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TMI Blog2019 (11) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) II, Chennai -600 034 dated 07.03.2014 in I.T.A.No.1419/2013-14 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case. 2. The CIT (Appeals) erred in sustaining the assumption of jurisdiction u/s 147 of the Act and erred consequently in confirming the re-assessment framed u/s 143(3) r/w section 147 of the Act without assigning proper reasons and justification. 3. The CIT (Appeals) failed to appreciate that the order of re-assessment under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law. 4. The CIT (Appeals) erred in sustaining the action of the Assessing Officer in bringing to tax Rs. 5,45,76,988/- as deemed dividend u/s 2(22)(e) of the Act in the computation of taxable total income without assigning proper reasons and justification. 5. The CIT (Appeals) failed to appreciate that the provisions of section 2(22)(e) of the Act had no application to the facts of the case and ought to have appreciated that transactions for business purpose based on commercial exigencies would not fall within the purview of section 2(22)(e) of the Act thus vitiating his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee submitted before the AO as under: "The transaction between the assessee and M/s.Empee Distilleries Ltd., is for the purpose of business and to promote mutual business interest. Such commercial transactions are outside the purview of the said deeming provisions of the Act. Even on the other facet and based on the judicial precedents, it is submitted that the commercial transaction between the group companies would be the outside scope of the deeming provisions under consideration. The various conditions envisaged for applying the deeming provisions u/s.2(22)(e) of the Act are not cumulatively satisfied and complied with on the facts of the present case and hence the assessment of deemed dividend is wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law. The loan or advance should be understood with reference to the benefit derived there from by the registered share holder and not with reference to the normal commercial transaction between two companies". In nut shell, the assessee submitted before the AO that these are commercial transactions between assessee and M/s. Empee Distilleries Limited for the purposes of business and to promote mut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the present case, the assessee has during the previous year relevant to impugned ay had received certain loans/advances from a subsidiary company in which assessee held 41.78% of the shares, which constitutes deemed dividend within provisions of Section 2(22)(e) of the 1961 Act. It was observed by learned CIT(A) that these details were neither available to AO at the time of original assessment nor assessee furnished these details before the AO. It was observed by learned CIT(A) that AO did not form any opinion on this issue of chargeability of said loans and advances received by assessee from its subsidiary during the year , as income in the hands of the assessee as deemed dividend u/s 2(22)(e) of the 1961 Act and hence there is no question of change of opinion by the AO. The learned CIT(A) observed that reopening is done within four years from the end of assessment year and hence proviso to Section 147 of the 1961 Act is not applicable. The learned CIT(A) observed that income of the assessee was under-assessed and this is the information which came to possession of the AO as to escapement of income chargeable to tax, and thus reopening of the concluded assessment by invoking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of receipt and payment of money and there are no business transactions . The learned CIT(A) observed that onus is on assessee to prove that there were business expediency in these transactions and it was for assessee to prove through cogent evidences as to nature of transaction between assessee and said M/s Empee Distilleries Limited. The learned CIT(A) observed that assessee has not furnished any such details or compelling conditions before M/s Empee Distilleries Limited while making these payments to the assessee and hence assessee claim of business expediency in receiving these amounts from its subsidiary company namely M/s Empee Distilleries Limited stood rejected by learned CIT(A). Thus, learned CIT(A) upheld the assessment order passed by the AO by confirming the additions made on merits by invoking provisions of Section 2(22)(e) of the 1961 Act . With respect to claim of the assessee that if at all provisions of Section 2(22)(e) of the 1961 Act are to be invoked, then in that condition only amount of Rs. 48.95 lacs can be brought to tax which stood credited in the head 'Profit and Loss Appropriation Account' under the head 'Reserves and Surplus' and amount of Revaluation R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lleries Ltd. . These are transactions between group companies and by virtue of transactions between holding company and subsidiary company, these are itself to be categorized as business transactions. It was fairly submitted by learned counsel for the assessee that these transactions were not scrutinized by AO during the course of original assessment, but these transactions were scrutinized in re-assessment proceedings conducted by AO u/s 147/148 of the 1961 Act, which proceedings are now under challenge before this tribunal. The learned counsel for the assessee brought our attention to para No.4.2.1 of the appellate order passed by learned CIT(A) and submitted that these are business transactions between group companies governed by commercial expediency. The learned counsel for the assessee also relied upon CBDT Circular No.19/2017 [F.No.279/Misc./140/2015/ITJ] dated 12.06.2017. 5.2 The Ld.DR on the other hand submitted that re-opening of the concluded assessment by invoking provisions of Section 147/148 of the 1961 Act was done within four years from the end of the assessment year and proviso to Section 147 of the 1961 Act is not applicable. It was submitted that this issue was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year." Thus, as could be seen from the aforesaid proviso that it , inter-alia, provides that where an assessment has been originally framed u/s 143(3) of the 1961 Act, no action can be taken against the assessee u/s 147 of the 1961 Act after expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on the part of the assessee to disclose truly and fully all material facts necessary for framing assessment, for that assessment year. Thus, even if there is a complete disclosure then also the AO shall be entitled to invoke provisions of Section 147 of the 1961 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited before AO during the course of original assessment proceedings. Thus, the AO did not form any opinion on chargeability to tax of the said loans and advances received by assessee from its subsidiary company M/s Empee Distilleries Limited as deemed dividend u/s 2(22)(e) of the 1961 Act during the course of original assessment framed by it and hence there is no question of any change of opinion by the AO while reopening concluded assessment by invoking provisions of Section 147 of the 1961 Act 6.3 The second Explanation to Section 147 of the 1961 Act clearly stipulates vide clause (c)(i) to second Explanation that wherein originally assessment was framed u/s 143(3) of the 1961 Act , but income chargeable to tax has been under assessed , the AO shall have powers to invoke provisions of Section 147 of the 1961 Act for reopening the concluded assessment as said under-assessment shall be deemed to be a case wherein income of tax-payer has escaped assessment .The second Explanation to Section 147 of the 1961 Act is reproduced hereunder: "Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment. Thus, at the stage of invocation of provision of Section 147 of the 1961 Act for initiating reopening of the concluded assessment what is required is prima facie material to show income has escaped assessment and not conclusive proof with evidence that income chargeable to tax of the assessee has escaped assessment. The Courts cannot go into sufficiency or correctness of the material before upholding invocation of provisions for initiating reopening of concluded assessment u/s 147 of the 1961 Act. The decision of Hon'ble Supreme Court in the case of Raymond Woolen Mills Limited v. ITO reported in (1999) 236 ITR 34(SC) is relevant , wherein Hon'ble Supreme Court held as under: "In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective satisfaction ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC). 17. The scope and effect of section 147 as substituted with effect from 1-4-1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Ltd. [2010] 320 ITR 561/187 Taxman 312 is whether the Assessing Officer had tangible material to come to the conclusion that there is an escapement of income from assessment. The Supreme Court has held that the "reason to believe" that any income chargeable to tax has escaped assessment cannot be founded on a mere change of opinion. The power to reassess is not in the nature of a power to review. Hence, the true test to be applied, where a reopening takes place within a period of four years, as in the present case, is whether there exists tangible material on the basis of which the Assessing Officer has proceeded to reopen the assessment. That determination has to be made on the basis of the reasons which are disclosed to the assessee. For it is those reasons which form the foundation of the action of the Assessing Officer and form the basis on which the belief that income has escaped assessment is formed. Hindustan Lever Ltd v. R.B. Wadkar, Asstt. CIT [2004] 268 ITR 332/137 Taxman 479 (Bom.). 5. The judgments of the Supreme Court on the subject contain a clear elaboration of principle in which it has been held that an Assessing Officer acts within jurisdiction in reopening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed." 7. A similar principle of law has been laid down in a judgment of a Division Bench of the Madras High Court in Virudhunagar Co-operative Milk Supply Society Ltd v. CIT [1990] 183 ITR 545/[1989] 46 Taxman 13 and in a judgment of a Division Bench of the Punjab and Haryana High Court in Ropar District Co-operative Milk Producers Union Ltd. v. CIT [2009] 311 ITR 42/[2007] 165 Taxman 477 (Punj & Har.) In a more recent judgment, a Division Bench of the Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y came in 2003 was the observation of the Hon'ble High Court. We are concerned with ay: 2005- 06 wherein electronic processing of returns was undertaken. Secondly Hon'ble High Court observed that AO has reopened the assessment based on same stale material which was available with the AO while processing of return of income u/s 143(1)(a) and there was no tangible material available with AO to have prima facie reason to believe that income of the tax-payer has escaped assessment. Thirdly, the partner of the tax-payer firm retired from the assessee firm in that case and the same person also retired from two other partnership firms as partner and assessment in case of both the firms were made by Revenue u/s 143(3) of the 1961 Act , while later on provisions of Section 148 of the 1961 Act were invoked by Revenue, and in both these cases, the tribunal held that the Revenue lacks jurisdiction to reopen concluded assessment and reopening was held to be bad in law by tribunal. 6.9 The assessee had also relied upon judgment of Hon'ble Madras High Court in case of Tenzing Match Works v. DCIT in Tax Case(Appeal) No 702, vide judgment dated 11.07.2019 to contend that reopening is bad in law. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in reopening the concluded assessment and we uphold reopening of the concluded assessment by the AO on legal ground.We order accordingly 6.12 On merits, we have observed that the assessee had received loans/advances from its subsidiary company M/s Empee Distilleries Limited to the tune of Rs. 5,45,76,988/- during the year under consideration in which subsidiary company, the assessee held 41.78% of shareholding of that company, M/s Empee Distilleries Ltd.. The said subsidiary company possessed accumulated profits to the tune of Rs. 6,69,15,506/- which is far in excess of loans/advances granted to the assessee during the year under consideration . Provisions of Section 2(22)(e) of the 1961 Act creates a deeming fiction wherein it provides , inter-alia, that any payments of loans and advances by a company, not being a company in which the public are substantially interested to a shareholder being a person who is beneficial owner of shares holding not less than 10% of the voting power , to the extent to which the company possess accumulated profits shall be deemed to be dividend and chargeable to tax in the hands of shareholder. The purpose and intent behind the enactment of this prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.-The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. [Explanation 3.-For the purposes of this clause,- (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;]" 6.13 It is not the case of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no question of change of opinion as no opinion was formed by AO during course of original assessment proceedings on this issue. The reopening in the instant case is sought to be done within four years from the end of relevant assessment year and proviso to Section 147 is not applicable. It will be relevant to produce decision of Hon'ble Gujarat High Court in the case of Chunibhai Ranchhodbhai Dalwadi v. ACIT reported in (2016) 388 ITR 130(Guj.) , wherein Hon'ble Gujarat High Court held as under: "7. Regarding the validity of reassessment proceedings, we may recall the Assessing Officer in his reasons had stated that the assessee had sold immovable property vide sale deed dated April 19, 2006. The sale value declared was Rs. 87.71 lakhs (rounded off). However, the sale deed was registered with the Sub-Registrar, Nadiad on April 19, 2006 on which registration charge of Rs. 1.32 lakhs (rounded off) and stamp duty of Rs. 11.92 lakhs (rounded off) was paid. He therefore, noted that as per the stamp duty, sale value determined by the stamp authorities would come to Rs. 2.12 crores (rounded off). He therefore, invoked section 50C and desired to treat the difference of Rs. 1.25 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the land. Hence, the land in question purchased was non-agricultural land and accordingly the stamp registering authority had rightly applied the rates for non-agricultural land at the time of execution of the sale deed. In view of the above, the stamp rates charged by the Stamp Authority was for non-agricultural land and the Sub Registrar accordingly worked out the document value as Rs. 2.12,86,400. Thus. from the above it becomes amply clear that you have sold non-agricultural land whereas you have paid capital gains on agriculture land. The registration of banakat appears only to circumvent the due process of law to pay capital gains on non-agricultural land. By registering the banakat without releasing the possession of the land to the purchasers, you have in fact retained all the incumbent rights on the said land. It appears that by asking the purchasers to convert the said land into non-agricultural land you have tried to avoid incurring the cost of taking non-agricultural permission. Another pertinent point to mention in this sale transaction is that the purchasers are a charitable trust and agricultural land as claimed by you could not be purchased by them. Thus, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, 95[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]." 6.15 Thus, clearly capital gains except arising before 01st April , 1946 , or after 31st March, 1948 , and before 1st April , 1956, all other capital gains are to be included. Thus, we hold that profit on sale of profits on sale of Palakkad unit shall be included while computing accumulated profits for making disallowance u/s 2(22)(e) of the 1961 Act, unless it falls into exception as provided under Explanation 1 to Section 2(22)(e) of the 1961 Act. Thus, we direct AO to verify this limited point as to whether capital gains on sale of Palakkad unit falls in the exempted period per Explanation 1 to Section 2(22)(e) of the 1961 Act or not and then to bring to tax said amount in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X
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