2023 (10) TMI 975 - AT - Income Tax

Tribunal Rules for Assessees, Invalidates Additions Under Section 2(22)(e) Due to Procedural Violations in Hearing Rights.

The Appellate Tribunal ruled in favor of the assessees, allowing their appeals and setting aside the additions made under section 2(22)(e) of the Income ... Reopening of assessment - deemed dividend addition - AO invoked the provisions of section 150 for issuing the impugned notices - as argued assessment made by AO in the assessment order in the hands of the assessee is invalid without giving any opportunity of being heard to the assessee - HELD THAT:- As higher appellate forums have upheld the findings of the CIT(A) that addition u/s 2(22)(e) can be made only in the hands of the registered shareholders. If the addition has to be done in the hands of other persons, as per the directions of CIT(A), the prescription of law has to be followed. In the present case, admittedly, the directions have been issued without giving any opportunity to the assessee as contemplated by Explanation of Section 3 of Section 153 and as observed in [2022 (4) TMI 346 - BOMBAY HIGH COURT] Hence, assessee’s appeals stand allowed. Issues involved:The judgment involves appeals filed by two assessees against the orders of the Commissioner of Income Tax (Appeals) for Assessment Year 2007-08. The main issue pertains to the validity of the addition made under section 2(22)(e) of the Income Tax Act in the hands of the assessees based on the order of the CIT(A) in the case of Madhav Arcade Pvt. Ltd.Issue 1: Reliance on CIT(A) order without opportunity for the assesseeThe primary contention raised by the assessee was regarding the reliance placed by the Assessing Officer and CIT(A) on the order passed in the case of Madhav Arcade Pvt. Ltd. The assessee argued that the unilateral findings recorded by the CIT(A) in that case, without providing an opportunity for the assessee to present its version, cannot be used against the assessee. The assessee contended that the notice issued under section 148 based on such findings is illegal and bad in law.Issue 2: Application of Explanation 3 of Section 153The assessee's counsel referred to Explanation 3 of Section 153, which states that if any income is excluded from one person's total income and held to be the income of another person, the assessment of such income on the other person should be deemed to be made in consequence of the finding or direction contained in the order, provided the other person was given an opportunity to be heard before the order was passed. The assessee argued that the findings of the CIT(A) in the Madhav Arcade case, affecting the assessee, were made without granting the assessee an opportunity to be heard, rendering the assessment invalid.Judgment:After considering the arguments presented, the Appellate Tribunal found that the higher appellate forums had upheld the CIT(A)'s findings that the addition under section 2(22)(e) of the Act can only be made in the hands of registered shareholders. However, if the addition is to be made in the hands of other persons, as directed by the CIT(A), the prescribed legal procedures must be followed. The Tribunal concurred with the assessee's contention that the directions issued without providing an opportunity to the assessee, as required by Explanation 3 of Section 153, were invalid. Citing a precedent from the Bombay High Court, the Tribunal ruled in favor of the assessee, allowing their appeals and setting aside the additions made in their cases.Separate Judgment:No separate judgment was delivered by the judges in this case.