2019 (3) TMI 334 - HC - Income Tax

Court Quashes Reopening of Assessment: Loan Not Deemed Dividend

The court quashed the notice of reopening the assessment under Section 147 of the Income Tax Act for the assessment year 2013-14. The Assessing Officer's ... Reopening of assessment - formation of belief under section 147 - deemed dividend under section 2(22)(e) - examination of issue in original scrutiny assessment - reopening at behest of audit party and independence of AO's beliefExamination of issue in original scrutiny assessment - deemed dividend under section 2(22)(e) - Whether the notice to reopen the assessment could be sustained when the loan transaction and relevant shareholding details relevant to applicability of section 2(22)(e) were placed before and examined in the original scrutiny assessment. - HELD THAT: - The Court examined the contemporaneous communications between the assessee and the Assessing Officer during the scrutiny assessment which specifically disclosed the loan from Rupani Spinning Mills Pvt. Ltd. and furnished shareholding patterns, ledger copies and related particulars. The Assessing Officer had raised queries requiring the very information necessary to test applicability of section 2(22)(e), and the assessee supplied those details on multiple occasions. The Court also noted that in the immediately preceding assessment year the Assessing Officer had considered the identical loan transaction with focus on section 2(22)(e). On these facts the Court concluded that the question of applicability of section 2(22)(e) had been duly placed before and scrutinized by the Assessing Officer in the original assessment, and therefore the reason for reopening did not constitute a valid fresh basis for invoking the reassessment jurisdiction. [Paras 6, 7, 8, 9, 10]Impugned notice quashed insofar as it sought to reopen on the ground that section 2(22)(e) had not been examined in the original scrutiny assessment.Reopening of assessment - formation of belief under section 147 - reopening at behest of audit party and independence of AO's belief - Whether the reopening is vitiated because it was issued at the insistence of the audit party despite the Assessing Officer having earlier recorded reasons rejecting invocation of section 2(22)(e). - HELD THAT: - On inspection of the departmental file the Court found that the audit party had specifically brought the possibility of invoking section 2(22)(e) to the Assessing Officer's attention. The Assessing Officer had earlier responded in detail on 9th June, 2015, giving reasons why section 2(22)(e) did not apply. Notwithstanding that response, the impugned notice was issued upon further insistence by the audit party. The Court reiterated the settled principle that reassessment must proceed from the Assessing Officer's independent belief that income has escaped assessment; an audit party may only draw attention to matters but cannot substitute its view for the AO's independent satisfaction. Since the reopening resulted from insistence by the audit party contrary to the AO's earlier view, the action to reopen was held to be impermissible. [Paras 11, 12]Impugned notice quashed as having been issued under the influence of the audit party rather than on the Assessing Officer's independent formation of belief.Final Conclusion: The High Court quashed the notice of reopening of assessment for AY 2013-14, holding that the question under section 2(22)(e) had been examined in the original scrutiny assessment and that the reopening was impermissibly prompted by the audit party rather than the Assessing Officer's independent belief. Issues Involved:1. Legality of reopening the assessment under Section 147 of the Income Tax Act.2. Examination of deemed dividend under Section 2(22)(e) of the Income Tax Act.3. Influence of the audit party on the Assessing Officer's decision to issue the notice.Detailed Analysis:1. Legality of Reopening the Assessment under Section 147:The petitioner challenged the notice of reopening the assessment dated 28th March 2018 for the assessment year 2013-14. The original assessment was completed under Section 143(3) on 30th March 2016. The Assessing Officer issued the notice to tax a loan of Rs. 1,02,00,000 received by the petitioner from M/s Rupani Spinning Mills Private Limited as deemed dividend under Section 2(22)(e). The petitioner contended that the grounds for reopening were already examined during the original assessment, and thus, reopening under Section 147 was not justified. The court found that during the original scrutiny, the petitioner had provided detailed information about unsecured loans, shareholding patterns, and other relevant details, indicating that the Assessing Officer had the opportunity to examine the applicability of Section 2(22)(e). Therefore, the reopening of the assessment was deemed unjustified.2. Examination of Deemed Dividend under Section 2(22)(e):The Assessing Officer sought to tax the loan of Rs. 1,02,00,000 as deemed dividend under Section 2(22)(e), citing that the shareholder of the petitioner company held substantial interest in both companies involved. During the original assessment, the petitioner had disclosed details of unsecured loans and shareholding patterns. The court noted that the Assessing Officer had previously examined similar transactions for the preceding assessment year, focusing on Section 2(22)(e). Therefore, the court concluded that the issue of deemed dividend under Section 2(22)(e) was duly scrutinized in the original assessment, making the reopening of the assessment on the same grounds invalid.3. Influence of the Audit Party on the Assessing Officer's Decision:The petitioner argued that the Assessing Officer issued the notice under the influence of the audit party. The court examined the department's original file and found that the audit party had suggested invoking Section 2(22)(e) for the loan transaction in question. The Assessing Officer initially opposed this suggestion, providing detailed reasons for the inapplicability of Section 2(22)(e). However, the notice was issued after further insistence by the audit party. The court emphasized that the decision to reopen the assessment must be based on the Assessing Officer's independent belief, not the audit party's insistence. Citing the case of Commissioner of Income Tax Vs. Ranjan N. Aswani, the court held that the reopening of the assessment under the audit party's influence was invalid.Conclusion:The court quashed the impugned notice, holding that the reopening of the assessment was unjustified as the issue of deemed dividend under Section 2(22)(e) was already scrutinized in the original assessment. Additionally, the decision to reopen was influenced by the audit party, which is not permissible. The petition was allowed, and the notice was quashed.