TaxTMI 
TaxTMI 
2019 (8) TMI 987
X X X X Extracts X X X X
X X X X Extracts X X X X
....er authority grossly erred in making addition of Rs. 7,48,07,150/- as deemed dividend u/s 2(22)(e) of the Act. 3. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing." Ground No. 1 and 1.1 are regarding validity of initiation of reassessment proceedings under section 147/148 of the IT Act. 2. The ld. Counsel for the assessee has challenged the initiation of proceedings for reopening of the assessment on various grounds. The first contention raised by the ld. Counsel for the assessee is regarding non compliance of the directions of the Hon'ble Supreme Court in case of GKN Driveshaft India Ltd. vs. ITO, 259 ITR 19 (SC) as well as various High Courts while disposing off the objection raised by the assessee against the notice issued under section 148 of the Act and, therefore, the order passed by the AO under section 147 read with section 143(3) without giving the sufficient time to the assessee to challenge the said order of disposing off the objection. The final reassessment order passed by the AO is bad in law and deserves to be quashed. The ld. Counsel for the assessee has relied upon the decision of Hon'ble Bombay Hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment to the assessee. Thereafter, the assessee filed the objection against the notice issued under section 148 on 04.12.2017 which was disposed off by the AO on 07.12.2017. The AO has also recorded these facts in para 15 of the impugned reassessment order as under :- " 15. On 04.12.2017, assessee filed objection with respect to the initiation of proceedings u/s 148 of the Act. The objection so raised by the assessee were disposed of as not acceptable on 07.12.2017 by passing a speaking order following the decision of Hon'ble Supreme Court in the case of GKN Drive shafts (India) Ltd. vs. ITO (2003) 259 ITR 19 (SC). The order was send through India Post tracking no. RR335815675IN. Along with the objection disposal order necessary notices were issued fixing the next date of hearing on 14.12.2017." The objection raised by the assessee on 04.12.2017 has been disposed off by a speaking order dated 07.12.2017 passed by the AO. Therefore, it is manifest from the record that the assessee has raised the objections against the initiation of the proceedings under section 148 at the fag end of the limitation of the reassessment on 04.12.2017 and the AO disposed off the objection....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the AO of M/s. Saj Properties Pvt. Ltd. The reasons recorded by the AO to form the belief that the said amount of Rs. 7,48,07,150/- is assessable to tax as deemed dividend under the provisions of section 2(22)(e) is not based on any application of mind independently but it is based on the said information forwarded by the AO of M/s. Saj Properties Pvt. Ltd. In support of his contention, the ld. Counsel has relied upon the decision of Hon'ble Delhi High Court in case of Krown Agro Foods Pvt. Ltd. vs. ACIT, 57 taxmann.com 355 (Delhi) as well as decision in case of Principal CIT vs. Meenakshi Overseas Pvt. Ltd. 82 taxmann.com 300 (Delhi). Thus the ld. Counsel has submitted that the requirement of law as held by the Hon'ble High Court is a reason to believe and not reason to suspect. The AO has acted merely on the basis of the said information and without any application of mind while forming the belief that income assessable to tax has escaped assessment. The AO has even not verified the fact whether any accumulated profits as provided under section 2(22)(e) was available at the time of alleged loan/advance given by M/s. Saj Properties Pvt. Ltd. He has contended that since there w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....believe that the income has escaped assessment. The case of the assessee is also covered by the deeming fiction of Explanation 2(b) to section 147 of the Act. It could be seen from the reasons recorded by the AO that there was live link between the material and the reasons recorded for initiating proceedings u/s 147 of the Act. It is an undisputed fact that the assessee was having substantial shareholding of M/s. Saj Properties Pvt. Ltd. from which the assessee has obtained substantial amount as loan or advance. Further, the said company was having accumulated profits also and thus, the case of the assessee is clearly covered by the provisions of section 2(22)(e) of the Act. In the case of Dr. Shiv Kant Mishra vs. DCIT (2009) 118 ITD 347 (Lucknow), the action u/s 147 was upheld by the Hon'ble Tribunal on account of deemed dividend. He has relied upon the decision of Hon'ble Supreme Court in case of Raymond Wollen Mills Ltd. vs. ITO, 236 ITR 34 (SC) and submitted that the sufficiency of reasons recorded by the AO for reopening of the assessment under section 148 of the Act is not required to be looked into. As regards the accumulated profits for the purpose of section 2(22)(e), t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted profits to the tune of Rs. 7,48,07,150/-. The transaction is squarely covered under the provisions of section 2(22)(e) of the Income Tax Act as deemed dividend. On the basis of the information available on record, I have reason to believe that income of Rs. 7,48,07,150/- chargeable to tax has escaped assessment within the meaning of section 147 of the I.T. Act, 1961." Thus the AO has stated in the reasons recorded that on the basis of the information it is noted that M/s. Sai Properties (correct name M/s. Saj Properties Pvt. Ltd.) have given a loan of Rs. 11.70 crores to the assessee who is holding 68% shares of the said company and the said company has accumulated profits to the tune of Rs. 7,48,07,150/-. Thus the AO formed the belief that the transaction is squarely covered under section 2(22)(e) of the Act as deemed dividend. The formation of belief as stated by the AO himself is based on the information, no further steps were taken by the AO to verify the correctness of the fact regarding the availability of the accumulated profits with M/s. Saj Properties Pvt. Ltd. or the nature of alleged transaction whether it is loan or advance or it is business transaction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....after about four years from the date of said letter forwarding the information. The AO could have conducted a due verification and enquiry about the facts as pointed out by the AO of M/s. Saj Properties Pvt. Ltd. But no such steps were taken by the AO and waited till the fag end of the limitation period for issuing the notice under section 148. The AO has just recorded the reasons based on the said information and without even conducting the bare minimum verification by calling the necessary information either from the assessee or from M/s. Saj Properties Pvt. Ltd., at least regarding the nature of transaction as well as the availability of accumulated profits. The ld. A/R has relied upon the various decisions on the point that the current year's profit cannot be included while working out the accumulated profits for the purpose of section 2(22)(e) of the Act. On the contrary, the ld. D/R has also relied upon the decisions wherein it has been held that the current year's profit upto the date of distribution/disbursement has to be taken into account for working out the accumulated profits for the purpose of section 2(22)(e) of the Act. Therefore, there are contrary decisions on this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted profit for the purpose of section 2(22)(e) of the Act. These are the primary and minimum facts required to be verified by the AO at the time of initiating the proceedings under section 147/148 of the IT Act. If on working out the accumulated profits as on the date of transaction and after reducing the brought forward losses comes to Nil, then there would be no deemed dividend under section 2(22)(e) of the IT Act in the absence of accumulated profits. The assessee has also raised the issue that the transaction is a business transaction and the advance was given by the company to the assessee for purchase of land as per the agreement dated 28th October, 2009, copy of which has been produced before us. We find that the copy of the said agreement has been reproduced by the ld. CIT (Appeals) in the impugned order and the AO as well as the ld. CIT (A) has rejected the contention and explanation of the assessee without conducting any enquiry about the genuineness and correctness of the said agreement. Even no enquiry was conducted from M/s. Saj Properties Pvt. Ltd. regarding the said transaction of purchase of land under the Agreement dated 28th October, 2009 but the AO as well as the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tantial evidence and not on mere suspicion, gossip or rumour. The "reason to believe" recorded in the case do not refer to any material that came to the knowledge of the Assessing Officer whereby it can be inferred that the Assessing Officer could have formed a reasonable belief that the said amount had escaped assessment. The purported belief that income has escaped assessment is not based on any direct or circumstantial evidence and is in the realm of mere suspicion. The requirement of law is "reason to believe" and not "reason to suspect". In the present case, since the purported reasons to believe recorded indicate that the Assessing Officer has acted on mere surmise, without any rational basis, the action of re-opening of the Assessment is thus clearly contrary to law and is unsustainable. 15. In view of the above, the impugned order dated 23.06.2014 is set aside and the proceedings initiated pursuant to the notice dated 18.03.2014 are hereby quashed." Thus the reopening based on borrowed satisfaction and mere suspicion was held to be invalid and liable to be quashed. Further, in case of PCIT vs. Meenakshi Overseas Pvt. Ltd. (supra) the Hon'ble Delhi High Court aga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....scaped assessment. Accordingly, we hold that the initiation of proceedings under section 148 is not sustainable in law and the same is quashed. 8. The ld. Counsel for the assessee has also raised the objection regarding the jurisdiction of the AO Circle-5 Jaipur who has reopened the assessment and passed the reassessment order on the ground that the assessee has filed the return of income under the jurisdiction of the AO Circle-2, Jaipur. The ld. Counsel for the assessee has referred to the returns of income filed for the assessment year under consideration 2010-11 to 2018-19 and submitted that for all these years the assessee has been filing the return electronically with Circle-2, Jaipur. Thus the AO Circle-5 Jaipur has no jurisdiction to issue the notice under section 148 and pass the reassessment order. 9. On the other hand, the ld. D/R has submitted that though the return might have been filed with Circle-2, Jaipur, however the processing under section 143(1) has been done by Circle-5, Jaipur and, therefore, the jurisdiction of AO Circle-5, Jaipur is based on the address shown in the PAN of the assessee. 10. Both the parties have relied upon a series of decisions in s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ash Suri (No.2) 359 ITR 41 (MP) Thus the ld. Counsel has submitted that when the amount in question was received by the assessee in accordance with the sale agreement dated 28th October, 2009 entered into between the assessee and M/s. Saj Properties Pvt. Ltd. for sale of land owned by the assessee, then the said advance received by the assessee does not fall in the ambit of loan or advance as per provisions of section 2(22)(e) of the Act. 12. On the other hand, the ld. D/R has submitted that it could be seen from page 11 of the assessment order that initially it was stated by the assessee that the amount of Rs. 11.70 crore was paid by M/s. Saj Properties to the assessee on account of its credit balance (Rs. 6.08 crore opening balance and Rs. 5.95 crore due to him on account of interest and other expenses) as appearing in its books of accounts. However, later on, it was stated that the amount of Rs. 11.70 crore was paid to the assessee by M/s. Saj Properties Pvt. Ltd. on account of sale of immovable property by the assessee to M/s. Saj Properties Pvt. Ltd. for Rs. 15 crore. In support, the ld. A/R filed a copy of agreement dated 28.10.2009. Thus, there was no consistency in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s in a position to manage the affairs of the company also. Therefore to make this transaction look like a business advance, an agreement was made which was actually never intended to be executed. It is clear that in this way assessee tried to escape from the liability of section 2(22)(e) provisions. Thus this entire edifice was basically a colorable device to give the color of genuineness to these transactions through which he was successful in avoiding application of provisions of section 2(22)(e). The Hon'ble Supreme Court in the case of McDowell vs. CTO has given strong verdict against any such arrangements by stating that "Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." In view of the Apex Court verdict, this entire arrangement is held as a mere colorable device devised with the aforementioned objectives." Thus the ld. CIT (A) has suspected the genuineness of the agreement produced by the assessee on the ground that just to make this t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lable on record to suggest that the impugned agreement is not genuine. Thus without bringing any contrary material on record by the AO as well as by the ld. CIT (A) the mere suspicion about the genuineness of the transaction cannot be the basis of arriving at the conclusion that the agreement filed by the assessee is a colorable device. In the case of Ashok Kumar Agarwal vs. ACIT (supra) the Coordinate Bench of this Tribunal while considering an identical issue has held in para 21 as under :- 21. We have heard the rival contentions and pursued the material available on record. An amount of Rs. 50,26,604 has been reflected as an advance given to the assessee in the books of accounts of M/s Ashish Builcon Private limited. The said advance is reflected in the current account of the assessee maintained with M/s Ashish Builcon Private limited through which various transactions of deposits and withdrawals were made during the year. The AO held that the provisions of deemed dividend are applicable to day-to-day transactions between the company and its shareholders and accordingly brought the whole of amount of Rs. 50,26,604 to tax as deemed dividend in the hands of the assessee. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ashish Buildcon are engaged in the business of real estate and similar transactions have been undertaken by the assessee with M/s Ashish Buildcon Private limited in the earlier years and subsequent years as well. We are therefore of the view that these are normal business transactions where the money has been advanced by the company for purchase of land and the same cannot be deemed as dividend in the hands of the assessee. In some cases, the sale transaction has fructifed by complying with the necessary conditions/formalities in terms of registered sale deed and in some cases, due to non-fulfillment of specified conditions, the agreement may be cancelled. We do not agree with the contention of the ld CIT(A) that where the agreement to sell is not registered and not found during the search, the authencity of the agreement will be in doubt and the assessee would be precluded in producing the same in support of its contention especially given the fact that there are regular and similar business transactions entered into between the assessee and M/s Ashish Buildcon. Nothing has been brought on record to suggest that M/s Ashish Builcon Pvt limited has negated the existence of the said ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e lower authorities to justify the transaction as a business transaction on the basis of agreement to sale dated 22.7.2009. There were certain conditions as per this Ikrarnama, which could not be fulfilled by the assessee but it does not mean that assessee's loans and advances are not for business purposes. The ld. A/R of the assessee has explained the reasons for not getting 90B done of agricultural land at village Ajayrajpura, Tehsil Sanganer as Draft Master Plan got changed by the JDA by draft Notification dated 10.11.2009 wherein it has been decided by the JDA that land use under 90B was to be approved not less than 25 acres but in final Master Plan this area has been reduced to 10 hectares. The assessee filed application on 23.08.2012 under section 90B of the Land Revenue Act before the JDA which was rejected by the JDA. The case laws relied on by the ld. A/R are squarely applicable on the facts of the case. Therefore, we hold that transactions made by the assessee and the company are for business purposes and are not deemed dividend under section 2(22)(e) of the Act. Accordingly, we allow the assessee's appeal and reverse the order of ld. CIT (A)." In light of above, we are o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....676 under section.2(22)(e). The learned Commissioner of Income-tax (Appeals) relying on the decision of the Income-tax Appellate Tribunal, Indore, dated January 3, 2012, for the assessment year 2005-06, in the case of the assessee and deleted the addition of Rs. 57,57,676 in the assessment year 2004-05. Thereafter, the Revenue preferred the appeal before the Income-tax Appellate Tribunal Bench Indore for the assessment year 2004-05. The learned Income-tax Appellate Tribunal relying on its earlier decision dated January 3, 2012, dismissed the appeal by the impugned order dated August 28, 2012, by holding that the issue towards of deemed dividend under section 2(22)(e) of the Act was decided in the favour of the assessee and dismissed the appeal of the Revenue. The relevant paragraph of the order dated January 3, 2012, passed by the Income-tax Appellate Tribunal in I.T.A. No. 425/ind/2009 for the assessment year 2005-06 is relevant which reads as under : "5. The next ground pertains to confirming the addition of Rs. 85,488, considered as deemed dividend under section 2(22)(e) of the Act. The learned counsel for the assessee strongly objected the addition, whereas the learned....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... perused the material available on record and also gone through the agreement to sell dated January 19, 2004, placed on record (pages 59 to 63 of the paper book). We find that the land was owned by the assessee which he agreed to sell to M/s. Puzzling Equipref Services P. Ltd. for a consideration of Rs. 2,53,60,000. As per the terms of the agreement, M/s. Puzzling Equipref Services P. Ltd. was required to pay a part of the sale consideration in advance. The agreement to sell also witnessed payment of these amounts through account payee cheques to the assessee on various dates as mentioned at page 3 of the agreement to sell. Thus, we find that the amount so received by the assessee was against the sale of land owned by him title of which is clear from the documents placed on record. Since the amount was received as a sale consideration in the normal course of business, the same cannot be branded as loans and advances. We also find that in its audited balance-sheet also, the assessee has changed the head of its classification from loans and advances to investment in the subsequent year. We, therefore, do not find any merit in the action of the lower authorities for treating ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Revenue. Finally, the appeal of the Revenue, is dismissed." In the said case the AO has made the addition under section 2(22)(e) by rejecting the claim of the assessee that the advances by the company to the assessee was for purchase of land. If the transaction is a business transaction between the parties then the amount received under the said transaction cannot be held as loan or advance to be treated as deemed dividend under section 2(22)(e) of the Act. The assessee explained the facts regarding the loan given by the assessee to the company and which was also received during the year under consideration along with the interest, the details of which has been reproduced by the AO at pages 8 & 9 of the impugned order. However, the second transaction of payment of Rs. 11.70 crores was shown separately being advance given for purchase of land. Therefore, these are two separate transactions, first one is the loan earlier given by the assessee to the company was repaid during the year under consideration along with the interest and second transaction was the advance given for purchase of land as per the agreement dated 28th October, 2009. Thus when the transaction d....