SHRI SHRAVAN CHOUDHARY,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-5, JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 29th March,

2019 of ld. CIT (A)-2, Jaipur for the assessment year 2010-11. The assessee has

raised the following grounds :-

“ 1. That in the facts and in circumstances of the case and in law the ld. Lower authority grossly erred in initiating the reassessment proceedings u/s 148 of the Act.

1.1. That the ld. Lower authorities grossly erred in ignoring the facts that the notice u/s 148 of the Act was issued without proper sanction, without any reason to believe, without any application of mind and the entire proceedings of reassessment deserved to have been quashed.

2 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

Ground No. 1 and 1.1 are regarding validity of initiation of

reassessment proceedings under section 147/148 of the IT Act.

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 High Court in case of Asian Paints Ltd. vs. DCIT, 308

ITR 195 (Bom) as well as decision in case of Bharat Jayantilal Patel vs. Union of

India, 378 ITR 596 (Bom.) and contended that the AO should have allowed four

weeks time to the assessee to seek legal remedy after rejection of objections of the

assessee but no such time was granted to the assessee by the AO before passing

the reassessment order in question. Therefore, the said order is bad in law. He has also relied upon the decision dated 30th August, 2018 of Delhi Benches of the

Tribunal in case of Smt. Kamlesh Goel vs. ITO in ITA no. 5730/Del/2017. Thus the

3 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

ld. Counsel has submitted that the impugned reassessment order deserves to be

quashed as it has violated the directions given by the Hon’ble Supreme Court as well

as Hon’ble High Courts while disposing off the objection of the assessee raised

against notice under section 148 of the IT Act.

the objection of the assessee without any delay and within the shortest possible

time. Therefore, when there is no delay on the part of the AO in disposing off the objection and the reassessment order was to be passed before 31st December, 2017

as it was time barring, therefore, after disposing off the objection vide order dated 07.12.2017 the AO has passed the impugned reassessment order on 22nd December,

2017. The ld. D/R has thus contended that the assessee filed the objection against the notice issued under section 148 only on 4th December, 2017 which was disposed off by the AO on 7th December, 2017 within three days from the date of filing of

objection. Therefore, in this case there is no violation of directions of the Hon’ble

Supreme Court in case of GKN Driveshafts (India) Ltd. vs. ITO (supra) as well as the

other decisions as relied upon by the ld. Counsel for the assessee.

March, 2017. In response to the said notice, the assessee filed return of income at Rs. 6,24,44,930/- on 25th April, 2017. The AO supplied the reasons recorded for

reopening of the assessment to the assessee vide letter dated 18.05.2017. Thus it is

clear that there was no delay on the part of the AO to supply the reasons recorded

for reopening of the assessment to the assessee. Thereafter, the assessee filed the

objection against the notice issued under section 148 on 04.12.2017 which was

4 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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 within a period of three days

from the date of objection raised by the assessee. Since the assessment was time barring on 31st December, 2017, therefore, the AO was having no option but to frame the reassessment before 31st December, 2017. In such a scenario it was not

possible for the AO to wait for four weeks after disposing off the objection and then

pass the reassessment order because by that time the reassessment order itself

would become time barred. Accordingly, in the facts and circumstances of the case,

when the delay is entirely attributable to the assessee for raising the objection

against the notice under section 148 and there is no delay on the part of the

Assessing Officer to dispose off the objection filed by the assessee, then we

5 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

do not find any substance or merits in this objection and ground of challenging the

reassessment order passed by the AO.

has reopened the assessment without any reason to believe and without any

application of mind but the assessment has been reopened on the basis of borrowed

satisfaction as per the information forwarded by the AO of M/s. Saj Properties Pvt.

Ltd. The ld. Counsel has submitted that the reason to believe recorded by the AO is

not based on any material which has direct nexus to the belief that income

assessable to tax has escaped assessment. It is mere suspicion in the mind of the

AO as the reason to believe recorded do not show any application of mind on the

part of the AO to form a reasonable belief that the amount in question has escaped

assessment. The ld. Counsel has referred to the reasons recorded by the AO and

submitted that this is nothing but reproduction of the information forwarded by the

AO of M/s. Saj Properties Pvt. Ltd. wherein it is stated that the assessee has

received loan/advance of Rs. 11.70 crores and M/s. Saj Properties Pvt. Ltd. has

accumulated profits to the tune of Rs. 7,48,07,150/-. The ld. Counsel has submitted

that the AO has not even conducted any enquiry or verification to find out the

primary facts regarding the nature of transaction as well as accumulated profits of

M/s. Saj Properties Pvt. Ltd. Therefore, the AO without even considering the

relevant and necessary facts before initiating the proceedings under section 148 has

reopened the assessment based on the said information forwarded 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

6 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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 was a loss of Rs. 2.55 crores in the

preceding years and, therefore, there was no accumulated profit at the time of the

alleged transaction of loan/advance though the said payment to the assessee was

not an advance or loan but it was a commercial transaction between the company

and the assessee for purchase of land. The assessee produced the agreement dated 28th October, 2009 to show that the said amount was paid to the assessee under the

agreement to sale whereby the assessee agreed to sell the land to the company

and, therefore, the said payment does not fall in the ambit of loan or advance. The

AO has not verified these facts before initiating the proceedings under section 148 of

the Act and, therefore, the reasons recorded by the AO are without any application

of mind but merely based on the report forwarded by the AO of M/s. Saj Properties

Pvt. Ltd. The ld. Counsel has relied upon various decisions in support of the

contention that the transaction is not covered under section 2(22)(e) as it is

7 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

business transaction and for the purposes of section 2(22)(e) accumulated profits

are to be worked out without inclusion of current year’s business profit. Since there

was a loss in the preceding years, therefore, there was no accumulated profits at the time of alleged transaction as on 28th October, 2009 and, therefore, there is no

income assessable being deemed dividend income under section2(22)(e) of the IT

Act. The decisions relied upon by the ld. Counsel are as under :-

Ashok Kumar Agarwal vs. ACIT ITA No. 778/JP/2015 dated 03.10.2016.

PCIT vs. Ashok Kumar Agarwal (DB IT Appeal No. 168/2016 dated 29.09.2016 (Rajasthan HC)

PCIT vs. Ashok Kumar Agarwal (DB IT Appeal No. 46/2017 dated 31.10.2017 (Rajasthan HC)

CIT vs. Krishna Behari Goyal (DB IT Appeal No. 137/2016 dated 19.10.2016 (Rajasthan HC)

CIT vs. Om Prakash Suri (No.2) 359 ITR 41 (MP)

CIT vs. M.B. Stockholding P. Ltd. 64 taxmann.com 138 (Gujarat)

Rajmal Lakhichand vs. JCIT 92 taxmann.com 94 (ITAT Pune)

reasons independently. Further, these reasons for initiating proceedings u/s 147

were approved by the ld. PCIT-2, Jaipur. The AO has not only examined the

assessment record but also the information sent by the Addl. CIT, Range-7, New

Delhi and only, he has reason to believe that the income has escaped assessment.

The case of the assessee is also covered by the deeming fiction of Explanation 2(b)

8 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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),

the ld. D/R has submitted that the current year’s profit has to be taken into account.

He has relied upon the decision of Mumbai Benches of the Tribunal in case of NCK

Sons Exports Pvt. Ltd. vs. ITO, 102 ITD 311 and submitted that the Tribunal after

analyzing the history of the provisions right from the Income Tax Act, 1922 and

subsequent amendments has held that the accumulated profits has to be worked out

on the date of transaction of disbursement which included the current year’s profit.

The ld. D/R has also relied upon the decision of Hon’ble Supreme Court in case of

First ITO vs. Short Brothers Pvt. Ltd., 60 ITR 83 (SC) as well as the decision of

Hon’ble Allahabad High Court in case of CIT vs. Roshan Lal, 98 ITR 349 (All.). Thus

the ld. D/R has submitted that the Explanation 2 to section 2(22) of the IT Act

makes it clear that the expression ‘accumulated profits’ shall include all profits of the

9 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

company upto the date of distribution or payment referred in clauses (a), (b), (d)

and (e) of section 2(22). Thus the ld. D/R has submitted that the reasons recorded

by the AO clearly make out a case of escapement of income assessable to tax.

Since the original return of income was processed under section 143(1), therefore,

the reasons recorded by the AO have direct connection and nexus with the fact of

income assessable to tax has escaped assessment. He has relied upon the orders of

the authorities below.

record. The assessee is an individual and holding substantial shares in M/s. Saj

Properties Pvt. Ltd. The assessee filed his return of income under section 139(1) of the IT Act on 3rd October, 2010 declaring total income of Rs. 6,24,44,930/- which

was processed under section 143(1) of the Act. Subsequently, the AO has reopened the assessment by issuing the notice under section 148 on 9th March, 2017 by

recording the reasons as under :-

“ The assessee has filed its return of income for the A.Y. 2010-11 declaring total income of Rs.6,24,44,930/- which was assessed u/s 143(1) of the I.T. Act, 1961 at Rs. 6,24,44,930/-. In this case on the basis of information brought on record it is noted that M/s. Sai Properties has given a loan of Rs. 11.70 crore to its share holders Sh. Shravan Chowdhary who is having holding of 68% of share and M/s. Sai Properties has accumulated 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.”

10 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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 between the

parties. It is pertinent to note that the AO of M/s. Saj Properties Pvt. Ltd. forwarded this information vide letter dated 8th May, 2013 as under :-

“ No. Addl.CIT Range-7/Ref/2013-14/59. Office of the Addl. CIT Range-7 Room No. 316, C.P. Building I.P. Estate, New Delhi 11 00 02 Dated : 08.05.2013

To The Income-tax Officer Ward 4(1), NCR Building, Statue Circle, Jaipur.

Sub : Information in the case of Sh. Sharwan Choudhary, PAN No. ABIPC 7810 K – A.Y. 2010-11 – Reg.

Kindly refer to the above subject. The assessee company M/s. Saj Properties Pvt. Ltd. (PAN No. AAKCS 1529 B), Regd Office : A 4, Near Shubham Tower, Shastri Nagar, Jaipur, Rajasthan-302016 has given a loan of Rs. 11.70 crores to its substantial shareholder Sh.

11 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

Sharwan Choudhary who is holding 68% shares. It is further noticed that M/s. Saj Properties Pvt. Ltd. has accumulated profits to the tune of Rs. 7,48,07,150/-. The transaction is covered under the provisions of section 2(22)(e).

The addition is to be made in A.Y. 2010-11 in the hands of Sh. Sharwan Choudhary PAN No. ABIPC 7810 K who is a beneficial shareholder of M/s. Saj Properties Pvt.

The issue is elaborately discussed in the assessment order passes u/s 143(3) dated 28.03.2013 in the case of M/s. Saj Properties Pvt. Ltd. for the A.Y. 2010-11. Copy of the assessment order in the case of M/s. Saj Properties Pvt. Ltd. for A.Y. 2010-11 as discussed above is being enclosed for necessary action at your end as the jurisdiction over the case lies with you.

(Sukhveer Choudhary) Addl. Commissioner of Income-tax Range-7, New Delhi. Copy for kind information to :

i) The Commissioner of Income-tax, Delhi-III, New Delhi. ii) The Commissioner of Income-tax, Jaipur-II. iii) The Addl. Commissioner of Income-tax, Range-4, Jaipur.”

Along with the said letter, the AO also sent a copy of the assessment order framed

under section 144 of the Act in case of M/s. Saj Properties Pvt. Ltd. The AO has

formed the belief and recorded the reasons by reproduction of this information forwarded vide letter dated 8th May, 2013. This information was sent by the AO of

M/s. Saj Properties Pvt. Ltd. in the month of May, 2013 however, the AO has issued the notice under section 148 only on 9th March, 2017 which is 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

12 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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 point. However, even without going into these

decisions, the plain reading of the provisions of section 2(22)(e) and Explanation-2

to section 2(22) makes it clear that the accumulated profit as on the date of

disbursement/distribution has to be taken into account. For ready reference, we

quote Explanation-2 to section 2(22)(e) as under :-

“ Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, 19[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place].”

Hence the date of transaction of the alleged loan/advance is a relevant point on

which the accumulated profits has to be considered even by taking the current

year’s profit for this purpose. Even by taking the current year’s profit into

13 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

consideration it has to be first determined as on the date of alleged transaction and

then to work out the accumulated profits. In the case in hand, there is no dispute

that the AO has taken the accumulated profits of Rs. 7,48,07,150/- which is as on 31st March, 2010 and not the profit of the current year as on 28th October, 2009.

Further, the AO of M/s. Saj Properties Pvt. Ltd. while giving the details of

accumulated profits has taken this figure from the financial statements of the said

company after reducing the brought forward losses of Rs. 2,55,34,499/-. Thus even

for sake of argument and accepting the contentions of the ld. D/R that current year’s

profit has to be considered for working out the accumulated profits, the said profit is also required to be worked out as on the date of alleged loan/advance i.e. on 28th

October, 2009. Once the profit of the current year is ascertained as on the date of

transaction, then the brought forward loss of Rs. 2,55,34,499/- is also required to be reduced from such current year’s profit as on 28th October, 2009 and only the

remaining amount can be considered as accumulated 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

14 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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 ld. CIT (A) has held that the agreement

to sale is nothing but a colourable device to avoid the payment of tax by resorting to

dubious method. Even without considering the nature of transaction, the undisputed

facts which were available on record at the time of recording the reasons were also

not appreciated and considered by the AO while forming the belief that the income

assessable to tax has escaped assessment. Thus it is a case of formation of belief

by the AO merely based on the information forwarded by the AO of M/s. Saj

Properties Pvt. Ltd. while framing the assessment under section 144 of the Act which

shows that even the stand of the company M/s. Saj Properties Pvt. Ltd was not

considered by the AO at the time of framing the assessment. Therefore, the

reopening is based merely on the opinion of the AO of M/s. Saj Properties Pvt. Ltd.

which clearly falls in the category of borrowed satisfaction as the AO has not applied

his mind independently on the relevant and necessary facts to form the opinion that

income assessable to tax has escaped assessment. The decision of Hon’ble Delhi

High Court in case of Krown Agro Foods Pvt. Ltd. vs. ACIT (supra) is relevant on this

point wherein it has been held in para 13 to 15 as under :-

“13. The reason to believe recorded by the Assessing officer is not based on any material that had come to the knowledge of the Assessing Officer. There is a mere suspicion in the mind of the assessing officer and the notice under section 147/148 has been issued for the purpose of verification and for clearing the cloud of suspicion. The reasons to believe recorded do not show as to on what basis the Assessing Officer has formed a reasonable belief that

15 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

the said amount of Rs. 2,00,000/- had escaped assessment. It is apparent the Assessing Officer suspects that the income has escaped assessment. However, mere suspicion is not enough. The reasons to believe must be such, which upon a plain reading, should demonstrate that such a reasonable belief could be formed on some basis/ foundation and had in fact been formed by the Assessing Officer that income has escaped assessment. No such reasonable belief can be inferred from the purported reasons to believe recorded. 14. The words "reason to believe" indicate that the belief must be that of a reasonable person based on reasonable grounds emerging from direct or circumstantial 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 again held in para 26, 36 &

37 as under :-

“26. The first part of Section 147 (1) of the Act requires the AO to have "reasons to believe" that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The AO being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre- condition to the assumption of jurisdiction under Section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment.

16 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

Thus when the AO has not applied his mind independently while forming the belief

that income has escaped assessment but the reopening is based on the information

received from the AO wherein a definite opinion or expression by the AO of M/s. Saj

Properties Pvt. Ltd. is given then the case falls in the category of borrowed

satisfaction as the reasons failed to demonstrate the link between the material and

formation of reason to belief that income has escaped assessment. Accordingly, we

hold that the initiation of proceedings under section 148 is not sustainable in law and

the same is quashed.

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

17 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

Circle-5 Jaipur has no jurisdiction to issue the notice under section 148 and pass the

reassessment order.

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.

contentions. At the outset, we are of the opinion that since we have already

quashed the initiation of proceedings under section 147/148 on the ground of

borrowed satisfaction and without application of mind independently by the AO,

therefore, this objection raised by the assessee becomes infructuous. However, we

leave this open.

Ground No. 2 is regarding the merits of addition made on account of

deemed dividend under section 2(22)(e) of the IT Act.

into an agreement to sale dated 28.09.2009 with M/s. Saj Properties Pvt. Ltd. of his

immovable property situated at C-4, Sardar Patel Marg, C-Scheme, Jaipur for a sum

of Rs. 15,00,00,000/- and the assessee had received a sum of Rs. 11,70,00,000/- as

advance in lieu thereof. For this precise reason, 2 separate A/cs were maintained by

M/s. Saj Properties Pvt. Ltd. of assessee in its books of accounts. One account was

named as Sharavan Choudhary wherein transactions relating to amount given as

advance by the assessee on interest were recorded. Second account was named as

Sharavan Choudhary Advance A/c wherein transactions relating to amount given as

advance by the company to the assessee towards sale of immovable property were

18 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

recorded. The assessing Officer has for no plausible reasons merged both the

accounts and arrived at peak amount of Rs. 11,74,77,779/- as amount liable to be

treated as deemed income. The ld. Counsel further submitted that M/s. Saj

Properties Pvt. Ltd. was dealing in real estate business and had given an advance of

Rs. 11,70,00,000/- to the assessee against sale of immovable property situated at C-

4, Sardr Patel Marg, C-Scheme, Jaipur. However, subsequently the parties decided

not to execute the sale deed, decided to cancel the agreement and accordingly the

assessee has returned back the amount as was available with him. In support of his

contention, the ld. Counsel has relied upon the following decisions :-

Ashok Kumar Agarwal vs. ACIT ITA No. 778/JP/2015 dated 03.10.2016.

PCIT vs. Ashok Kumar Agarwal (DB IT Appeal No. 168/2016 dated 29.09.2016 (Rajasthan HC)

PCIT vs. Ashok Kumar Agarwal (DB IT Appeal No. 46/2017 dated 31.10.2017 (Rajasthan HC)

CIT vs. Krishna Behari Goyal (DB IT Appeal No. 137/2016 dated 19.10.2016 (Rajasthan HC)

CIT vs. Om Prakash 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.

11 of the assessment order that initially it was stated by the assessee that the

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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 the stand of the assessee about this amount of Rs. 11.70 crore.

The ld. D/R also submitted that the said agreement to sale is nothing but a self-

serving document and an afterthought as this agreement to sale was not registered

and there is nothing on record which may suggest that the land was finally

transferred in the name of M/s. Saj Properties Pvt. Ltd. It is to be noted from the

balance sheet of M/s. Saj Properties Pvt. Ltd. as on 31.03.2010 that this transaction

of alleged sale of land is not appearing in the Disclosures as required by AS-18

pertaining to “Related Party Disclosure”. Instead, loan and advance of Rs.

1,89,77,779/- was still standing in the name of the assessee as on 31.03.2010. The

assessee has not brought on record any material which may indicate that M/s. Saj

Properties Pvt. Ltd. has authorized the authorized signatory to execute such

agreement to sale. Further, the assessee has not brought on record that the said

agreement to sale was cancelled subsequently and on what terms and conditions as

there is no such stipulation in the agreement to sale of its cancellation and why the

assessee has not returned the entire amount of Rs. 11.70 crore. He has relied upon

the decision of Mumbai Bench of the Tribunal in case of Kapil N. Shah vs. ITO, 85

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taxmann.com 253 as well as the decision of Hon’ble Supreme Court in case of Miss

P. Sarada vs. CIT, 96 Taxman 11 (SC).

record. The assessee has explained before the authorities below that this amount of

Rs. 11.70 crores was received on account of agreement to sale dated 28.10.2009

whereby the assessee and M/s. Saj Properties Pvt. Ltd has entered into an

agreement for purchase and sale of land owned by the assessee. Thus the said

advance received by the assessee is a business transaction as the said company is

engaged in the business of purchase and sale of real estate. The said contention of

the assessee has been rejected by the ld. CIT (A) by recording her finding in para

3.3.2 as under :-

“ 3.3.2. I have considered the submission order and facts of the case. It is seen that the agreement was cancelled as per assessee’s own admission therefore assessee cannot take shelter of this agreement for treating the same as business advance. Moreover since the assessee is a director in Saj Properties (P) Ltd., he was 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

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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 transaction looks like a business

the agreement was made which was not actually intended to be executed and

accordingly it was held to be a colorable device for avoiding the payment of tax. It

is pertinent to note that the assessee was having a credit/opening balance of Rs. 6,07,75,000/- as on 1st April, 2009 on which the assessee also received interest from

the company M/s. Saj Properties Pvt. Ltd. During the year under consideration the

said amount of loan given by the assessee to the company was repaid to the

assessee along with interest. This fact is also clearly mentioned in the audit report

wherein the company has stated that it took loan from the directors of the company

including the assessee and the interest paid to the assessee is also reflected in the

category of related party transactions. For ready reference, we reproduce the

details of the related party transactions as per the financial statements as well as

Note on Accounts forming part of the balance sheet as under :-

“ A) Related Parties

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B) Nature of Transaction

Thus only the commission and interest paid to the Directors has been reported

under the Related party transaction and no such transaction of granting of loan to

the assessee was reported. Thus it is clear that it was not a case of advance to the

assessee but this was only payment for purchase of the land from the assessee, the

details of which are duly given in the agreement being land bearing no. C-4, Sardar

Patel Marg, C-Scheme, Jaipur measuring 2852 sq. yards. Neither the AO nor the ld.

CIT (A) has taken any steps to verify the genuineness of this agreement or the

contents regarding the details of the land as well as the value of the land to be sold

by the assessee under the Agreement. Thus without conducting any enquiry or

verification of correctness of the transaction between the assessee and the company

as narrated in the Agreement to sale dated 28.10.2009 the rejection of the claim is

based on suspicion. There is no material either with the AO or any fact available 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 :-

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conversion formalities done before 31.3.2011. It was explained by the assessee that he was expecting the new township policy to be announced as was the case with other colonizer/builders and was under a bonafide belief that the JDA would allow the conversion of land. Unfortunately, the land under the sale agreement could not got 90B approval from the JDA and thereafter the agreement was cancelled and amount was refunded to the company. It is noted that both assessee and M/s 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 agreement. What is important to examine is the purpose at the point of time when the money was advanced by the company. Where the purpose is to carry out a business transaction for the benefit of the company, the amount of advance will be treated as normal business advance and cannot be termed as deemed dividend in the hands of the shareholders. The decision of Hon’ble Delhi High Court in case of Creative Dyeing and Printing Pvt. Ltd. (supra) supports the case of the assessee. Further, it is noted that in respect of a similar transaction entered between the assessee and M/s Ashish Buildcon in AY 2010-11, the Coordinate Bench has decided in favour of the assessee and the relevant findings are as under: “6. We have heard rival contentions and perused the material on record. On verification of copy of accounts placed at pages 38 to 39 of the Paper Book, it is seen that assessee had given money to the company. The opening balance as on 1.4.2009 was Rs. 1,12,17,000/-. Thereafter, he withdrew money from the company upto 15.7.2009. On 18.07.2009 the assessee again

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paid to company Rs. 7 lakhs. Thereafter assessee withdrew various amounts from the company. On 21.8.2009 again he paid Rs.2 lakhs to company, Rs. 9.5 lakhs on 28.07.2009, Rs. 3 lakhs on 13.10.2009, Rs 1.25 lakhs on 15.10.2009, Rs. 5 lakhs on 26.10.2009, Rs. 5 lakhs on 29.10.2009, Rs. 20 lakhs on 10.02.2010 and Rs. 60 lakhs on 10.3.2010 (Rs. 20 lakhs each) and Rs.13 lakhs on 10.03.2010 and Rs. 1.25 lakhs on 10.3.2010 which show that there are numbers of transactions between the assessee and company. Finally, the assessee’s accounts has been squared up. The assessee and company are in real estate business. It is a general practice in the line of business that most of the land are purchased and sold on agreement to sale basis to save the stamp duty and to increase the profit on the transactions. These facts have been accepted by the AO in scrutiny assessment also in number of years. The condition laid down in the section 2(22)(e) are squarely applied in case of the assessee but only issue disputed is whether these advances were loan for business purposes or otherwise. The prima facie copy of accounts in the books of the company shows that assessee had paid much more than amount received from the company. The transactions were regular. The assessee produced the evidence before the 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 of the opinion that the advance of Rs. 29,80,000 given by the company to the assessee is for business purposes towards purchase of land and the same cannot be treated as deemed dividend in the hands of the assessee. Accordingly, we allow the appeal of the assessee and dismiss the appeal of the Revenue on this ground.”

The said decision of the Tribunal was upheld by the Hon’ble Jurisdictional High Court vide decision dated 31st October, 2017 in DB IT Appeal No. 46/2017 held in para 11

to 12 as under :-

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“ 11. After taking into consideration the evidence on record and law discussed by the CIT (A) and the facts, it is a matter of evidence and restriction was made and the entries which were taken from sister concerned or from the relatives of the group of persons is permissible under law. 12. In that view of the matter, on the first issue we are in complete agreement with the view taken by the Tribunal. Therefore, issue is answered in favour of the assessee against the department.”

Thus it is clear that the Tribunal in case of Ashok Kumar Agarwal vs. ACIT (supra)

has also decided an identical issue for the assessment year 2010-11 which was also upheld by the Hon’ble Jurisdictional High Court vide order dated 29th September,

2016 in DB IT Appeal No. 168/2016. Similarly the Hon’ble Madhya Pradesh High

court in case of CIT vs. Om Prakash Suri (No. 2) 359 ITR 41 has held in para 6 to 10

as under :-

27 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

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 senior Departmental representative defended the impugned order. 5.1 We have considered the rival submissions of the learned representatives of both sides and perused the material available on record. With regard to the addition made under section 2(22)(e) of the Act, the Assessing Officer observed that during the year, under consideration, the assessee has taken the following amounts of Rs. 1,94,58,728 from the company : Debit Date Particulars Credit amount amount 01-04-04 By op. Bal- 8,798,728 01-04-04 By cheque 600,000 08-04-04 By cheque 1,150,000 08-04-04 By cheque 1,550,000 02-06-04 By cheque 800,000 02-06-04 By cheque 1,900,000 02-07-04 By cheque 1,750,000 18-09-04 By cheques 1,00,000 05-10-04 By cheques 700,000 30-03-05 By cheques 410,000 Total 1,94,58,728

On the Assessing Officer's query to add the said amount under section 2(22)(e) of the Act, the stand of the assessee was that the amount was not received as a loan but as an advance against the sale of its land situated in Gram Sinhansa Tehsil and District Indore. To support the contention the assessee has filed agreement to sell dated January 19, 2004, before the Assessing Officer. However, the Assessing Officer was not convinced with the same and held that the transaction was in the nature of loans and advances. On

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finding that accumulated profit of the company was Rs. 58,43,165 he restricted the addition under section 2(22)(e) of the Act to the extent of accumulated profit, i.e., Rs. 58,43,165. On appeal before the learned Commissioner of Income-tax (Appeals), the assessee contended that the amount was received as loans and advances. However, the learned Commissioner of Income-tax (Appeals) found that the accumulated profit of M/s. Puzzling Equipref Services P. Ltd. was Rs. 57,676 as on March 31, 2004, and Rs. 58,43,164 as on March 31, 2005. Accordingly, he directed that the addition to the extent of Rs. 57,57,676 is required to be made in the assessment year 2004-05 and the remaining amount of Rs. 85,488 was added to the income of the year under consideration. Further aggrieved, the assessee is in appeal before the Tribunal. We have 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 the transaction as in the nature of loans and advances. The ground of the assessee is, therefore, allowed in his favour." 8. The Income-tax Appellate Tribunal while deciding the identical facts for assessment year 2005-06 found that the agreement to sale was also witnessed payment of the impugned amount through account payee cheques on various dates which were mentioned on the said sale agreements per the terms and conditions of the sale agreement. The amounts were received from the assessee against the sale of land and the title of which was clear from the documents placed on record and the impugned amounts were received in the normal course of business in sale transaction, consequently, these cannot be branded as loan advances. The learned Tribunal has held that such transaction would not come under the provisions of section 2(22)(e)pf the Income-tax Act, 1961. 9. Learned senior counsel for the appellant has submitted that the order dated January 3, 2012, passed by the Income-tax Appellate Tribunal in respect of the assessment year 2005-06 the same has attained finality land, therefore, relying on the same the learned Tribunal passed the impugned order. 10. The relevant paragraph of the impugned order reads as under :

29 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

"We have perused the agreement to sale (pages 28 to 32 of the paper book). As per clause 2 of the said agreement (page 39 of paper, book), the amount of Rs. 2,53,60,000 was agreed to be given to the assessee by the purchaser and part of the payment was received through cheque. The assessee was also supposed to get conversion of the land within two months. As per clause 10 (page 31 of the paper book), the purchaser was free to do the development work on the land and was also free to sell the same to any third-party for which the assessee had no objection. In view of these facts, it cannot be said that it was a loan or an advance to the assessee. The contents of the sale agreements are very much clear that it was a clear cut agreement of sale. No contrary facts or decision was brought to our notice by either side and more specifically the Revenue. In view of these facts, we are not in agreement with the conclusion drawn in the assessment order and affirm the stand of the learned Commissioner of Income- tax (Appeals) in accepting the claim of the assessee, resultantly, there is no merit in the appeal 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 does not

30 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

fall in the category of loan or advance in terms of section 2(22)(e) of the Act but the

same is a business transaction, then the addition made by the AO is not sustainable.

In view of the above facts and circumstances and following the decisions of the

Coordinate Benches as well as Hon’ble Jurisdictional High Court, the addition made

by the AO is deleted. We have also discussed about the availability of accumulated

profits with the company as on the date of alleged transaction and, therefore, in any

case the addition made by the AO of the full amount is not sustainable when the AO

has not computed the accumulated profits as on date of transaction and then

reducing the brought forward losses to the tune of Rs. 2,55,34,499/-. After

considering all these relevant aspects if something is still found to be accumulated

profits as on the date of transaction, the addition can be made only to the extent of

such amount. The AO has not conducted any such exercise and thus the assessment

was framed in a mechanical manner without even considering the relevant

provisions of the Act as well as the binding precedents. Accordingly, in view of the

above discussion, the addition made by the AO is not sustainable and liable to be

deleted.

Order is pronounced in the open court on 07/08/2019.

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Jaipur Dated:- 07/08/2019. Das/

31 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

32 ITA No. 517/JP/2019 Shri Shravan Choudhary, Jaipur.