TMI Blog2020 (3) TMI 1203X X X X Extracts X X X X X X X X Extracts X X X X ..... benefitted from the transaction or not is a matter to be decided at the stage of evaluation of the material during the course of re-assessment were to be accepted, it would amount to allowing the Assessing Officer to make a fishing inquiry to ascertain as to whether or not any income has escaped assessment. For the purpose of invoking section 147 AO has to form a belief that income chargeable to tax has escaped assessment and not that income chargeable to tax may have escaped assessment. In the facts of this case, the petitioner being an individual does not fall in the first category; and since his gross total income is only ₹ 1.48 crores, he also does not fall under the second category of enterprises. Therefore, also there does not appear to be any specific requirement for the petitioner to disclose such transaction. In the aforesaid premises, this court is of the view that on the reasons recorded by the Assessing Officer, he could not have formed the belief that income chargeable to tax has escaped assessment. If the contention of the learned counsel for the respondent that the fact as to whether the petitioner has benefitted from the transaction or not is a matter t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under article 226 of the Constitution of India, the petitioner has challenged the notice dated 27.03.2015 issued by the respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') seeking to reopen the assessment of the petitioner for assessment year 2008-2009 as well as the orders at Annexure 'T' and 'V' to the petition whereby the respondent has rejected the objections raised by the petitioner to the reopening of assessment. 3. The facts as averred in the petition are that the petitioner is an individual and is assessed as such. For assessment year 2008-2009, the petitioner filed his return of income showing total income at ₹ 1,48,89,810/- as per the statement of income annexed along with the return of income. The petitioner had also filed audit report in Form No.3CB and 3CD before the Assessing Officer. Thereafter, the petitioner received a noticed dated 16.09.2010 issued under section 142(1) of the Act, calling upon the petitioner to furnish certain details. The petitioner furnished such details through his Chartered Accountant by a reply dated 14.10.2010. A further notice dated 19.10.2010 came to be issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the petitioner had disclosed fully and truly all material facts for the purpose of assessment under section 143(3) of the Act. It is the case of the petitioner that he had filed all primary documents which were statutorily required to be filed along with the return of income and had also filed all documents that were called for during the course of scrutiny assessment. The petitioner pointed out that the Assessing Officer, while carrying out scrutiny assessment, had examined the issue of deemed dividend under section 2(22)(e) of the Act. 3.3 By an order dated 11.09.2015, the respondent disposed of the objections raised by the petitioner vide letter dated 13.07.2015. Furthermore, by a letter dated 11.09.2015, the respondent called upon the petitioner to explain as to why loans extended by M/s. J. P. Infrastructure Pvt. Ltd. (now known as J. P. Iscon Limited) to its sister concern amounting to ₹ 12.61 crores should not be treated as deemed dividend under section 2(22)(e) of the Act as the petitioner was holding 27.49% of the shares in M/s. M/s. J. P. Iscon Ltd and called upon the petitioner to reply the query within the time specified thereunder. The petitioner respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, the Court has held thus: 11. xxxxxxxThe companies having accumulated profits and the companies in which substantial voting power lies in the hands of a person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. Therefore, the legislature realised that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting Section 2(22)(e) of the Act. 12. xxxxxxx It is not in dispute that the assessee had more than 10% of voting power in MKSEPL during the block period. It is not in dispute that the assessee had substantial inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to hold enquiries and in that enquiry the cash-flow statement emerged, therefore, the Department was right in invoking the provisions of Chapter XIV-B in the present case. The five payments had direct correlation with ₹ 5.99 crores paid by MKSEPL to MKF and MKI and payments by the said two firms to the assessee who used the said money to buy 9% RBI Relief Bonds. Therefore, the said payment by the company through the two firms was for the benefit of the assessee. Therefore, the said funds were not repayment of loans, they were for purchase of 9% RBI Relief Bonds by the respondent. 16. The above two judgments indicate that the question as to whether payment made by the company is for the benefit of the assessee is a question of fact. In this case, the Tribunal has concluded that the payment routed through MKF and MKI was for the benefit of the assessee. This was a finding of fact. It was not perverse. Therefore, the High Court should not have interfered with the said finding. Further, the above two judgments lay down that the concept of deemed dividend under Section 2(22)(e) of the Act postulates two factors, namely, whether payment is a loan and whether on the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of the assessee. It was submitted that section 2(22)(e) contains a deeming provision and hence, it must be strictly construed and that the court should adopt a practical approach. 4.5 Adverting to the reasons recorded, it was submitted that the reasons do not state that any loan or advance has been received by the petitioner or any benefit has been received; there is no allegation that income of dividend has been earned by the petitioner; and there is no allegation that M/s. J. P. Infrastructure Pvt. Ltd. has accumulated profits; and hence, in the absence of those overriding considerations, the notice under section 148 of the Act must fail. 4.6 Referring to the objections raised against the reopening of assessment, it was submitted that in the objections, the petitioner has stated that he has not received a single rupee from the two loanees, which has not been dealt with in the order disposing of the objections; it was also contended that the loan was given for the purpose of business, and hence, there is no question of dividend, however, these two objections have not been dealt with. 4.7 It was urged that the return is filed electronically and it is not possibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, the initiation of the impugned re-assessment proceedings, which were beyond a period of four years was not permissible 4.9 Reliance was also placed upon the decision of this Court in CIT v. Alfa ICA, (India ) Ltd., (2013) 217 Taxman 129 (Gujarat), wherein, the court has held that where there is no failure on the part of the assessee to disclose fully and truly all material facts, merely because the claim was not previously processed during the scrutiny assessment or that such claim was legally not sustainable, would not vest the jurisdiction in the Assessing Officer to reopen the assessment beyond a period of four years from the end of relevant assessment year. It was contended that the impugned notice under section 148 of the Act having been issued after a period of more than four years from the end of relevant assessment year, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts, the assumption of jurisdiction on the part of the Assessing Officer lacks validity. 4.10 It was, accordingly, urged that on the reasons recorded, the Assessing Officer could not have formed the belief that income chargeable to tax has escape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Dishman Pharmaceuticals and Chemicals Ltd. v. Deputy Commissioner of Income Tax (supra). Attention was invited to paragraph 6 of the said decision to submit that the arguments of the revenue in this case are similar. It was pointed out that one of the arguments raised on behalf of the assessee in the said case was that the format of filing return did not require such information to be given, which contention has been repelled by the court. 5.4 As regards the contention of the learned advocate for the petitioner that the amount given by M/s. J. P. Infrastructure Pvt. Ltd. to Gujarat Malls Management Pvt. Ltd. and Aryan Arcade Pvt. Ltd. were inter-corporate deposits. It was submitted that in this case, the entire transaction was not disclosed. Consequently, in the absence of nature of transaction being disclosed, there was no question of considering whether or not the payments were in the nature of inter-corporate deposits. 5.5 Insofar as the decision of this Court in the case of Viren Sureshchandra Shah (supra) is concerned, it was submitted that in the case of a private limited company, the control is with a few persons and a director who holds more than 10% shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission and failure on the part of the assessee-petitioner to make full and true disclosure. The term failure on the part of the assessee is not restricted only to the income-tax return and the columns of the income-tax return or the tax audit report. This is the first stage. The said expression failure to fully and truly disclose material facts also relate to the stage of the assessment proceedings, the second stage. There can be omission and failure on the part of the assessee to disclose fully and truly material facts during the course of the assessment proceedings. This can happen when the assessee does not disclose or furnish to the Assessing Officer complete and correct information and details it is required and under an obligation to disclose. Burden is on the assessee to make full and true disclosure. 12. The law postulates a duty on every assessee to disclose fully and truly all material facts for its assessment. The disclosure must be full and true. Material facts are those facts which if taken into accounts they would have an adverse affect on assessee by the higher assessment of income than the one actually made. They should be proximate and not have any rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer is wholly justified in reopening of assessment under section 147 of the Act. It was urged that the petition being devoid of merits, deserves to be dismissed. 6. In rejoinder, Mr. M. J. Shah, learned advocate for the petitioner submitted that in the case of Dishman Pharmaceuticals and Chemicals Ltd. v. Deputy Commissioner of Income Tax (supra), the transaction was made by the company itself and the percentile of share was not given. It was submitted that the petitioner is required to state the percentage of shares which he has duly disclosed and that, insofar as the loans given by M/s. J. P. Infrastructure Pvt. Ltd. to Gujarat Malls Management Company Pvt. Ltd. and Aryan Arcade Pvt. Ltd. are concerned, since no amount has been received by the petitioner from the amount given to the two concerns, the petitioner may not be aware of the transaction between the two companies. It was submitted that this case is not identical to the case of Dishman Pharmaceuticals and Chemicals Ltd. v. Deputy Commissioner of Income Tax (supra). In the said case, primary facts were not disclosed; whereas, in this case, the percentage of shares has been disclosed and hence, primary facts h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the said case it could not be ascertained as to what was the shareholding of the petitioner. Thus, a primary fact was missing, which is the distinction between that case and this case. 6.3 Referring to the decision of this Court in the case of Viren Sureshchandra Shah (supra), it was submitted that section 2(22)(e) of the Act envisages disclosure qua those parties. Primary facts which are required to be given have been provided by the petitioner, what questions are to be asked by the Assessing Officer is not for the assessee to tell. According to the learned counsel, the facts of the present case are identical to the facts to the case of Viren Sureshchandra Shah (supra). 6.4 It was submitted that in the objections, it was contended that section 2(22)(e) of the Act would not be applicable as there is divergence of views. Only if the loan is for the benefit of the shareholder, section 2(22)(e) of the Act would apply. It was submitted that these were inter-corporate deposits between two companies which are covered by judgment and order dated 18th July, 2012 passed by this court in the case of Commissioner of Income-tax v. Daisy Packers Pvt. Ltd. rendered in Tax Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act was finalized on determining total income at ₹ 2,02,55,060/- after making addition on various counts. As per the information received from DCIT, TDS Circle, Ahmedabad it is noted that unsecured loans have been extended by M/s. J. P. Infrastructure Ltd. (Now Known as J. P. Iscon Ltd.) to various sister concerns during F.Y. 2007-08. Sr. No. Name of Group Company Unsecured loan extended by M/s. J. P. Infrastructure Pvt. Ltd. Amount paid on behalf of Group company by M/s. J. P. Infrastructure Pvt. Ltd. 1 Gujarat Mall Management Co. Pvt. Ltd. 1 4650000 5097719 5 Aryan Arcade Pvt. Ltd. 6120000 121008426 Total 20770000 126106145 On verification of assessment record, it is seen that during the year under consideration the assessee is shareholder and is holding beneficial interest by holding equity shares in the various companies as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the third limb of section 2(22)(e) is also not applicable. (iv) The third limb of section 2(22)(e) has the quantification aspect and is based on the principle that the amount which needs to be taxed as deemed dividend is the amount which has ultimately been made available to the concerned shareholder. Hence, in a case where the funds are advanced by a company to a concern which in turn are advanced to the concerned shareholder, then only the second and third limb of section 2(22)(e) need to be invoked simultaneously so as to work out the amount of deemed dividend. Since no amount has been advanced to him, the second limb read with the third limb would not be applicable. (v) The amount that has been received is not loans and advances but ICD received for the purpose of business and ICD does not fall within the purview of loans and advances. (vi) There is no provision under section 2(22)(e) to consider payments made by a company on behalf of another company as deemed dividend. (vii) All primary documents which are statutorily required to be filed along with the return of income and also documents called for during the course of assessment proceedings for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndray K. Shah (supra). In the said decision the court had placed reliance upon the decision of the Madras High Court in the case of Commissioner of Income-tax v. Alagusundaram Chettiar, [1977] 109 ITR 508, wherein it was held that the word payment in section 2(22)(e) of the Act means the act of paying and, therefore, in that case it was held that payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the Managing Director of the company, L. Alaugusunsaram Chettiar, and was therefore assessable as dividend in the hands of the assessee. It was held further that the basic test to be applied in such cases is not whether the loan given is a benefit but whether the payment made by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Applying the said decision to the facts of the case before it, the Supreme Court held thus: Applying the above test to the facts of the present case, we are of the view that the Tribunal was right in holding, on examination of the cash-flow statement, that MKSEPL had made payments to MKF and MKI for the benefit of the assessee which enabled the assessee to bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re aspect in this regard. From the facts, indicated above, the Department has established a sort of circular trading in this case. One of the important features of circular trading is to route the funds through conduits. In such cases the picture emerges only after seeing the cash-flow statements. In the present case, ML-20 made the AO to hold enquiries and in that enquiry the cash-flow statement emerged, therefore, the Department was right in invoking the provisions of Chapter XIV-B in the present case. The five payments had direct correlation with ₹ 5.99 crores paid by MKSEPL to MKF and MKI and payments by the said two firms to the assessee who used the said money to buy 9% RBI Relief Bonds. Therefore, the said payment by the company through the two firms was for the benefit of the assessee. Therefore, the said funds were not repayment of loans, they were for purchase of 9% RBI Relief Bonds by the respondent. 7.6 The Court further held referred to the decision of the Calcutta High Court in Nandlal Kanoria v. CIT, [1980] 122 ITR 405 and the Bombay High Court in CIT v. P.K. Badiani, [1070] 76 ITR 369, and held thus: 16. The above two judgments indicate that the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power in a company as described therein, and such company makes any payment: (i) to the shareholder; or (ii) to any concern in which such shareholder is a member or a partner and in which he has substantial interest; or (iii) on behalf of or for the individual benefit of any such shareholder; then, to the extent to which the company in either case possesses accumulated profits, the same shall be deemed to be dividend. 7.10 Thus, section 2(22)(e) envisages payment by way of loan or advance in any of the three modes provided therein to be deemed dividend in the hands of the concerned shareholder to the extent of the accumulated profits of the loan giver company. As held in the above decision, the concept of deemed dividend under section 2(22)(e) of the Act postulates two factors, namely, whether the payment is a loan and whether, on the date of payment there existed accumulated profits and that these two factors have to be co-related. 7.11 Examining the facts of the case in the light of the above legal and statutory position, this case relates to the second mode of payment envisaged under clause (e) of section 2(22) viz. to any concern in which such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions. 7.12 Besides, as pointed out by the learned counsel for the petitioner, the council has decided to make Accounting Standard (AS) 18, which relates to Related Party Disclosures mandatory only to the enterprises mentioned therein and not to all enterprises. The two categories of enterprises are mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the petitioner has shown the extent of his shareholding in the three concerns in which he had substantial interest as shown in the first table in the reasons recorded, he had failed to disclose the loans advanced by M/s JP Infrastructure Limited to Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. In the opinion of this court, unless the petitioner had received any benefit from the loan transactions referred to in the reasons recorded, there was no obligation cast upon him to disclose the same. Furthermore, as rightly submitted by the learned counsel for the petitioner, the transactions in question being between independent entities, the petitioner may not even be aware of such transactions if they were not for his benefit. 7.15 As discussed earlier clause (e) of section 2(22) of the Act, postulates two factors, firstly, whether the payment by the company in which the shareholding of the assessee is more than 10 per cent of the voting power is a loan; and whether on the date of payment there existed accumulated profits . In the facts of the present case, the reasons recorded do not say that the petitioner has received any loan from the loan giver company, nor d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt could be treated as deemed dividend under section 2(22)(e) was whether the assessee was holding share of not less than 10 per cent of the voting power in SDBL. The court found that from the return submitted by the assessee and the documents produced along with such returns, no where can it be ascertained as to what was the share holding in terms of the voting power of the assessee-company in SDBL. While the assessee had disclosed the number of shares it held in SDBL, the extent of its holding in SDBL, namely that it was more than 10% of the voting power was not disclosed. It is in this backdrop that the court held that the petitioner-Company had failed to truly and fully disclose all material facts. 7.17 Thus, it is evident that in the facts of the said case: (i) the petitioner company had obtained a loan from a company in which it had shareholding not less than 10 per cent of the voting power. While the loan was disclosed and the number of shares held in the loan giver company was disclosed, the extent of the petitioner s shareholding in the said company, which is a relevant fact for the purpose of computation of deemed dividend under section 2(22)(e) of the Act, had not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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