2018 (10) TMI 373 - HC - Income Tax

Court upholds assessment reopening for 1998-99; advances deemed dividend.

The Court upheld the reopening of the assessment for the assessment year 1998-99 under Section 147 of the Income Tax Act, 1961, finding it justified based ... Reopening of assessment - Deemed dividend - addition u/s 2(22)(e) - change of opinion - whether information received from the Deputy Commissioner of Income Tax, Company Circle V(1) constituted new information? - Held that:- The correctness of the factual findings recorded by the Assessing Officer and the CIT (A) was tested by the Tribunal. The Tribunal independently examined the matter and held that when there was no information before the Assessing Officer regarding the shareholding pattern of the company or its accumulated profits, it cannot be said that the assessee disclosed all necessary materials for the assessment in this regard. It was further held that the Assessing Officer had no occasion to examine the advances received from the company from the angle of taxability of the sum under Section 2(22)(e) of the Act and that it was not a case of change of opinion. On going through the above factual matrix, we are fully satisfied that the reopening of assessment was not a case of change of opinion, but it was a case where the assessee did not disclose fully and truly the material facts necessary for the assessment. In the light of the above, substantial question of law answered against the assessee and in favour of the Revenue. Deemed dividend addition u/s 2(22)(e) - contention of the assessee is that the amounts were received for the purposes of advances for the purchase of mining land and for supply of material - Held that:- After referring to the decision of the Hon'ble Supreme Court in the case of Smt.Tarulata Shyam Vs. CIT [1977 (4) TMI 3 - SUPREME COURT], the Tribunal held that the amount that was advanced during the year was to be considered as deemed dividend and not the balance outstanding at the end of the accounting year. It was also held that there was no infirmity in the order passed by the CIT (A) for the assessment year 1998-99, as no part of the advance given had been treated as deemed dividend before this assessment year and accordingly, the finding was confirmed. As regards the assessment year 1999-2000, it held that it did not agree with the view taken by the CIT (A) that the deemed dividend for the assessment year 1998-2000 should not be adjusted from the balance of accumulated profit as on the close of the assessment year 1998-99. After referring to the decision in the case of G.Narasimhan [1998 (12) TMI 5 - SUPREME COURT], it was further pointed out that there was no ambiguity in that regard. Hence, for the assessment year 1999-2000, the Assessing Officer was directed to compute the deemed dividend equivalent to the amount advanced during that year to the extent the PGIIPL had accumulated profits after adjustment of the deemed dividend for the assessment year 1998-99. We fully subscribe to the view taken by the Tribunal in affirming the order passed by the Tribunal. Thus, the factual matrix clearly shows that the findings rendered by the Tribunal and the Authorities below on the concept of 'deemed dividend' call for no interference. - decided in favour of revenue Issues Involved:1. Reopening of assessment under Section 147 of the Income Tax Act, 1961.2. Computation of 'deemed dividend' under Section 2(22)(e) for the assessment years 1998-99 and 1999-2000.Issue-wise Analysis:1. Reopening of Assessment Under Section 147:The third substantial question of law addressed whether the Department was correct in reopening the assessment for the assessment year 1998-99 based on a mere change of opinion. The assessee argued that the reopening was invalid as it was based on information already available with the Assessing Officer (AO) at the time of the original assessment, thus constituting a mere change of opinion. The assessee relied on the decisions of the Hon'ble Supreme Court in CIT Vs. Kelvinator of India Ltd., CIT Vs. ELGI Ultra Industries Ltd., and CIT Vs. Schwing Stetter India P. Ltd.The Court noted that post the amendment to Section 147 effective from 01.04.1989, the AO must have a 'reason to believe' that income had escaped assessment, which confers jurisdiction to reopen the assessment. This power is broad but must be based on tangible material and not merely a change of opinion. The AO had received new information from the Deputy Commissioner of Income Tax regarding advances made by a company (PGIIPL) to its sister concerns, which necessitated examining the applicability of Section 2(22)(e).The Court found that the assessee failed to disclose fully and truly all material facts necessary for the assessment. The assessment was initially completed under Section 143(3), and the reopening was triggered by new information received in 2005. The AO and the CIT (A) noted that the assessee did not furnish complete details regarding the advances received or the shareholding pattern of the company at the time of the original assessment. Therefore, the reopening was justified and not a mere change of opinion. The Court answered the third substantial question of law against the assessee and in favor of the Revenue.2. Computation of 'Deemed Dividend' Under Section 2(22)(e):The first and second substantial questions of law dealt with whether the Tribunal was correct in its approach to computing 'deemed dividend' for the assessment years 1998-99 and 1999-2000. The assessee contended that the advances were for the purchase of mining land and supply of materials, implying a business transaction. However, the CIT (A) found no evidence supporting the business transaction claims and concluded that the advances were utilized by the firm in its own business without benefiting the company.The CIT (A) and the Tribunal examined the agreement between the assessee and PGIIPL and found it to be a mere paper deal with no actual implementation. The Tribunal also noted that the assessee maintained a running account with PGIIPL and there was no indication that the advances were part of a business transaction.The assessee argued that if the advances made by PGIIPL to its associate concerns were reduced from the accumulated profits each year, the balance of accumulated profits would be NIL, and no portion of the amounts could be taxed as deemed dividend. The CIT (A) and the Tribunal rejected this argument, stating that the provision must be applied independently for each year, and the advances received during the relevant period must be considered as deemed dividend if the company had accumulated profits.For the assessment year 1999-2000, the Tribunal directed the AO to compute the deemed dividend equivalent to the amount advanced during that year, to the extent PGIIPL had accumulated profits after adjusting for the deemed dividend of the previous year.The Court upheld the Tribunal's findings, affirming that the advances received by the assessee constituted deemed dividend under Section 2(22)(e) and that the computation was correct. The first and second substantial questions of law were answered against the assessee and in favor of the Revenue.Conclusion:The appeals were dismissed, and the Court upheld the reopening of the assessment and the computation of deemed dividend as per the findings of the Tribunal and the Authorities below.