Revenue's reopening of assessment quashed for deemed dividend addition under Section 2(22)(e) lacking fresh tangible material (22)(e)

The Gujarat HC quashed the reopening of assessment under Section 147 for deemed dividend addition under Section 2(22)(e). The court held that revenue's reasons to believe were based solely on existing scrutiny records, balance sheet, and P&L account without any fresh tangible material. The assessee company was not a shareholder of the lending company, and loans were given in normal course of business benefiting both parties. Following precedents from Delhi HC and SC, the court ruled that reasons must have proper linkage with belief formation, deciding in favor of the assessee.

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Issues involved:
The issues involved in this case are the validity of the notice dated 27.03.2021 issued under section 148 of the Income Tax Act, 1961, and the order disposing of the objections.

Judgment Summary:

Issue 1: Reopening of Assessment
The petitioner challenged the notice dated 27.03.2021 issued under section 148 of the Income Tax Act, 1961, and the subsequent order disposing of the objections. The petitioner argued that there was no escapement of income as all material facts were fully disclosed during the scrutiny assessment for the Assessment Year 2014-15. The petitioner contended that the notice and order were bad in light of the decision in the case of CIT vs. Kelvinator of India Ltd as it was a case of "change of opinion."

Issue 2: Deemed Dividend
The revenue's basis for reopening the assessment was that the loan accepted by the petitioner from GSEC Aviation Ltd. would be treated as deemed dividend under Sec. 2(22)(e) of the Income Tax Act. The petitioner argued that the loan was not received as a shareholder, and therefore, should not be classified as "Dividend." The petitioner relied on legal precedents to support this argument.

Issue 3: Lack of Fresh Tangible Material
Upon considering the submissions, the court found that the reasons to believe for reopening the assessment were based on scrutiny of existing case records, balance-sheet, profit & loss account, and computation of income. There was no fresh or new tangible material available to the revenue to justify the reopening of the assessment. The court also noted that the petitioner was not a shareholder of GSEC Aviation Limited, and therefore, the loan received should not be considered as dividend under section 2(22)(e) of the Act.

Conclusion:
The court quashed and set aside the notice dated 27.03.2021 issued under section 148 of the Income Tax Act, 1961, and the order disposing of the objections. The petition was allowed, and the rule was made absolute to the aforementioned extent.

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