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening Notice under Section 148

Relevant legal framework and precedents: Section 148 of the Income Tax Act permits reopening of assessment if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. However, the reopening must be based on tangible material and not merely a change of opinion, as established in CIT vs. Kelvinator of India Ltd. (2010) (320 ITR 561), which mandates that reasons must have a link with the formation of belief.

Court's interpretation and reasoning: The Court examined the reasons recorded for reopening and found them to be based on material already considered during the original assessment. The petitioner had filed detailed objections pointing out that the transactions were already scrutinized and assessed. The Court held that the reopening notice was based on a change of opinion rather than fresh material, which is impermissible under law.

Key evidence and findings: The petitioner's return for AY 2016-17 declared income of Rs. 5,84,250/-. The original assessment order was passed after scrutiny. The reopening notice dated 26.03.2021 was issued after amalgamation of the petitioner company with Relitrade Stock Broking Pvt. Ltd., but in the name of the erstwhile company. The objections raised were not disposed of before the reopening.

Application of law to facts: Since the reopening was based on facts already examined and assessed, the Court concluded that the reopening amounted to impermissible change of opinion.

Treatment of competing arguments: The revenue contended that there was escapement of income and that Section 2(22)(e) was attracted. However, the Court found this unsubstantiated and unsupported by fresh material.

Conclusion: The reopening notice under Section 148 was held invalid and liable to be quashed.

Applicability of Section 2(22)(e) to the Transaction in Question

Relevant legal framework and precedents: Section 2(22)(e) of the Income Tax Act deems certain loans or advances made by a company to its shareholders or to a concern in which such shareholders hold substantial interest as deemed dividend income. The CBDT Circular No. 19/2017 clarifies that trade advances are excluded from the scope of Section 2(22)(e). The Court relied on several precedents including:

• GSEC Ltd. v. Deputy Commissioner of Income-tax (2023) 157 taxmann.com, which held that loans received from a company in which the assessee is not a shareholder cannot be treated as deemed dividend.
• Commissioner of Income-tax v. Daisy Packers (P) Ltd., which distinguished inter-corporate deposits from loans attracting Section 2(22)(e).
• Commissioner of Income-tax v. Ankitech (P) Ltd., where the Delhi High Court held that loans and advances given in the normal course of business benefiting both parties do not attract Section 2(22)(e).
• Commissioner of Income-tax v. Madhur Housing & Development Co. (2018) 93 taxmann.com 502 (SC), where the Supreme Court held that the legal fiction under Section 2(22)(e) cannot be extended to concerns not shareholders of the payer company.

Court's interpretation and reasoning: The Court found that the disputed amount of Rs. 6,08,17,054/- was not an unsecured loan but a credit balance arising from client accounts involving F&O trading, payments, receipts, margins, and interest on margin. The audited financial statements reflected this amount under sundry creditors, not borrowings. Hence, it constituted trade advances or inter-corporate deposits rather than loans attracting Section 2(22)(e).

Key evidence and findings: The petitioner's submissions, audited financial statements, and the CBDT Circular were pivotal in establishing the nature of the transaction. The presence of a common director and substantial interest in both companies was noted by the revenue but was insufficient to apply Section 2(22)(e) given the nature of the transaction.

Application of law to facts: The Court applied the legal principles from the above precedents and the CBDT Circular to hold that the transaction did not qualify as deemed dividend under Section 2(22)(e).

Treatment of competing arguments: The revenue's reliance on the presence of a common director and alleged substantial interest was rejected in light of the factual matrix and settled legal position excluding trade advances from Section 2(22)(e).

Conclusion: The transaction was not subject to Section 2(22)(e), and the reassessment on this ground was unsustainable.

Effect of Amalgamation and Notice Issuance in the Name of Erstwhile Company

Relevant legal framework: Post-amalgamation, the petitioner company ceased to exist independently, and the successor company assumed its assets and liabilities. Notices issued in the name of the erstwhile company may raise procedural issues.

Court's reasoning: Although not the primary ground for quashing, the Court noted that the notice was issued in the name of the amalgamated company's predecessor, which could cause confusion and procedural irregularity.

Conclusion: This factor, coupled with substantive issues, supported quashing the notice.

3. SIGNIFICANT HOLDINGS

The Court made the following crucial legal determinations:

"It is a settled position of law that trade advances are not subject to Provision of Section 2(22)(e) as per Circular N.19/2017 dated 12.6.2017."

"Where loans and advances are given in normal course of business and transaction in question benefits both, i.e. the payer and the payee companies, the provisions of Sec.2(22)(e) cannot be invoked."

"Reason must have a link with the formation of the belief." (CIT vs. Kelvinator of India Ltd.)

"Where the assessee company does not hold a share in other company from whom it had received deposit then it cannot be treated to be a deemed dividend under Section 2(22)(e) of the Act."

Core principles established include:

• Reopening of assessment under Section 148 must be based on fresh material and not a mere change of opinion.
• Trade advances or inter-corporate deposits are excluded from the ambit of deemed dividend under Section 2(22)(e).
• The legal fiction under Section 2(22)(e) applies only where the recipient is a shareholder or a concern in which shareholders hold substantial interest, and the transaction is not in the ordinary course of business benefiting both parties.
• Proper procedural compliance is essential, including issuing notices in the correct name post-amalgamation.

Final determinations on each issue were:

• The reopening notice under Section 148 was quashed as it was based on a change of opinion and not on fresh material.
• The transaction was not an unsecured loan attracting Section 2(22)(e) but a trade advance or inter-corporate deposit excluded by CBDT Circular and judicial precedents.
• The reassessment proceedings initiated on the basis of the notice were invalid and set aside.