2023 (12) TMI 408 - AT - Income Tax

Assessee wins appeal as beneficial ownership below threshold for deemed dividend under section 2(22)(e) application (22)(e)

ITAT Ahmedabad allowed the assessee's appeal against PCIT's revision order u/s 263. The PCIT had found error in the assessment order for non-application ... Revision under section 263 - deemed dividend under section 2(22)(e) - beneficial ownership and 10% voting power test - principles of natural justice in revisionary proceedings - exclusion of COVID-19 extension for computation of limitationDeemed dividend under section 2(22)(e) - beneficial ownership and 10% voting power test - revision under section 263 - Whether the Pr. CIT was justified in holding that loans received by the assessee from MAP Ltd. qualified as deemed dividend under section 2(22)(e) and thereby invoking jurisdiction under section 263 to revise the assessment. - HELD THAT: - The Tribunal examined the Pr. CIT's order and the facts recorded therein. Although the Pr. CIT concluded that the parameters of section 2(22)(e) were satisfied, the factual record relied upon by him showed that the assessee held 32,550 shares (13.25% shareholding) but only 6.63% of the voting power in MAP Ltd. The statutory test in section 2(22)(e) requires the payee company to be a beneficial owner holding not less than ten percent of the voting power. The Pr. CIT's own findings therefore demonstrate non-fulfilment of the voting-power threshold, and on that factual basis section 2(22)(e) could not be invoked. As the asserted error in the assessment - non-invocation of section 2(22)(e) in respect of loans from MAP Ltd. - thus failed on the facts recorded by the revising authority himself, the exercise of revision under section 263 with respect to that transaction was not sustainable. [Paras 5, 8, 9, 10, 11]The finding of error by the Pr. CIT in not invoking section 2(22)(e) qua loans from MAP Ltd. is not sustainable; section 2(22)(e) did not apply and the revision under section 263 in respect of that transaction is set aside.Deemed dividend under section 2(22)(e) - principles of natural justice in revisionary proceedings - revision under section 263 - Whether the Pr. CIT was justified in directing the AO to tax loans received from MAP Cotton Pvt. Ltd. as deemed dividend under section 2(22)(e) without affording the assessee an opportunity to be heard during the revisionary proceedings. - HELD THAT: - The Tribunal noted that the Pr. CIT identified loans from MAP Cotton Pvt. Ltd. as potentially qualifying for taxation under section 2(22)(e), but also recorded that this specific error had not been put to the assessee in the show-cause notice issued under section 263. Section 263 mandates that the revising authority, before passing an order, shall give the assessee an opportunity of being heard. The Pr. CIT himself directed the AO to afford a fresh hearing on this issue, indicating that the assessee had not been confronted with the alleged error during revision. For that reason, the finding of error in respect of loans from MAP Cotton Pvt. Ltd. could not be sustained in law because the principles of natural justice required that the assessee be heard before any revisionary direction was issued. [Paras 12, 13, 14, 15]The Pr. CIT's note of error qua loans from MAP Cotton Pvt. Ltd. is unsustainable for non-compliance with the requirement to afford the assessee an opportunity of hearing; the direction under section 263 in respect of that transaction is set aside.Exclusion of COVID-19 extension for computation of limitation - limitation condonation - Whether the Tribunal should condone the delay in filing the appeal given the period of limitation extension ordered by the Supreme Court during the COVID-19 pandemic. - HELD THAT: - The Tribunal observed that the appeal was filed with a delay of 315 days but that the Hon'ble Supreme Court in Suo Moto Writ Petition (Civil) No.(s) 3/2020 and subsequent orders extended limitation periods during the COVID-19 pandemic up to 28 February 2022. The period of extension granted by the Supreme Court was to be excluded for purposes of computing limitation. Applying that exclusion, the Tribunal condoned the delay in filing the appeal and proceeded to decide the matter on merits. [Paras 3]Delay in filing the appeal is condoned by excluding the COVID-19 extension period; the appeal is entertained on merits.Final Conclusion: Both errors noted by the Pr. CIT - in respect of loans from MAP Ltd. and MAP Cotton Pvt. Ltd. - are held not sustainable (first because the voting-power criterion for section 2(22)(e) was not met as per the revising authority's own findings; second because the assessee was not afforded an opportunity of hearing), the Pr. CIT's order under section 263 is set aside and the assessee's appeal is allowed; the Tribunal also condoned the delay in filing the appeal by excluding the COVID-19 extension period. Issues Involved:1. Condonation of delay in filing the appeal.2. Validity of the order under Section 263 of the Income Tax Act, 1961.3. Invocation of Section 2(22)(e) of the Income Tax Act, 1961 (Deemed Dividend).Summary of Judgment:1. Condonation of Delay:The appeal filed by the assessee was delayed by 315 days. However, due to the COVID-19 pandemic, the Hon'ble Supreme Court extended the limitation period for filing appeals. Consequently, the delay was condoned, and the appeal was admitted for hearing on merits.2. Validity of the Order under Section 263:The assessee challenged the order passed by the Pr. Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961, which set aside the assessment order on the grounds of being erroneous and prejudicial to the interests of the revenue. The Pr. CIT invoked Section 263 due to the omission by the Assessing Officer (AO) to apply the provisions of Section 2(22)(e) concerning deemed dividends.3. Invocation of Section 2(22)(e) (Deemed Dividend):a. Loans from MAP Ltd.:The Pr. CIT found that the loans received by the assessee from MAP Ltd. qualified as deemed dividends under Section 2(22)(e). However, the Tribunal noted that the assessee held only 6.63% of the voting rights in MAP Ltd., which is below the 10% threshold required for invoking Section 2(22)(e). Thus, the Tribunal held that the provisions of Section 2(22)(e) were not applicable to the loans received from MAP Ltd., and the Pr. CIT's finding was unsustainable.b. Loans from MAP Cotton Pvt. Ltd.:The Pr. CIT also identified loans received from MAP Cotton Pvt. Ltd. as deemed dividends. However, this issue was not confronted to the assessee during the revisionary proceedings. The Tribunal emphasized that Section 263 mandates giving the assessee an opportunity of being heard. Since this principle of natural justice was violated, the Tribunal held that the Pr. CIT's finding regarding loans from MAP Cotton Pvt. Ltd. was also unsustainable.Conclusion:Both errors noted by the Pr. CIT were found unsustainable in law. The Tribunal set aside the order of the Pr. CIT and allowed the appeal of the assessee.Result:The appeal of the assessee was allowed.