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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI S.S.GODARA, JM & SHRI DR. DIPAK P. RIPOTE, AM
आदेश / ORDER
PER S. S. GODARA, JM :
This assessee’s appeal for A.Y. 2007-08 is directed against the CIT(A)-3, Pune’s order dated 20/09/2019 passed in case No. PN/CIT(A)-3/ACIT, Cir- 2/204/2011-12 involving proceeding u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 ; in short "the Act”.
Heard both the parties. Case file perused.
2 ITA No.1719/PUN/2019 A.Y. 2007-08, Jayant Kaneria,
Coming to assessee’s first and foremost substantive ground that the impugned reopening set into motion by the Assessing Officer is not sustainable in law, we find that the following reasons had been recorded at the assessing authorities behest :-
“REASONS FOR ISSUE OF NOTICE UNDER SECTION 148 OF THE IT ACT, 1961
In this case, the before the Ward 4(6), Pune on 26.2.2008. The said return of income was duly processed assessee had filed the return of income for the AY 2007-08 declaring total income of Rs. 6,86,227 under section 143(1) of the IT Act,1961. While completing scrutiny in the case of M/s N.K. Associates (henceforth “NK”) for AY 2007-08, it was found that NK had accepted loan of Rs. 1,02,00,000 from Niraj Kumar Associates Pvt Ltd. As the payment by this mode gets the form of deemed dividend as per Section 2(22)(e) of the IT Act, Rs.l,02,00,000/-to the extent of accumulated profit was considered as deemed dividend under section 2(22)(e) and added to the total income of NK for AY 2007-08. However, Hon’ble CIT(A)-II, Pune, while his order dated 13.5.2010 had decided the issue in favour of NK relying on the following 3 case laws: a) ACIT Vs. Bhaumik Colour(P) Ltd. (2009) 120 TTJ (Mumbai) (SB) 865 b) CIT Vs. Hilltop (2008) 217 CTR (Raj) 527
c) DCIT Vs. National Travel Services (20.Q9|) 31 SOT 76
According to all these decisions, the deemed dividend is taxable in the hands of the beneficial shareholder who is an individual and not in the hands of other entities.
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An appeal has already been filed with ITAT against the decision of CIT(A) before ITAT, Pune Bench, Pune. However, to protect the revenue, on a protective basis, the beneficial shareholder’s income needed to be reassessed based on the ratio laid down in the above case laws, i.e. deemed dividend, if any, needs to be taxed in the hands of beneficial shareholder and not at the hands of the firm. The ratio laid down in the above judgments can be applied to the case of Shri Jayant Kaneria by observing the following facts:
The payment of Rs. 1,02,00,000/- has been made by Niraj (i) Kumar Associate Private Limited, which is a private limited company. The payment has been made as loan/advance. (ii) The payment has been made to M/s N K Associates. One (iii) Shareholder in NKAPL, viz., Jayant Kaneria has more than 10% of voting power (5625 shares held out of 30,000 shares, i.e. 18.75% of total shares). The same person has a substantial interest in M/s N K Associates (entitled to 32.5% of the income of the firm) (iv) The company had accumulated profits at the beginning of the year and also at the end of the year (Reserves and surplus: Ai the beginning of the year: Rs. 1,20,55,148,54 and at the end of the year: Rs. 2,26,15,583.12)
Accordingly, relying on the above mentioned decisions, I am satisfied that the income to the tune of Rs. 1,02,00,000/- which needs to be taxed as deemed dividend in the hands of Jayant Kaneria has escaped assessment within the meaning of provisions of section 147 of the I.T. Act, 1961. Therefore a notice u/s 148 is issued for reopening the assessment for the AY 2007-08.”
Learned Counsel vehemently argued that such an approach “To protect the Revenue, on a protective basis” hardly satisfies the basic principles of section 148/147 reopening as per hon’ble jurisdictional high court’s decision
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in (2013) 34 taxmann.com 300 (Bom.) DHFL Venture Capital Fund V/s. ITO as under.
“7. On 18 May 2012 a notice had been issued by the Assessing Officer under Section 148 for Assessment Year 2008-09. The notice has been issued to "the AOP of the contributors of M/s. DHFL Venture Capital Fund" at the address of the Petitioner. The reasons on the basis of which the assessment is sought to be reopened for Assessment Year 2008-09 are as follows :
"During the course of assessment proceedings of M/s DHFL Venture Capital Fund it was noticed that, as per the Trust deed dated 19.08.2005 furnished by the assessee, the body of contributors having minimum 75% of the units had the power to revoke the amount transferred by the contributors to DHFL Venture Capital Fund and not an individual contributor. Obviously, therefore, cumulative contributions made by body of contributors is "revocable transfer" as envisaged in the provisions of section 61 to 63 of the Act and not that of individual contributors, in light of the stand taken by the DHFL Venture Capital Fund during its assessment proceedings that provisions of section 61 to 63 are attracted to the transactions between the contributors and DHFL Venture Capital Fund.
In view of the above, the income arising from the contributions made by the contributors to DHFL Venture Capital Fund is taxable in the hand of Body of contributors whose members being companies and individuals is "Association of Persons of the contributors" if provisions of section 61 to 63 are attracted to the transactions between contributors and DHFL Venture Capital Fund as has been claimed by the DHFL Venture Capital Fund during the assessment proceedings for AY 2008-09 as per letter dated 25.12.2010.
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Therefore, the income of Rs.32,83,77,906/- arising from investment of contributions of the contributors to DHFL, which has been claimed as exempt in the hands of the DHFL Venture Capital Fund, has to be assessed as income in the hands of the "AOP of the contributors" of DHFL Venture Capital Fund. However, it is found that no return of income has been filed by such AOP of the contributors of DHFL Venture Capital Fund and therefore, an amount of Rs.32,83,77,906/- has escaped income of the 'AOP of the contributors of DHFL Venture Capital Fund". Accordingly I have reason to believe that income of Rs.32,83,77,906/- chargeable to tax has escaped assessment within the meaning of the provisions of section 147 r.w.s. 148 of the Income Tax Act, 1961.
You are, therefore, required, as per the provisions of section 148 of the Act to furnish a return of income in respect of the 'AOP of the contributors of DHFL Venture Capital Fund" within the time specified in the notice u/s 148 which is enclosed along with this letter."
The Petitioner submitted its objections on 20 June 2012 to the reopening of the assessment. The Assessing Officer by his order dated 9 November, 2012 disposed of the objections and maintained the notice for the reopening of the assessment.
Learned senior counsel appearing on behalf of the Petitioner submitted that-
(i) Even though the reopening of the assessment for Assessment Year 2008-09 is by a notice within four years of the end of the relevant Assessment Year, the jurisdictional condition for the reopening of an assessment is that there must be a reason to believe that income had escaped assessment. In the present case, ex facie, the reasons disclosed by the Assessing Officer would show that the reopening is contingent on a potential escapement of income in the event that the provisions of Sections 61 to 63 are
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attracted as has been claimed by the Petitioner during the course of the assessment proceedings for Assessment Year 2008-09. Whether or not the provisions of Sections 61 to 63 are attracted, is a matter which is pending determination before the Tribunal. Before the Tribunal the case of the Revenue is that the income is taxable in the hands of the Petitioner as an AOP. In the circumstances, the notice reopening the assessment on the ground that there is independently an AOP of the contributories of the trust is contingent on the Revenue failing in the appeal before the Tribunal. A reopening under Section 148 is impermissible on a contingency that would arise if the Revenue were to fail in appeal before the Tribunal, because the jurisdictional requirement is that there must be reason to believe that income has escaped assessment which is absent in this case;
(ii) There is no AOP of the contributories in existence and the inference of the Assessing Officer that there is such an AOP is based on a patent misreading of Clause 15 of the deed of trust. All that Clause 15 postulates is that the contribution of an investor cannot be withdrawn without the consent of 75% of the contributories, but by that itself is not sufficient to hold that the contributories have come together to form an AOP;
(iii) For Assessment Year 2009-10 and for Assessment Year 2010-11, the Assessing Officer has held that the trust itself is an AOP and the assessment order for Assessment Year 2010-11 is after the reopening of the assessment for Assessment Year 2008-09 which is the year in question. Even if the Petitioner is held to be an AOP, the provisions of Sections 61 to 63 would be attracted and in a situation where there is a revocable transfer of assets, all income
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arising to any person is chargeable to income tax as the income of the transferor under Section 61. Hence, even on the basis that the contention of the Revenue to the effect that the Petitioner is an AOP is correct, even so by virtue of the provisions of Section 61, the income would be brought to tax only in the hands of the contributories.
On the other hand, counsel appearing on behalf of the Revenue submits that :
(i) The notice reopening the assessment has not been issued to the Petitioner, but to the AOP formed by the contributories of the Petitioner and the Petitioner has no locus to institute these proceedings under Article 226;
(ii) Explanation 2(a) of Section 147 postulates that where no return of income had been furnished by the assessee, although his total income or the total income of any other person in respect of which he is assessable under the Act is taxable, that shall be deemed to be a case where income chargeable to tax has escaped assessment. Since the AOP of the contributories has not filed a return of income, explanation 2(a) would be attracted and the Assessing Officer would have reason to believe that income chargeable to tax has escaped assessment;
(iii) The Revenue in the present case is justified in making a protective assessment by taking recourse to the provisions of Section 148, in order to safeguard the interests of the Revenue, should the Tribunal come to the conclusion in the appeal pending for Assessment Year 2008-09 that the income cannot be brought to tax in the hands of the Petitioner. The modality of adopting a protective assessment is accepted in income tax law and a protective assessment can even be made by taking recourse to the provisions of Section 148;
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(iv) The entire scheme constitutes a collective investment under which all the contributories have pooled their resources together thereby forming an AOP of the contributories to whom a notice has been issued under Section 148. A reading of the scheme and of the individual contributories' agreements would indicate that the contributories have come together in a collective venture and constituted an AOP.
The rival submissions now fall for consideration.
The maintainability of the Petition at the behest of the Petitioner is sought to be questioned on the ground that the notice under Section 148 has not been issued to the Petitioner, but to an AOP formed of the contributories of the Petitioner. In our view, it would not be possible to accede to this submission. The Petitioner is directly and vitally affected by the issuance of a notice under Section 148 ostensibly to an entity which is now termed as an AOP of the contributors of the DHFL venture capital fund. As the facts which would be unfolded in the course of the discussion hereinafter indicate, it is evident that the Petitioner has a direct and substantial interest in the issues which are raised in these proceedings and in the challenge to the legality of the notice which has been issued under Section 148.
During the course of the assessment proceedings for Assessment Year 2008-09 under Section 143(3) the Assessing Officer brought the income of the Petitioner to tax on the basis that the status of the Petitioner is that of an AOP. Though the Assessing Officer was of the view that the income arising to the AOP was by a revocable transfer, the Assessing Officer nonetheless came to the conclusion that the contributories have practically no control over the Petitioner as a result of which the provisions of Sections 61 to 63 were held not to be attracted. In appeal, the Commissioner (Appeals) accepted the case of the Petitioner and came to the conclusion that the income arising to the trust was taxable in the hands of the contributors and not in the hands of the Petitioner since there was a revocable transfer within the meaning
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of Sections 61 to 63. The correctness of that determination is pending before the Tribunal where the Revenue is in appeal and we must clarify at the outset that we express no opinion on the correctness of the finding in the order of the appellate authority. The issue which falls for determination before this Court is whether the jurisdictional requirement for the reopening of an assessment even within a period of four years is fulfilled because before an Assessing Officer can take recourse to the provisions of Section 148, he must have reason to believe that any income chargeable to tax has escaped assessment. Again, whether the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment must be determined with reference to the reasons which have been disclosed to the assessee. The recording of reasons and the disclosure of those reasons to the assessee is a valuable safeguard against an arbitrary exercise of power.
In the present case, the reasons which have been disclosed make it abundantly clear that the reopening of the assessment is contingent on the provisions of Sections 61 to 63 being attracted to the transactions between the contributors and the Petitioner as has been claimed by the Petitioner. At the cost of repetition, it would be appropriate to emphasize the following extract from the reasons which have been disclosed to the Petitioner :
"In view of the above, the income arising from the contributions made by the contributors to DHFL Venture Capital Fund is taxable in the hand of Body of contributors whose members being companies and individuals is "Association of Persons of the contributors" if provisions of section 61 to 63 are attracted to the transactions between contributors and DHFL Venture Capital Fund as has been claimed by the DHFL Venture Capital Fund during the assessment proceedings for AY 2008-09 as per letter dated 25.12.2010. Therefore, the income of Rs.32,83,77,906/- arising from investment of contributions of the contributors to DHFL, which has been claimed as exempt in the hands of the DHFL Venture Capital
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Fund, has to be assessed as income in the hands of the "AOP of the contributors" of DHFL Venture Capital Fund." (emphasis supplied)
The reasons for the reopening of the assessment clearly postulate that the reopening is based on the contingency that the provisions of Sections 61 to 63 are held to be attracted to the transactions between the contributors and the Petitioner "as has been claimed" by the Petitioner. The formation of a reason to believe is "if" the provisions of Sections 61 to 63 are attracted. It is on this hypothesis that the Assessing Officer proceeds to record that the income of Rs.32.83 Crores arising from the investment of contributions of the contributories "which has been claimed as exempt in the hands of" the Petitioner has to be assessed as income in the hands of the AOP of the contributors of the Petitioner. Reading the reasons as they stand, it is evident that the Revenue has sought to reopen the assessment in exercise of powers conferred by Section 148 on the hypothesis that should the Tribunal accept the contention of the Petitioner and affirm the view of the Commissioner (Appeals), the income would be exempt in the hands of the Petitioner and in such an eventuality should be brought to tax in the hands of an AOP of the contributors of the Petitioner.
The jurisdictional requirement for reopening an assessment under Section 148 is the formation of a reason to believe by the Assessing Officer that income has escaped assessment. The formation of the reason to believe and the existence of that reason must be in the present . Recourse can be taken to the provisions of Section 148 where the Assessing Officer has a reason in present, meaning thereby, a reason which is present to his mind when he forms his reason to believe, that income has escaped assessment. Recourse to Section 148 cannot be founded in law on a hypothesis of what would be the position in future should an appeal before the appellate authority, being the Tribunal or the High Court, result in a particular outcome. The statute does not contemplate the reopening of an assessment under Section 148 on such a hypothesis or a contingency which may emerge in the future.
11 ITA No.1719/PUN/2019 A.Y. 2007-08, Jayant Kaneria,
The basis on which the Assessing Officer has purported to reopen the assessment is placed beyond any doubt by the affidavit which has been filed in reply to the Petition. As we have noted, there is no ambiguity whatsoever in the reasons which have been communicated to the assessee in the order dated 18 May 2012, but in the affidavit in reply, it has been stated that the income of Rs.32.83 Crores arising from the investment of contributions of the contributors to the Venture Capital Fund which has been claimed as exempt in the hands of the Petitioner should be assessed as income in the hands of the AOP of the contributors of the Petitioner "on a protective basis". Again it has been stated that the issue of taxing the AOP of the contributors of the Petitioner "has arisen from the submission of the Petitioner before the appellate authorities" where the Petitioner has contended that the transactions amount to a revocable transfer and that the income which would arise should be taxed in the hands of the individual contributors. The reopening of an assessment under Section 148 on the basis of a submission which is raised before the appellate authority by the assessee is clearly impermissible because what Section 147 requires is a formation of a reason to believe by the Assessing Officer. In the present case, there is clearly a want of compliance with the jurisdictional condition. The Assessing Officer has not formed a reason to believe that income has escaped assessment since the reopening is based purely on a contingency that may arise upon a particular outcome before the appellate tribunal.
Undoubtedly as counsel appearing on behalf of the Revenue submits the concept of a protective assessment is well known to the law of income tax in India. The basis on which a protective assessment is carried out is summed up succinctly in Sampath Ayengar's Law of Income Tax (11 th edition, Vol. VI, page 9724) :
"Protective assessment - The Assessing Officer may often have to assess the same income in more than one place. Sometimes they may be made by different officers as, for example, where an officer assessing A thinks that certain income belongs to him but another
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officer assessing B is of the opinion that the income is his. Sometimes the same officer may find that an assessee before him is returning a particular income but is of the opinion that it should be assessed in the hands of a firm or a family and not in the hands of the person who returned it. It has been held that the officer may, when in doubt, (Not otherwise : CIT v. Shri Ramchandraji Maharaj Ka Bada Mandir (1988) 73 CTR (MP) 79), to safeguard the interests of the Revenue assess it in more than one hand (Lalji Haridas v. ITO (1961) 43 ITR 387 (SC). But this procedure can be permitted only at the stage of the assessment as, at higher levels, it is possible for the appellate or revisional authority to give a clear finding as to the assessee who is liable to be so assessed leaving the one who is aggrieved to get redress by appropriate proceedings. (See Dayabai v. CIT [1985] 154 ITR 248 (MP). In any event, if, at the stage of the Tribunal or High Court it is found that the same income is assessed in both places, the Department should provide relief suo motu to one of them. (ITO v. Bachu Lal Kapoor [1966] 60 ITR 74 (SC). There can be precautionary assessments but not protective recovery. (CIT v. Cochin Co.Pvt. Ltd. [1976] 104 ITR 655 (Ker.). But where an assessment is intended to be protective, it should be so expressed. (CIT v. Khalid Mehdi [1987] 165 ITR 685 (AP).
A protective assessment as the learned author indicates (Vol. 1 Page 272) is regarded as being protective because it is an assessment which is made ex abundanti cautela where the department has a "doubt as to the person who is or will be deemed to be in receipt of the income". A departmental practice, which has gained judicial recognition, has emerged where it appears to the Assessing Officer that income has been received during the relevant Assessment Year, but where it is not clear or unambiguous as to who has received the income. Such a protective assessment is carried out in order to ensure that income may not escape taxation altogether particularly in cases where the Revenue has to be protected against the bar of limitation. But equally while a protective assessment is permissible a protective recovery is not allowed. However,
13 ITA No.1719/PUN/2019 A.Y. 2007-08, Jayant Kaneria,
such an exercise which is permissible in the case of a regular assessment must necessarily yield to the discipline of the statute where recourse is sought to be taken to the provisions of Section 148. Protective assessments have emerged as a matter of departmental practice which has found judicial recognition. Any practice has to necessarily yield to the rigour of a statutory provision. Hence, when recourse is sought to be taken to the provisions of Section 148, there has necessarily to be the fulfillment of the jurisdictional requirement that the Assessing Officer must have reason to believe that income has escaped assessment. To accept the contention of the Revenue in the present case would be to allow a reopening of an assessment under Section 148 on the ground that the Assessing Officer is of the opinion that a contingency may arise in future resulting an escapement of income. That would, in our view, be wholly impermissible and would amount to a rewriting of the statutory provision. Moreover, the reliance which is sought to be placed on the provisions of Explanation 2(a) to Section 147 is misconceived. Explanation 2 provides a deeming definition of cases where income chargeable to tax has escaped assessment and clause (a) includes a case where no return of income has been furnished by the assessee although his income or the income of any other person in respect of which he is assessable exceeds the maximum amount which is not chargeable to tax. As the reasons which have been disclosed to the assessee would indicate, this is not a case where an assessee has not filed a return of income simplicitor. The whole basis of the reopening is on the hypothesis that if the provisions of Sections 61 to 63 are attracted as has been claimed by the assessee, and the income of Rs.32.83 Crores which has been claimed by the assessee to be exempt is treated as exempt, in that event an alternate basis for taxing the income in the hands of the AOP of the contributories is sought to be set up. For the reasons already indicated, the entire exercise is only contingent on a future event and a consequence that may ensure upon the decision of the Tribunal, that again if the Tribunal were to hold against the Revenue. A reopening of an assessment under Section 148 cannot be justified on such a basis. There has to be a reason to believe that income has escaped assessment. 'Has
14 ITA No.1719/PUN/2019 A.Y. 2007-08, Jayant Kaneria,
escaped assessment' indicates an event which has taken place. Tax legislation cannot be rewritten by the Revenue or the Court by substituting the words 'may escape assessment' in future. Writing legislation is a constitutional function entrusted to the legislature.
In the view which we have taken it has not been necessary for the Court nor is it appropriate for this Court to enter upon the merits of the other issues raised by the learned senior counsel appearing on behalf of the assessee. The appeal before the Tribunal is still pending and hence, it would not be proper for this Court to express any opinion thereon. We clarify that we are allowing this petition on the ground that the jurisdictional requirement for reopening an assessment under Section 147 for Assessment Year 2008-09 has not been fulfilled.”
Mr. Walimbe strongly defended the Assessing Officer’s foregoing reopening. He highlighted the fact that the Assessing Officer had made a substantive addition reassessment herein dated 23.12.2011 invoking section 2(22)(e) deemed dividend addition of Rs.1,02,00,000/- as assessee was the registered as well as beneficial share holder in NKAPL (a private limited company) who had made payment of the sum in issue to M/s. N.K. Associates.
We have given our thoughtful consideration to the foregoing rival pleadings and find merit in assessee’s stand. It has come on record that the Assessing Officer went on to record the impugned reopening only on “protective basis” despite the facts that the departmental authorities had already assessed the very sum in the case of the recipient’s M/s. N. K. Associates(supra). We further find that the CIT(A)’s order deleted the
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impugned addition which was further affirmed in Revenue’s appeal ITA No. 1116 /PUN/ 2010 on 13.02.2011 i.e. very well after section 148 notice issued on 21.07.2010. Faced with this situation, we adopt the hon’ble jurisdiction high court’s detailed discussion mutatis mutandis to quash the impugned reopening initiated on “protective” basis. Ordered accordingly.
All other pleadings on merits are rendered academic.
This assessee’s appeal is allowed in above terms.
Order pronounced in the Open Court on this 19th day of July, 2022.
Sd/- Sd/- (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 19th July, 2022. Ashwini आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : अपऩलधथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(A)-3, Pune. 4. The Pr.CIT-2, Pune. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “ए” बेंच, पपणे / DR, ITAT, “A” Bench, Pune. गधर्ा फ़धइल / Guard File. 6. आदेशधनपसधर / BY ORDER,
// True Copy // Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune.
16 ITA No.1719/PUN/2019 A.Y. 2007-08, Jayant Kaneria,
S.No. Details Date Initials 1 Draft dictated on 08.06.2022 2 Draft placed before author 04.07.2022 Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement on 7 Date of uploading of Order 8 File sent to Bench Clerk 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order