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Facts
The assessee's original assessment for A.Y. 2018-19 was completed u/s 143(3) accepting the returned income. Subsequently, the PCIT initiated revisionary proceedings u/s 263, deeming credit card payments by M/s. Rachana Television Pvt. Ltd. on behalf of the assessee as dividend under Section 2(22)(e) and thus finding the original assessment erroneous and prejudicial to the revenue.
Held
The Tribunal condoned a 449-day delay in filing the appeal, noting the assessee's bona fide belief regarding the appealable order. It held that Section 2(22)(e) requires the recipient to hold not less than 10% voting power, but the assessee held only 4.48% equity shares. Therefore, the PCIT's invocation of Section 263 without satisfying this condition precedent was unsustainable in law, and the assessment order was not erroneous.
Key Issues
1. Whether the PCIT validly invoked Section 263 to revise an assessment order when the assessee did not meet the 10% voting power threshold for Section 2(22)(e) applicability. 2. Whether payments made by a company on behalf of a shareholder can be treated as deemed dividend under Section 2(22)(e) if the shareholder holds less than 10% of the company's voting power.
Sections Cited
263, 143(3), 2(22)(e), 143(3A), 143(3B)
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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M. : This appeal is filed by Ms. Rama Devi Tummala (“the assessee”), feeling aggrieved by the order passed by the Learned Principal Commissioner of Income Tax, Hyderabad-1 (“Ld. PCIT”), dated 24.03.2023 for the A.Y. 2018- 19.
The assessee has raised the following grounds of appeal :
1. “1. The Principal Commissioner of Income Tax (PCIT) erred in assuming jurisdiction under Section 263 of the Income Tax Act, 1961. The original assessment order passed under Section 143(3) was neither erroneous nor prejudicial to the interests of the Revenue. Therefore, the invocation of Section 263 by the PCIT is bad in law and deserves to be quashed.
2. The order passed under Section 263 is in violation of the principles of natural justice as the appellant was not provided with a sufficient and proper opportunity to present their case. The appellant was deprived of the opportunity to substantiate the facts and provide relevant documentary evidence, which makes the order unsustainable in law.
3. The PCIT erred in holding that the payments made by M/s. Rachana Television Pvt. Ltd. on behalf of the appellant attract the provisions of Section 2(22)(e) of the Income Tax Act, 1961, as deemed dividend. The PCIT failed to appreciate that the payments were made for legitimate business expenses of the company, not as loans or advances.
4. The PCIT's findings that the original assessment order was erroneous and prejudicial to the interests of the Revenue are arbitrary, perverse, and based on mere conjectures and surmises. The original assessment was completed after a thorough examination of the appellant's records, and there was no error in the Assessing Officer's application of law or appreciation of facts.
5. The exercise of revisionary powers under Section 263 by the PCIT is improper and not in accordance with law. The revisionary authority has failed to demonstrate how the original assessment order was erroneous, and the order under Section 263 is merely a difference of opinion, which does not warrant the invocation of such powers.
6. The PCIT failed to establish that the original assessment order caused any prejudice to the Revenue. The order under Section 263 is therefore uncalled for, as the income returned by the appellant was correctly assessed and there was no under-assessment or tax evasion.
7. The directions issued by the PCIT for reassessment under Section 263 are without valid grounds and are based on an incorrect understanding of the facts and the law. The reassessment order, if passed, would result in a baseless and unwarranted demand, causing undue hardship to the appellant.
8. The appellant to raise any additional grounds of appeal that may arise during the course of the hearing.”
3. At the outset, it is seen that there is a delay of 449 days in filing of appeal before the Tribunal, for which the assessee has filed petition for condonation of delay in filing the appeal along with an affidavit explaining the reasons for such delay. The Learned Authorised Representative (“Ld. AR”) submitted that, the assessee was in a bona fide belief that the appealable order would be consequential assessment order passed u/s.143(3) r.w.s. 263 of the Income Tax Act, 1961 (“the Act”) and the remedy, if any, lies against such consequential order. It was only upon subsequent proper legal advise and realisation that, the appeal ought to have been preferred against the order u/s.263 itself, the assessee immediately took necessary step to file appeal before the Tribunal. The Ld. AR further submitted that, there was no mala fide intention or deliberate delay in filing the appeal and the assessee has not gained any benefit from such delay. Accordingly, the Ld. AR prayed before the bench to condone the delay in filing of this appeal.
4. Per contra, the Learned Department Representative (“Ld. DR”) relying on the decisions of Hon'ble Supreme Court in the case of Esha Bhattacharjee Vs. Managing Committee of Raghunathpur Nafar Academy & Other in Civil Appeal Nos.8183-8184 of 2013 dated 13.09.2013 and the decision of this Tribunal in the case of SRK Infracon (India) Pvt. Ltd. Vs. ITO (ITA No.8/Hyd/2022 dated 08.02.2023) strongly opposed the condonation of delay stating that there is inordinate delay in filing of the appeal. The Ld. DR contended that the reason of lack of proper advise from counsel cannot constitute sufficient cause under law and such delay should not be condoned.
We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. It is well settled that while dealing with condonation of delay, the Courts and Tribunals are expected to adopt a liberal and justice oriented approach. When substantial justice and considerations are pitted against each other, then cause of substantial justice to be preferred. It is not the length of the delay that matter but the acceptability of the explanation is to be seen. In the present case, on consideration of the affidavit and the explanation rendered by the assessee, we are of the view that the assessee was under a genuine and bona fide impression that the appealable order was the consequential order passed by the Ld. AO u/s.143(3) r.w.s. 263 of the Act. The mistake on the part of the assessee, acting on legal advise, appears to be bona fide and not motivated by mala fide intention or deliberate inaction. Moreover, immediately upon realising the legal position, the assessee took step to file the appeal without any further delay. Further, the facts of the cases relied on by the Ld. DR are different from the fact of the present case. Therefore, in the interest of justice, we found the cause shown by the assessee to be reasonable to condone the delay of 449 days in filing the appeal. Accordingly, the appeal is admitted for adjudication on merits.
The brief facts of the case as culled out from the record are that, the assessee is an individual, filed her Return of Income (“ROI”) for A.Y. 2018-19 on 30.03.2019 declaring total income at Rs.34,07,790/-. The case of the assessee was selected for limited scrutiny for the specific issue of credit card payments. After examining the submission and details furnished by the assessee, the Ld. AO completed the assessment u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Act on 09.02.2021, accepting the returned income.
6.1 Subsequently, the Ld. PCIT on examination of record noted that, the assessee is a shareholder and director of M/s. Rachana Television Private Limited (“the company”) and that certain credit card expenses of the assessee were paid by the company. Observing that such payment falls within the ambit of deemed dividend u/s.2(22)(e) of the Act, the Ld. PCIT formed a view that the assessment order passed by the Ld. AO is erroneous in so far as it is prejudicial to the interest of revenue. Accordingly, the Ld. PCIT issued notice u/s.263 of the Act to the assessee. After considering the submission of the assessee, the Ld. PCIT set aside the assessment order with a direction to Ld. AO to reframe the assessment after due examination of the applicability u/s.2(22)(e) of the Act.
Aggrieved with the order of Ld. PCIT, the assessee is in appeal before us.
The Ld. AR submitted that, the issue of credit card payments had been duly examined during the original assessment proceedings and no adverse inference was shown by the Ld. AO. It was further contended that, section 2(22)(e) of the Act is not applicable in the present case as the assessee holds only 4.48% of equity shares in the company, whereas the statutory requirements for invoking the said provisions is holding of not less than 10% of the voting power. The Ld. AR invited our attention to para no. 4 of the order of Ld. PCIT and submitted that, the said facts that the assessee holds only 4.48% of equity shares in the company, whereas the statutory requirements for invoking the said provisions is holding of not less than 10% of the voting power, were brought before the Ld. PCIT. However, without dealing with this specific legal requirement, the Ld. PCIT set aside the assessment order with a direction to Ld. AO to reframe the assessment after due examination of the applicability u/s.2(22)(e) of the Act. Accordingly, the Ld. AR submitted that the invocation of jurisdiction by Ld. PCIT u/s 263 is not as per law and liable to be quashed.
Per contra, the Ld. DR relied on the order of Ld. PCIT.
We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through para no.4 of the order of Ld. PCIT which is to the following effect :
9.1 On perusal of above, we found that, the assessee had disclosed before the Ld. PCIT that the assessee is having only 4.48% of equity shares in the company. We have also gone through the details of the shareholders holding more than 5% shares in the company which is forming part of financial statements of the company for the F.Y. 2017-18, placed at page no.13 of the paper book, which is to the following effect :
---Space left blank intentionally---- 9.2 On perusal of above, we found that, the list of shareholders who are holding more than 5% of shares in the company have been given by the company in their financial statement. The name of the assessee is not found in the said list, which indicates that the assessee is not holding more than 5% of shares in the company. Accordingly there is no dispute on the facts that, the assessee is not holding more than 5% of voting powers in the company. We have also gone through the provisions of section 2(22)(e) of the Act which is to the following effect :
“ Section 2. In this Act, unless the context otherwise requires,— (1)…… (2)…… (22) "dividend" includes—
(a) …….. (b) ………. (c) ……… (d) ……. (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”
9.3 On perusal of above, it is abundantly clear that as per the provisions of section 2(22)(e) of the Act, for a payment to be considered as dividend, the recipient must be a shareholder holding not less than 10% of the voting power in the company. In the present case, the assessee is not holding more than 5% of voting power in the company. Accordingly, the threshold condition of holding of 10% of the voting power is not satisfied in the present case. Hence, the very foundation on which the revisionary proceedings u/s.263 of the Act are initiated is not in accordance with law.
9.4 Further more, the Ld. PCIT, despite being apprised of the statutory requirement and the factual position of the share holding failed to render any finding on the applicability of the threshold share holding limit. Therefore, in our considered view, the invocation of jurisdiction u/s.263 of the Act, by the Ld. PCIT without satisfaction of a condition precedent for application of the section 2(22)(e), renders the impugned order unsustainable in law.
9.5 In view of the above facts and legal position, we hold that, the assessment order passed by the Ld. AO accepting the returned income of the assessee cannot be said to be erroneous in so far as prejudicial to the interest of revenue. Accordingly, the order passed by the Ld. PCIT u/s.263 of the Act is liable to be quashed.
In the result, the appeal of the assessee is allowed.