(1.) THIS is assessee's appeal against CIT(A) -XXVI, New Delhi's order dated 31 -10 -2012 in appeal no. 376/11 -12 relating to A.Y. 2006 -07. In short following effective grounds are raised:
"1. That on the facts and circumstances of the case, the CIT(A) was not justified in confirming reassessment u/s 148 even though there was no case of any income escaping assessment or recording of requisite satisfaction by the Assessing officer.
2(i) That even on merits, the absence of any loan or advance or any such transaction between appellant and M/s Aricon Developers Pvt. Ltd. and M/s B.R. Arora and Associates Pvt. Ltd. There is no justification for addition of Rs. 6,05,29,778/ - u/s 2(22)(e) of the Income Tax Act, 1961.
(ii) That transaction of loan or advance being subject matter of addition was between M/s Navyug Promoters Pvt. Ltd., M/s Aricon Developers Pvt. Ltd. and M/s B.R. Arora and Associates Pvt. Ltd. and as such it is not relevant for consideration in the case of appellant."
(2.) THE assessee has filed an application for admitting additional ground and proceeding sheet of assessment as additional evidence to the following effect:
"1. That following ground be please admitted as additional ground of appeal
"That in the absence of notice issued u/s 143(2) the reassessment proceedings and consequential assessment order is without jurisdiction and unsustainable in law as well as on merits."
2. That it is a pure legal ground which goes to the root of the matter and no new facts are required to be investigated or placed on records for adjudicating the same. Under these circumstances, as per the following authorities, the additional ground deserves to be admitted: -
National Thermal Power Company Ltd. 229 ITR 383 (SC) Gedore Tools Pvt. Ltd. 238 ITR 268 (Del.)"
2.1. Ld. DR is heard who objects the admission of additional ground.
2.2. Since the additional ground sought to be admitted is legal in nature and goes to the root of the matter, in view of Hon'ble Supreme Court judgment in the case of NTPC (supra), we are inclined to admit the same.
(3.) BRIEF facts are: The assessee has share holding in following three companies:
(i) M/s B.R. Arora and Associates Pvt. Ltd. 59.52%
(ii) M/s Aricon Developers Pvt. Ltd. 30.86%
(iii) M/s Navyug Promoters Pvt. Ltd., 39.27%
3.1. The assessee filed its return of income for A.Y. 2006 -07 on 8 -8 -2006 declaring income of Rs. 20,09,134/ -, which was accepted by the assessing officer.
3.2. In assessment proceedings of M/s Navyug Promoters Pvt. Ltd. ("NPPL" in short) for A.Y. 2006 -07 the assessing officer found that it had received advance of more than Rs. 5 crores from sister concern M/s B.R. Arora and Associates Pvt. Ltd. ("BRAPL" in short) and one M/s Expert Way Makers Pvt. Ltd. Assessing officer in the assessment of NPPL made an additions of Rs. 4.95 crores and Rs. 1,10,29,778/ - as deemed dividend received u/s 2(22)(e) from BRAPL and M/s Aricon Developers Pvt. Ltd. (earlier M/s Expert Way Makers Pvt. Ltd.).
3.3. In appeal, order of NPPL ld. CIT(A) relying on ITAT Special Bench judgment in the case of ACIT Vs. Bhaumik Colours Pvt. Ltd. 314 ITR 80 (Mum)(SB) gave a direction that deemed dividend income was to be assessed in the hands of director Shri B.R. Arora during the year under consideration.
3.4. On the basis of this CIT(A)'s order assessing officer formed a belief that income to the extent of Rs. 6,05,29,778/ - being deemed dividend u/s 2(22)(e) had escaped assessment in terms of sec. 147 and on recording of reasons notice u/s 148 for reopening the assessment was issued. The assessee objected to the action u/s 147 and reasons recorded before AO, on the ground that they were neither valid nor could vest the assessing officer with the jurisdiction to reopen the assessment as well as on merits, as reproduced below:
"Sir, I am holding substantial shares in all the three companies namely, M/s B.R. Arora and Associates Pvt. Ltd., M/s Aricon Developers Pvt. Ltd., and M/s Navyug Promoters Pvt. Ltd., as defined under the provisions of sec. 2(22)(e) of the Income Tax Act, 1961 and during the year under review I hold 52.92% shares of M/s B.R. Arora and Associates Pvt. Ltd., 33.83% shares in M/s Aricon Developers Pvt. Ltd., and 39.27% shares in M/s Navyug Promoters Pvt. Ltd.,.
However the amount of advance was received by M/s Navyug Promoters Pvt. Ltd. and nothing was received by me in that transaction therefore applying the provisions of Sec. 2(22)(e) of the Income Tax Act, 1961 to add the entire advance received by M/s Navyug Promoters Pvt. Ltd. during the course of business is not justifiable and is very harsh on my part.
Further I wish to submit that I was one of the shareholders of M/s Navyug Promoters Pvt. Ltd. and holding 39.27% shares in that company along with other shareholders and making the entire deemed dividend taxable in my hands alone is also not justifiable/ therefore I am requesting to your honour to consider the matter in the light of above submission and oblige."
3.5. Assessing officer, however, upheld the addition by following observations:
The reply of the assessee has been considered but found not tenable. The assessee is a substantial share holder in all the three companies, namely, M/s B.R. Arora and Associates Pvt. Ltd., M/s Aricon Developers Pvt. Ltd., and M/s Navyug Promoters Pvt. Ltd. as defined under the provisions of sec. 2(22)(e) of the Income -tax Act, 1961. the payment received by M/s Navyug Promoters Pvt. Ltd. on account of so called agreement to sell with one company is either diverted to Shri B.R. Arora or to the family members or to the other company with whom again M/s Navyug Promoters Pvt. Ltd. entered into agreement to sell to the same property. Thus it is clear that M/s Navyug Promoters Pvt. Ltd. has rotated the money amongst the three companies i.e. the payer companies and the appellant company and the director Shri B.R Arora/ relatives in such a manner so as to give it a colour of 'business transition...".
3.6. Aggrieved, assessee preferred first appeal where the ld. CIT(A) upheld 147/148 proceedings by following observations:
"I have carefully considered the facts of the case, the submissions made on behalf of the appellant and the reasons recorded by the Assessing officer. What is required for initiating re -assessment proceedings is the existence of afresh prima facie material, on the basis of which the Assessing officer, after examination of record, has to have a reasonable belief that the income has escaped assessment. On consideration of the facts of the case, I find that before invoking the provisions of section 147 of the IT Act, 1961, the Assessing officer had in his possession information that the income to the extent of Rs. 6,05,29,778/ - being deemed dividends u/s 2(22)(e) of the IT Act, 1961 has escaped assessment. The order passed by the CIT(A) in the case of M/s Navyug Promoters Pvt. Ltd. for the A.Y. 2006 -07 constitutes information or material from any external source. Therefore, the appellant's contention that the proceedings for re - assessment have been initiated without any material on record in respect of escapement of any income ahs no merit."
3.7. Apropos merits, assessee strongly pleaded that he has not received any advances for any company, in that eventuality there was no case at all to add the deemed dividend u/s 2(22)(e). The transactions being among inter group companies, shareholders cannot be saddled with additions u/s 2(22)(e) only on the ground that he holds the substantial share holding. CIT(A), however, held that it was a fa ade of business transactions and the corporate veil can be lifted from them. The lifting of corporate veil showed that the payment received by M/s Navyug Promoters Pvt. Ltd. on account of so called agreement to sell of property is either diverted to the appellant Sh. B.R. Arora or to his family member or to the other company with whom M/s Navyug Promoters Pvt. Ltd. entered into agreement to sell of the same property. The transactions make it clear that the money has been rotated among the three i/.e. the payer companies and M/s Navyug Promoters Pvt. Ltd. and the appellant Sh. B.R. Arora and his relatives in such a manner so as to give it a colour of business transaction. Therefore, ld. CIT(A) held that the provisions of section 2(22)(e) of the I.T. act, 1961 (deemed dividend) are applicable in the hands of the appellant.
3.8. Thus by observing that the transactions were routed so as to ultimately benefit the assessee, the addition u/s 2(22)(e) was confirmed in the hands of the assessee.
3.9. Aggrieved, assessee is before us.
Taking the additional ground first, ld. Counsel for the assessee contends that the reassessment proceedings are bad in law as no mandatory notice u/s 143(2) was served on the assessee. Ld. Counsel
filed proceeding sheets from the assessment record as additional evidence which gives following
18 -11 -2011.
Issued notice u/s 142(1)
14 -11 -11
Attended Sh. Rakesh Bobal and submitted details. Case adj. for 2 Dec. Show cause why deemed dividend of Rs. 6,05,29,778/ - u/s 2(22)(e) not be added to your income.
Attended Sh. Rakesh Bobal and submitted details. Case discussed.
Order passed u/s 147.
4.1. Ld. Counsel for the assessee further contends that CIT(A) while deciding the appeal in the case of M/s Navyug Promoters Pvt. Ltd. and not the assessee, has given a finding that addition on account of deemed income is required to be made in the hands of director Shri B.R. Arora during this year and the assessing officer is directed to take requisite action accordingly. This binding direction is contrary to law as neither the CIT(A) was seized with assessee's appeal along with M/s Navyug Promoters Pvt. Ltd. appeal nor such a binding direction can be issued by CIT(A) while disposing of the appeal of another assessee. The assessee has not been heard and his record has been perused by CIT(A) while hearing the appeal of M/s Navyug Promoters Pvt. Ltd. in order to come to such a finding of fact and law and issue a direction. Thus the findings being ex parte qua assessee and in disregard of principle of natural justice is invalid and ab initio void. It cannot be a valid basis to reopen the assessment of a third party i.e. the assessee. To come to such a finding the CIT(A) has to necessarily examine whether or not the impugned transactions were governed by business expediency or during the course of regular business or advances for some property transaction to which section 2(22) is not applicable at all.
4.2. Similarly, ld. Assessing officer has to apply independent mind and cannot be bound by any authority's direction to reopen the assessment by quoting the direction of CIT(A) as binding on him. In the eyes of law, finding of CIT(A) in third party's case cannot be held to be binding on assessing officer who is not a subordinate officer to CIT(A). Thus the assessing officer did not applying his independent mind to the facts of the case, consequently the reassessment is bad in law. Reliance is placed on following case laws:
- P.G. Foils Ltd. 215 CTR (Mad) 537 holding:
observation of settlement commission in the case of another person to which assessee was not a party could not form basis of reason to believe for reopening of assessee's assessment without inviting objections or explanation from assessee and deciding the same on merits uninfluenced by said observation of Settlement Commission.
- CIT and Anr. Vs. Aslam Ulla Khan (2010) 34 DTR (KLar.) 58.
Assessing authority having acted on the dictates of the CIT who had directed him to reopen the Asstt. And the Tribunal having recorded finding that there was no application of mind on the facts of the assessing authority, the reopening of Asstt. Was bad in law.
- CIT Vs. Shree Rajasthan Syntex Ltd. 313 ITR 231 (Raj.) (SLP filed by the department was dismissed in 313 ITR (Statute) 27.
Held that The reassessment proceedings initiated only on account of the opinion of the AO of the lessee and the Tribunal was right in finding that it was 'borrowed satisfaction' which was not sufficient to confer power on the AO to initiate re -asstt. Proceedings against the assessee.
- Surender Kumar Jain Vs. DCIT 85 TTJ (Nag) 285
Held that AO made reassessment on the dictates of his superiors, the same is a nullity.
- ITO Vs. Vijendra Kumar in ITA no. 1202/Del/2009 order dtd. 19 -08 -2011.
4.3. Ld. Counsel further assailed the reopening of assessment proceedings u/s 148 on the ground that the action of the assessing officer amounts to change of opinion in as much as in the original assessment the assessee's stand was accepted and addition in the case of Nayug was made u/s 143(3). Thus, the exercise of reopening amounts to change of opinion by assessing officer on the same set of facts. Reliance is placed on following case laws:
- CIT vs. Orient Craft Ltd. 354 ITR 536 (Del.).
Asstt. U/s 143(1) cannot be reopened in the absence of any fresh material received by AO.
Held:"14. In the present case the reasons disclose that the Assessing officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under Section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing officer, both strongly deprecated by the Supreme Court in CIT Vs. Kelvinator (supra). The reasons recorded by the Assessing officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis a vis an intimation issued under section 143(1) can cause to the tax regime. There is no whisper in the reasons recorded of any tangible material which came to the possession of the assessing officer subsequent to the issue of the information. It reflects an arbitrary exercise of the power conferred under section 147."
- CIT Vs. Kelvinator of India Ltd. 320 ITR 561 (SC):
After 1st April, 1989, AO has power to reopen the Astt. u/s 147 provided AO has reason to believe that income has escaped Asstt. And there is tangible material to come to the conclusion that there is escapement of income, mere "change of opinion" cannot per se be reason to reopen.
4.4. On merits it is contended that the fact that the amounts in question were received by M/s Navyug Promoters Pvt. Ltd. from B.L. Arora Pvt. Ltd. against agreement to sell of a property by way of a duly executed agreement dated 21 -3 -2005. Similarly, another advance was received by M/s Navyug Promoters Pvt. Ltd. from M/s Aricon Developers Pvt. Ltd. also against sale of a property vide agreement dated 25 -3 - 2006.Thus, the amounts were given by one company to another by way of a transaction of sale of property. Property advances are not covered u/s 2(22)(e) as they were commercial transactions effected for the purposes of purchase and sale of the property. Reliance is placed on following case laws:
- CIT Vs. Raj Kumar 214 Taxation 182 (Del.)
Money transacted as trade advance does not fall within the ambit of deemed dividend.
- Ambassador Travel(P) Ltd. 220 CTR (Del.) 475
- ACIT Vs. Smt. C. Rajini 140 TTJ (Che.) 218.
4.5. Learned counsel thus contends that:
(i) lower authorities have not correctly appreciated the facts of the case and provisions of sec. 2(22)(e) of the I.T. Act. It is not the revenue's case that assessee is a beneficiary of such loan. No loan or advance was received by the assessee from M/s B.R. Arora and Associates Pvt. Ltd. and M/s Aricon Developers Pvt. Ltd. and as such the case is not covered under the provisions of sec. 2(22)(e).
(ii) As per ITAT Spl. Bench decision in the case of ACIT Vs. Bhaumik Colours Pvt. Ltd. 314 ITR 80, both the conditions of being shareholder and beneficiary of such loans and advances should be satisfied. The same principle has been followed by Hon'ble Delhi High Court in the case of CIT Vs. Ankitech Pvt. Ltd. 340 ITR 14.
(iii) In the light of above said principle, it is self evident that merely because director is holding share in the lender company and receiving company, the provisions of sec. 2(22)(e) could not be applied in the absence of any loan or advance to the shareholder. The company and shareholder are separate and distinct entity and cannot be treated same for the purpose of provisions of section 2(22)(e).
(iv) These are deeming provisions and onus is on the assessing officer to establish that provisions of sec. 2(22)(e) are attracted. The above said legal position is supported by decision of 3rd Member in the case of 109 ITD 1. Reliance is placed on Hon'ble Supreme Court decision in the case of CIT Vs. G. Narsimmon 236 ITR 327 and CIT Vs. CP Sarathi Mudaliyar 83 IOTR 170.
(v) Further, as per deeming provisions of sec. 2(22)(e) only in case loans and advances which have been given otherwise then for the business purpose and for earning interest income with stipulated period of repayment are to be considered for the purpose of sec. 2(22)(e) and not advances given for the purpose of business.
(vi) The deeming provisions of sec. 2(22)(e) are not applicable to business transactions and only in case funds have been provided in the nature of loans and advances for the purpose of earning interest with stipulated period of refund. In this case the advances are specifically for the purpose of acquiring properties for the business purposes and not as loans and advances. The concept of loans and advances have not been correctly understood and applied by the Assessing officer.
(vii) Thus the transactions between these companies are for the purpose of business and not in the nature of loans or advance. Reliance is placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Shri Raj Kumar to the following effect:
Whether trade advances given to the assessee (shareholder) by company can be treated as deemed dividend u/s 2(22)(e) word 'advance' which appears in the company of the word 'loan could only mean such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of sec. 2(22)(e) held that trade advance does not fall within the ambit of the provisions of sec. 2(22)(e), additions were rightly deleted by Tribunal.
4.6. Ld. Counsel for the assessee contends that in the entire length and breadth of the reassessment order and the notings in proceeding sheets from the assessment record, there is no whisper about issuing of 143(2) notice. Thus from record it clearly emerges that no notice u/s 143(2), which is mandatory for framing the assessment was served on the assessee. On this ground alone the assessment needs to be quashed being without valid jurisdiction. Reliance is placed on following case laws:
- Mohinder Kumar Chabra Vs. ITO (ITA no. 3523/D/2013) ITAT Delhi order dated 13 -12 -2013.
- DIT Vs. V.R. Educational Trust (ITA no. 510/2011) (Delhi High Court order dtd. 10 -2 -2011)
Alpine Electronics Asia Pte Ltd. Vs. DGIT and Ors. 341 ITR 247 (Del.)