2014 (6) TMI 642 - AT - Income Tax

Tribunal overturns re-assessment for AY 2003-04 & 2004-05, quashes additions under Section 2(22)(e)

The Tribunal allowed the appeals, setting aside the re-assessment proceedings initiated under Section 147 for AY 2003-04 and AY 2004-05 as they were ... Reopening of assessment u/s 148 of the Act – Bar of limitation – Mere change of opinion - Held that:- No action can be taken under the section after the expiry of four years unless income chargeable to tax has escaped assessment for the failure on the part of the assessee either to file return u/s 139 or in response to the notice issued u/s 142(1) /148 or to disclose fully and truly all material facts necessary for that AY - the re-assessment proceedings have been initiated beyond the period of four years in both the AYs AY.2003-04 and 2004-05. Relying upon Sri Sakthi Textiles Ltd. Vs. JCIT [2010 (8) TMI 449 - MADRAS HIGH COURT] - in order to fall within the proviso to section 147 of the Act, apart from stating that there were reasons for the authority to believe that there had been escapement of chargeable income, it should have also been recorded that such escapement was due to the failure of the assessee to disclose fully and truly all material particulars necessary for that AY - such recording is absolutely mandatory - the AO cannot travel beyond his jurisdiction and invoke the provisions of section 147 by ignoring mandatory conditions set out in proviso to the section - the action of AO clearly amounts to review of the assessment order which is not permissible under the Act - the re-assessment proceedings initiated against the assessee in both the AYs are without jurisdiction and are thus liable to be set aside. Deemed dividend u/s 2(22)(e) of the Act – Loans received – Held that:- The assessee is having substantial interest in both the companies – assessee contended that the amounts have been advanced by CEPL to CIPL in the normal course of business - there is no question of invoking provisions of section 2(22)(e) - both the companies are in the same line of business and are complementing the business of each other - CEPL apart from the fact, it has advanced loan to CIPL is also the holding company of CIPL - It has interest in the business of its subsidiary – Relying upon Farida Holdings P. Ltd. Vs. DCIT [2012 (6) TMI 235 - ITAT CHENNAI] - where regular business transactions are carried on by an assessee in its ordinary course of business with its subsidiary, they cannot be treated as deemed dividend for the purpose of section 2(22)(e) of the Act – Decided in favour of Assessee. Issues Involved:1. Validity of re-assessment proceedings under Section 147 of the Income Tax Act, 1961, beyond the period of four years.2. Addition made under Section 2(22)(e) by treating unsecured loans advanced by CEPL to CIPL as deemed dividend in the hands of the assessee.Detailed Analysis:1. Validity of Re-assessment Proceedings under Section 147:The primary issue raised by the assessee is the validity of re-assessment proceedings initiated under Section 147 of the Income Tax Act, 1961, beyond the period of four years. The assessee argued that the re-opening of the assessment was without valid reasons and thus, bad in law. The assessee contended that the Revenue had not demonstrated that the assessee failed to fully and truly disclose all material facts necessary for the assessment.The Tribunal examined the relevant provisions of Section 147, which stipulate that no action can be taken after four years unless the income chargeable to tax has escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The Tribunal noted that the re-assessment proceedings for AY 2003-04 and AY 2004-05 were initiated beyond four years, and the notices issued under Section 148 did not indicate any failure on the part of the assessee to disclose material facts.The Tribunal cited precedents, including the Hon'ble Madras High Court's decision in Sri Sakthi Textiles Ltd. v. JCIT and Fenner (India) Ltd. v. DCIT, which emphasized the necessity of recording reasons for the belief that income escaped assessment due to the assessee's failure to disclose material facts. The Tribunal concluded that the re-assessment proceedings were initiated without jurisdiction and thus, set aside the re-assessment orders for both AY 2003-04 and AY 2004-05.2. Addition under Section 2(22)(e) - Deemed Dividend:The second issue pertained to the addition made under Section 2(22)(e) by treating the unsecured loans advanced by CEPL to CIPL as deemed dividend in the hands of the assessee. The assessee argued that the loans were advanced in the normal course of business and that both companies were complementing each other's business. It was also highlighted that CEPL had a substantial shareholding in CIPL, making CIPL a subsidiary of CEPL.The Tribunal noted that the amounts were advanced by CEPL to CIPL in the ordinary course of business and that CEPL had a business interest in its subsidiary. The Tribunal referred to the co-ordinate Bench's decision in Farida Holdings P. Ltd. v. DCIT and the Hon'ble Delhi High Court's decision in CIT v. Creative Dyeing and Printing P.Ltd., which held that amounts advanced for business transactions between companies do not fall within the definition of deemed dividend under Section 2(22)(e).Based on the facts and precedents, the Tribunal concluded that the addition made by the Assessing Officer under Section 2(22)(e) was unjustified and set aside the addition.Conclusion:The Tribunal allowed the appeals of the assessee, setting aside the re-assessment proceedings initiated under Section 147 for being beyond jurisdiction and quashing the additions made under Section 2(22)(e) for both AY 2003-04 and AY 2004-05. The order was pronounced on June 2, 2014, in Chennai.