TMI Blog2019 (11) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... to Section 147 is not applicable . Thus, in our considered view, the AO has rightly invoked provisions of Section 147 of the 1961 Act in reopening the concluded assessment and we uphold reopening of the concluded assessment by the AO on legal ground. Deemed dividend addition u/s 2(22)(e) - 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) unless it falls into exception as provided under Explanation 1 to Section 2(22)(e). 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 hands of the assessee u/s 2(22)(e). Thus, on our considered view, the assessee does not have any case on merit too . The assessee fails in this appeal. We order accordingly. - ITA No.1503/Chny/2014 - - - Dated:- 7-11-2019 - Shri George Math An, Judicial Member And Shri Ramit Kochar, Accountant Member For the Appellant : Mr. S.Sridhar, Adv. For the Respondent : Ms.Sumathi Venkatraman, DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciate that there was no proper opportunity given before the passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law. 8. The Appellant craves leave to file additional grounds/arguments at the time of hearing. 3. The brief facts of the case are that the assessee filed its return of income for impugned ay: 2005-06 on 31.10.2005 returning a loss of ₹ 4,98,660/-. The assessment was framed by AO u/s.143(3) of the 1961 Act on 17.12.2007 assessing the income of the assessee at ₹ 1,73,640/-. The AO later observed that income of the assessee chargeable to tax has escaped assessment, and a notice u/s.148 was issued by the AO to the assessee on 31.03.2010. The assessee in response to aforesaid notice issued by AO u/s.148 of the 1961 Act, submitted before AO to treat return of income originally filed on 31.10.2005 as return of income filed in pursuance to notice dated 31.03.2010 issued u/s.148 of the 1961 Act. Thus, it is an admitted position between rival parties that assessment was originally framed by AO u/s.143(3) of the Act and secondly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracted. 3.2 The AO on the other hand referred to provisions of Section 2(22)(e) of the 1961 Act and held that provision of Section 2(22)(e) of the 1961 Act are clearly applicable and said sum is chargeable to income-tax in the hands of the assessee because the said subsidiary company of the assessee namely M/s Empee Distilleries Limited possessed accumulated profits which are utilized to release this amount to assessee as loan/advance instead of paying the same as dividend and thus not paying taxes on distribution of accumulated profits which were distributed by said M/s Empee Distilleries Limited to assessee as loan/advances , vide assessment order dated 16.12.2011 passed by the AO u/s 143(3) read with Section 147 of the 1961 Act. 4. The assessee being aggrieved by an assessment order dated 16.12.2011 passed by AO u/s 143(3) read with Section 147 of the 1961 Act filed first appeal before Ld.CIT(A) and challenged the additions made by AO both on legal grounds challenging the re-opening of the assessment u/s.147 of the Act and also challenging the additions made on merits by invoking provisions of Section 2(22)(e) of the 1961 Act by brining to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A), vide appellate order dated 07.03.2014 passed by learned CIT(A). 4.2 The learned CIT(A) also upheld the additions made by the AO on merits in brining to tax an amount of ₹ 5,45,76,988/- received by assessee from its subsidiary company as loan/advance during previous year relevant to impugned ay, as deemed dividend u/s 2(22)(e) of the 1961 Act. The learned CIT(A) observed that assessee held 41.78% of shares in its subsidiary company namely M/s Empee Distilleries Limited and accumulated profits available with said subsidiary company namely M/s Empee Distilleries Limited were to the tune of ₹ 6,69,15,506/-. Thus, loans/advances received by assessee from said M/s Empee Distilleries Limited to the tune of ₹ 5,45,76,988/- during previous year relevant to impugned ay was upheld to be deemed dividend u/s 2(22)(e) by learned CIT(A). The assessee, however claimed before learned CIT(A) that this amount received by assessee from M/s Empee Distilleries Limited was not loans/advances and the aforesaid amount was received for business purposes and based on commercial expediency, the provisions of Section 2(22)(e) of the 1961 Act are not attracted. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of sale of Palakkad unit cannot be brought to tax, the learned CIT(A) was pleased to restore the matter to the file of the AO for verification with further direction that Section 2(22)(e) contemplates accumulated profits which means not only profits derived from business activity, but also includes all other profits including capital gains on sale of assets , etc. and hence additions as were made by AO by invoking provisions of Section 2(22)(e) of the 1961 Act were confirmed by learned CIT(A) subject to verification by the AO of actual accumulated profits in the hands of M/s Empee Distilleries Limited, vide appellate order dated 07.03.2014 passed by learned CIT(A). 5. Being aggrieved by decision of learned CIT(A), the assessee filed second appeal with tribunal. The learned Counsel for assessee opened argument and submitted that assessee is challenging re-opening of the concluded assessment by Revenue by invoking provisions of Section 147 of the 1961 Act. The learned counsel for the assessee submitted that return of income was originally filed on 31.10.2005 for impugned ay and assessment was originally framed by AO u/s.143(3) of the Act , vide assessment order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue was not examined by the AO in the original assessment . It was submitted by learned DR that income has been brought to tax by invoking provisions of Sec.2(22)(e) of the Act as deemed dividend in the hands of the assesee and the assessee could not explain/show commercial expediency in these transactions of granting loan by subsidiary company namely M/s. Empee Distilleries Limited to the assessee. The learned DR would submit that only bald statements are made that these transactions between assessee and said M/s Empee Distilleries Limited were governed by commercial expediency but no cogent material/explanations are submitted to prove that these were business transactions and there was infact commercial expediency which governed the execution of these transactions . Our attention was drawn by learned DR to para no.4.2.3 of the appellate order passed by Ld.CIT(A). The learned DR would rely on decision of Hon ble Karnataka High Court in the case of United Spirits Ltd. v. DCIT reported in [2018] 90 taxmann.com 86 (Karnataka). 5.3 The Ld.AR submitted in rejoinder that it is a case of transactions between holding company and subsidiary company, which itself sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closure then also the AO shall be entitled to invoke provisions of Section 147 of the 1961 Act for reopening of the concluded assessment within four years from end of the relevant assessment year , provided other ingredients for reopening of the concluded assessee as are enshrined u/s 147/148 of the 1961 Act are fulfilled. Present is a case before us, wherein originally assessment was framed by Revenue u/s 143(3) of the 1961 Act and reopening was done within four years from the end of the assessment year and hence aforesaid proviso shall have no applicability . 6.2 The first Explanation to Section 147 of the 1961 Act provides that production before AO of a account books or other evidence from which material evidence with due diligence could have been discovered by the AO will not necessarily amount to disclosure within meaning of the foregoing proviso and if there is an tangible incriminating material / information with AO even if emanating from the records before the AO which leads to AO having reasons to believe that income of the assessee has escaped assessment, the AO shall be justified in invoking provisions of Section 147 of the 1961 Act .The Explanation 1 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment, namely :- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to incometax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (c) where an assessment has been made, but- (i) income chargeable to tax has been under-assessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. There will be no order as to costs. 6.5 At this stage it will be relevant to refer to decision of Hon ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers Private Limited reported in (2007) 291 ITR 500(SC) , wherein Hon ble Supreme Court dealt with amended provisions of Section 147 of the 1961 Act and held as under: 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndly 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 under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. 18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an assessment on the basis of information which comes to him after the original assessment and during the course of the assessment proceedings for a subsequent assessment year. This principle was laid down in a judgment of the Supreme Court in Kalyanji Mavji Co. v. CIT [1976] 102 ITR 287 while construing the expression information in Section 34(1)(b) of the Income Tax Act 1961. A similar principle of law was enunciated in a subsequent decision of the Supreme Court in Claggett Brachi Co. Ltd. v. CIT [1989] 177 ITR 409/44 Taxman 86 where the Income tax Officer came to realise that income had escaped assessment for two assessment years when he was in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 in Diwakar Engineers Ltd. v. ITO [2010] 329 ITR 28/187 Taxman 327 held that where materials had come to light during the assessment of a subsequent Assessment Year, that would not constitute a mere change of opinion, but could sustain a notice of reopening. 8. In Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) the Supreme Court has held that the expression reason in the phrase reason to believe would mean a cause or justification and if the Assessing Officer has cause or a justification to know or suppos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etired 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. In this case, reopening of the concluded assessment by invoking provisions of Section 147 of the 1961 Act was done after four years from the end of relevant ay :2001-02, by issuance of notice dated 22.11.2006, u/s 148 of the 1961 Act and hence proviso to Section 147 is applicable and reopening can be validly done in such cases only when there is an failure on the part of the assessee to disclose truly and fully material all material facts in the return of income filed with the Revenue, which are necessary f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Ltd.. The said subsidiary company possessed accumulated profits to the tune of ₹ 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 provision is to curb distribution of accumulated profits by closely held companies to its shareholders holding shareholding in excess of prescribed percentage, without payment of income-tax in the guise of loans/advances , to evade taxes. Distribution of dividend is subject to payment of dividend distribution tax as also it is also taxable in certain situations in the hands of recipients. The said Section 2(22) of the 1961 Act is reproduced hereun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee that payment of loan/advances were made by said subsidiary company namely M/s Empee Distilleries Limited to assessee in its ordinary course of business and covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 1.32 lakhs (rounded off) and stamp duty of ₹ 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 ₹ 2.12 crores (rounded off). He therefore, invoked section 50C and desired to treat the difference of ₹ 1.25 crores (rounded off) by way of deemed long term capital gains. He therefore, recorded the reason to believe that income chargeable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 land. in question had to be compulsorily an non-agri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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, 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 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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