EMPEE HOLDINGS LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against appellate order

dated 07.03.2014 passed by learned Commissioner of Income Tax

(Appeals)-II, Chennai (hereinafter called “the CIT(A)”), in ITA

No.1419/13-14 for assessment Year(ay) 2005-06, the appellate

proceedings had arisen before learned CIT(A) from assessment order

dated 16.12.2011 passed by learned Assessing Officer ( hereinafter called

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“ the AO”) u/s 143(3) read with Section 147 of the Income-tax Act, 1961(

hereinafter called “ the Act”) for ay 2005-06.

with the Income-Tax Appellate Tribunal, Chennai (hereinafter called “the

Tribunal”) read as under:-

“1. The order of The Commissioner of Income Tax (Appeals) II, Chennai -600 034 dated 07.03.2014 in I.T.A.No.1419/2013-14 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case. 2. The CIT (Appeals) erred in sustaining the assumption of jurisdiction u/s 147 of the Act and erred consequently in confirming the re-assessment framed u/s 143(3) r/w section 147 of the Act without assigning proper reasons and justification. 3. The CIT (Appeals) failed to appreciate that the order of re-assessment under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law. 4. The CIT (Appeals) erred in sustaining the action of the Assessing Officer in bringing to tax Rs.5,45,76,988/- as deemed dividend u/s 2(22)(e) of the Act in the computation of taxable total income without assigning proper reasons and justification. 5. The CIT (Appeals) failed to appreciate that the provisions of section 2(22)(e) of the Act had no application to the facts of the case and ought to have appreciated that transactions for business purpose based on commercial exigencies would not fall within the purview of section 2(22)(e) of the Act thus vitiating his action in relation thereto. 6. The CIT (Appeals) went wrong in recording the findings in this regard in para 4.2.3 of the impugned order without assigning proper reasons and justification. 7. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before the passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law. 8. The Appellant craves leave to file additional grounds/arguments at the time of hearing.” 3. The brief facts of the case are that the assessee filed its return of

income for impugned ay: 2005-06 on 31.10.2005 returning a loss of

`4,98,660/-. The assessment was framed by AO u/s.143(3) of the 1961

Act on 17.12.2007 assessing the income of the assessee at `1,73,640/-.

The AO later observed that income of the assessee chargeable to tax has

escaped assessment, and a notice u/s.148 was issued by the AO to the

assessee on 31.03.2010. The assessee in response to aforesaid notice

issued by AO u/s.148 of the 1961 Act, submitted before AO to treat return

of income originally filed on 31.10.2005 as return of income filed in

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pursuance to notice dated 31.03.2010 issued u/s.148 of the 1961 Act.

Thus, it is an admitted position between rival parties that assessment was

originally framed by AO u/s.143(3) of the Act and secondly it is also an

admitted position that notice u/s.148 was issued by AO to the assessee

within four years from the end of the assessment year and hence proviso

to Section 147 is not applicable. The main reason for re-opening of the

concluded assessment was that the assessee held 29,67,606 shares in its

subsidiary company M/s Empee Distilleries Ltd in which it held 41.78%

shareholding of the aforesaid subsidiary company. The aforesaid

subsidiary company had accumulated profits to the tune of `6,69,15,506/-

and assessee company had taken a loan of `5,45,76,988/- from its

aforesaid subsidiary company which in the opinion of the AO had infringed

provisions of Section 2(22)(e) of the 1961 Act. The assessee was asked

by AO to explain as to why provisions of Sec.2(22)(e) of the 1961 Act be

not invoked and the said loan/advance of `5,45,76,988/- received by

assessee from its subsidiary company namely M/s Empee Distilleries

Limited be not treated as deemed dividend in the hands of the assessee

and accordingly brought to income-tax. The assessee submitted before

the AO as under:

"The transaction between the assessee and M/s.Empee Distilleries Ltd., is for the purpose of business and to promote mutual business interest. Such commercial transactions are outside the purview of the said deeming provisions of the Act. Even on the other facet and based on the judicial precedents, it is submitted that the commercial transaction between the group companies would be the outside scope of the deeming provisions under consideration. The various conditions envisaged for applying the deeming provisions u/s.2(22)(e) of the Act are not cumulatively satisfied and complied with on the facts of the present case and hence the assessment of deemed dividend is wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law. The loan or advance should be understood with reference to the benefit derived there from by the registered share holder and not with reference to the normal commercial transaction between two companies".

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In nut shell, the assessee submitted before the AO that these are

commercial transactions between assessee and M/s. Empee Distilleries

Limited for the purposes of business and to promote mutual business

interest and hence deeming fiction of provisions of Sec.2(22)(e) of the

1961 Act are not attracted.

3.2 The AO on the other hand referred to provisions of Section 2(22)(e)

of the 1961 Act and held that provision of Section 2(22)(e) of the 1961

Act are clearly applicable and said sum is chargeable to income-tax in the

hands of the assessee because the said subsidiary company of the

assessee namely M/s Empee Distilleries Limited possessed accumulated

profits which are utilized to release this amount to assessee as

loan/advance instead of paying the same as dividend and thus not paying

taxes on distribution of accumulated profits which were distributed by said

M/s Empee Distilleries Limited to assessee as loan/advances , vide

assessment order dated 16.12.2011 passed by the AO u/s 143(3) read

with Section 147 of the 1961 Act.

16.12.2011 passed by AO u/s 143(3) read with Section 147 of the 1961

Act filed first appeal before Ld.CIT(A) and challenged the additions made

by AO both on legal grounds challenging the re-opening of the assessment

u/s.147 of the Act and also challenging the additions made on merits by

invoking provisions of Section 2(22)(e) of the 1961 Act by brining to tax

loans/advances received by assessee from its aforesaid subsidiary

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company to the tune of `5,45,76,988/- . The Ld.CIT(A) was pleased to

dismiss the appeal of the assessee on both the grounds. While dismissing

appeal of the assessee on legal ground challenging invocation of

provisions of Section 147 of the 1961 Act , the learned CIT(A) refers to

the provisions of the Section 147 of the 1961 Act and observed that if

there is an assessable income for any ay which was not brought to tax,

will constitute reason for re-opening of the concluded assessment u/s 147

of the Act. The learned CIT(A) referred to Explanation 2 to Section 147 of

the 1961 Act and held that in case where scrutiny assessment has been

framed u/s 143(3) of the 1961 Act, and there is an underassessment of

the taxable income , or assessing the income at too low a rate, or granting

of excessive relief , or granting/computation of excessive loss or

depreciation allowance or any other allowance shall constitute valid

reasons for reopening of the concluded assessment by invoking provisions

of Section 147 of the 1961 Act. The learned CIT(A) observed that in the

present case, the assessee has during the previous year relevant to

impugned ay had received certain loans/advances from a subsidiary

company in which assessee held 41.78% of the shares, which constitutes

deemed dividend within provisions of Section 2(22)(e) of the 1961 Act. It

was observed by learned CIT(A) that these details were neither available

to AO at the time of original assessment nor assessee furnished these

details before the AO. It was observed by learned CIT(A) that AO did not

form any opinion on this issue of chargeability of said loans and advances

received by assessee from its subsidiary during the year , as income in the

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hands of the assessee as deemed dividend u/s 2(22)(e) of the 1961 Act

and hence there is no question of change of opinion by the AO. The

learned CIT(A) observed that reopening is done within four years from the

end of assessment year and hence proviso to Section 147 of the 1961 Act

is not applicable. The learned CIT(A) observed that income of the

assessee was under-assessed and this is the information which came to

possession of the AO as to escapement of income chargeable to tax, and

thus reopening of the concluded assessment by invoking provisions of

Section 147 of the 1961 Act was upheld by learned CIT(A), vide appellate

order dated 07.03.2014 passed by learned CIT(A).

4.2 The learned CIT(A) also upheld the additions made by the AO on

merits in brining to tax an amount of ` 5,45,76,988/- received by

assessee from its subsidiary company as loan/advance during previous

year relevant to impugned ay, as deemed dividend u/s 2(22)(e) of the

1961 Act. The learned CIT(A) observed that assessee held 41.78% of

shares in its subsidiary company namely M/s Empee Distilleries Limited

and accumulated profits available with said subsidiary company namely

M/s Empee Distilleries Limited were to the tune of ` 6,69,15,506/-. Thus,

loans/advances received by assessee from said M/s Empee Distilleries

Limited to the tune of ` 5,45,76,988/- during previous year relevant to

impugned ay was upheld to be deemed dividend u/s 2(22)(e) by learned

CIT(A). The assessee, however claimed before learned CIT(A) that this

amount received by assessee from M/s Empee Distilleries Limited was not

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loans/advances and the aforesaid amount was received for business

purposes and based on commercial expediency, the provisions of Section

2(22)(e) of the 1961 Act are not attracted. The assessee submitted that if

at all this receipt of loan/advance from subsidiary company is to be

treated as hit by provisions of Section 2(22)(e) of the 1961 Act, then

revaluation reserves of profit from sale of assets at Palakkad has to be

excluded which presently forms part of ‘General Reserves’. The assessee

submitted before learned CIT(A) that actual profits which are shown in

‘Profit and Loss Appropriation’ account are to the tune of ` 48.95 lacs

which are only to be considered for computing accumulated profits while

invoking provisions of Section 2(22)(e) of the 1961 Act. It was observed

by Ld.CIT(A) that no evidence has been brought on record by assessee to

prove that there is any business expediency to take loans/advance from

its subsidiary company namely M/s Empee Distilleries Ltd., and mere bald

statements are made that these are business transactions without any

cogent reasons/justification. The ld CIT(A) observed that there are no

business transactions between assessee and said M/s Empee Distilleries

Limited. The learned CIT(A) further observed that all transactions between

assessee and said M/s Empee Distilleries Limited are on account of receipt

and payment of money and there are no business transactions . The

learned CIT(A) observed that onus is on assessee to prove that there were

business expediency in these transactions and it was for assessee to prove

through cogent evidences as to nature of transaction between assessee

and said M/s Empee Distilleries Limited. The learned CIT(A) observed that

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assessee has not furnished any such details or compelling conditions

before M/s Empee Distilleries Limited while making these payments to the

assessee and hence assessee claim of business expediency in receiving

these amounts from its subsidiary company namely M/s Empee Distilleries

Limited stood rejected by learned CIT(A). Thus, learned CIT(A) upheld

the assessment order passed by the AO by confirming the additions made

on merits by invoking provisions of Section 2(22)(e) of the 1961 Act .

With respect to claim of the assessee that if at all provisions of Section

2(22)(e) of the 1961 Act are to be invoked, then in that condition only

amount of ` 48.95 lacs can be brought to tax which stood credited in the

head ‘Profit and Loss Appropriation Account’ under the head ‘Reserves and

Surplus’ and amount of Revaluation Reserves arising out of sale of

Palakkad unit cannot be brought to tax, the learned CIT(A) was pleased to

restore the matter to the file of the AO for verification with further

direction that Section 2(22)(e) contemplates accumulated profits which

means not only profits derived from business activity, but also includes all

other profits including capital gains on sale of assets , etc. and hence

additions as were made by AO by invoking provisions of Section 2(22)(e)

of the 1961 Act were confirmed by learned CIT(A) subject to verification

by the AO of actual accumulated profits in the hands of M/s Empee

Distilleries Limited, vide appellate order dated 07.03.2014 passed by

learned CIT(A).

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second appeal with tribunal. The learned Counsel for assessee opened

argument and submitted that assessee is challenging re-opening of the

concluded assessment by Revenue by invoking provisions of Section 147

of the 1961 Act. The learned counsel for the assessee submitted that

return of income was originally filed on 31.10.2005 for impugned ay and

assessment was originally framed by AO u/s.143(3) of the Act , vide

assessment order dated 17.12.2007. It was submitted that re-opening of

concluded assessment was done by AO u/s 147 of the 1961 Act by issuing

notices u/s 148 on 31.03.2010 which is within 4 years from the end of the

assessment year and re-assessment was finally framed by AO , vide

assessment order dated 16.12.2011 passed u/s.143(3) r.w.s.147 of the

1961 Act. It was submitted by learned counsel for the assessee that no

tangible material came in possession of the AO to invoke provisions of

Sec.147 of the 1961 Act. The Ld.Counsel for assessee relied upon the

decision of Hon’ble Madras High Court in the case of M/s.Tenzing Match

Works, Sivakasi v. DCIT in Tax Case (Appeal) No.702 of 2009, dated

11.07.2019. The learned counsel for the assessee also relied upon

decision of Hon’ble Madras High Court in the case of TANMAC India v.

DCIT reported in [2017] 78 taxmann.com 155 (Madras). He also relied

upon decision of Hon’ble Supreme Court in the case of GKN Driveshafts

(India) Ltd. v. ITO [2003] 259 ITR 19(SC). The learned counsel for the

assessee also relied on Explanation 2 to Section 147 of the 1961 Act. It

was submitted by learned counsel for the assessee that assessee is

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holding company of M/s Empee Distilleries Ltd. . These are transactions

between group companies and by virtue of transactions between holding

company and subsidiary company, these are itself to be categorized as

business transactions. It was fairly submitted by learned counsel for the

assessee that these transactions were not scrutinized by AO during the

course of original assessment, but these transactions were scrutinized in

re-assessment proceedings conducted by AO u/s 147/148 of the 1961 Act,

which proceedings are now under challenge before this tribunal. The

learned counsel for the assessee brought our attention to para No.4.2.1

of the appellate order passed by learned CIT(A) and submitted that these

are business transactions between group companies governed by

commercial expediency. The learned counsel for the assessee also relied

upon CBDT Circular No.19/2017 [F.No.279/Misc./140/2015/ITJ] dated

12.06.2017.

5.2 The Ld.DR on the other hand submitted that re-opening of the

concluded assessment by invoking provisions of Section 147/148 of the

1961 Act was done within four years from the end of the assessment year

and proviso to Section 147 of the 1961 Act is not applicable. It was

submitted that this issue was not examined by the AO in the original

assessment . It was submitted by learned DR that income has been

brought to tax by invoking provisions of Sec.2(22)(e) of the Act as

deemed dividend in the hands of the assesee and the assessee could not

explain/show commercial expediency in these transactions of granting

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loan by subsidiary company namely M/s. Empee Distilleries Limited to the

assessee. The learned DR would submit that only bald statements are

made that these transactions between assessee and said M/s Empee

Distilleries Limited were governed by commercial expediency but no

cogent material/explanations are submitted to prove that these were

business transactions and there was infact commercial expediency which

governed the execution of these transactions . Our attention was drawn

by learned DR to para no.4.2.3 of the appellate order passed by

Ld.CIT(A). The learned DR would rely on decision of Hon’ble Karnataka

High Court in the case of United Spirits Ltd. v. DCIT reported in [2018] 90

taxmann.com 86 (Karnataka).

5.3 The Ld.AR submitted in rejoinder that it is a case of transactions

between holding company and subsidiary company, which itself shows

that these transactions are governed by commercial expediency and

hence there is no need to go further to prove that these are business

transactions governed by commercial expediency .

record including cited case laws. We have observed that assessee has filed

return of income originally with Revenue for impugned ay: 2005-06, on

31.10.2005. The said return of income was selected by Revenue for

framing scrutiny assessment u/s.143(3) r.w.s.143(2) of 1961 Act , which

assessment was framed by AO on 17.12.2007. The assessee’s

assessment was re-opened by AO u/s.147 of the 1961 Act by issuing

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notice dated 31.03.2010 u/s.148 of the Act, to the assessee. It is an

admitted position between rival parties that originally scrutiny assessment

was framed by Revenue u/s 143(3) of the 1961 Act and also that the said

reopening of concluded assessment by invoking provisions of Section 147

was done by Revenue within 4 years from the end of the assessment year

and hence proviso to Sec.147 is not applicable. The proviso to Section 147

of the 1961 Act reads as under:

“Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.”

Thus, as could be seen from the aforesaid proviso that it , inter-alia,

provides that where an assessment has been originally framed u/s 143(3)

of the 1961 Act, no action can be taken against the assessee u/s 147 of

the 1961 Act after expiry of four years from the end of the relevant

assessment year, unless any income chargeable to tax has escaped

assessment for such assessment year by reason of failure on the part of

the assessee to disclose truly and fully all material facts necessary for

framing assessment, for that assessment year. Thus, even if there is a

complete disclosure then also the AO shall be entitled to invoke provisions

of Section 147 of the 1961 Act for reopening of the concluded assessment

within four years from end of the relevant assessment year , provided

other ingredients for reopening of the concluded assessee as are

enshrined u/s 147/148 of the 1961 Act are fulfilled. Present is a case

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before us, wherein originally assessment was framed by Revenue u/s

143(3) of the 1961 Act and reopening was done within four years from the

end of the assessment year and hence aforesaid proviso shall have no

applicability .

6.2 The first Explanation to Section 147 of the 1961 Act provides that

production before AO of a account books or other evidence from which

material evidence with due diligence could have been discovered by the

AO will not necessarily amount to disclosure within meaning of the

foregoing proviso and if there is an tangible incriminating material /

information with AO even if emanating from the records before the AO

which leads to AO having reasons to believe that income of the assessee

has escaped assessment, the AO shall be justified in invoking provisions of

Section 147 of the 1961 Act .The Explanation 1 is reproduced hereunder:

“Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.” Thus, merely because books of accounts were produced by assessee

before the AO during course of original assessment proceedings and from

such accounts while framing original scrutiny assessment u/s 143(3), the

AO could have found out with due diligence that there are transactions

between assessee and its subsidiary which had infringed provisions of

Section 2(22)(e) of the 1961 Act will not be a bar for AO to validly

proceed to invoke provisions of Section 147 of the 1961 Act , provided

other ingredients for invoking provisions of Section 147 of the 1961 Act

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are fulfilled. It is an admitted position between rival parties that the AO

did not enquire about these loan/advance transactions between assessee

and its subsidiary company M/s Empee Distilleries Limited during the

course of original assessment proceedings conducted by the AO u/s

143(3) read with Section 143(2) of the 1961 Act and admittedly the

assessee did not furnish details of transactions between itself and M/s

Empee Distilleries Limited before AO during the course of original

assessment proceedings. Thus, the AO did not form any opinion on

chargeability to tax of the said loans and advances received by assessee

from its subsidiary company M/s Empee Distilleries Limited as deemed

dividend u/s 2(22)(e) of the 1961 Act during the course of original

assessment framed by it and hence there is no question of any change of

opinion by the AO while reopening concluded assessment by invoking

provisions of Section 147 of the 1961 Act

6.3 The second Explanation to Section 147 of the 1961 Act clearly

stipulates vide clause (c)(i) to second Explanation that wherein originally

assessment was framed u/s 143(3) of the 1961 Act , but income

chargeable to tax has been under assessed , the AO shall have powers to

invoke provisions of Section 147 of the 1961 Act for reopening the

concluded assessment as said under-assessment shall be deemed to be a

case wherein income of tax-payer has escaped assessment .The second

Explanation to Section 147 of the 1961 Act is reproduced hereunder:

“Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—

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(a) where no return of income has 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 this Act during the previous year exceeded the maximum amount which is not chargeable to income- tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (c) where an assessment has been made, but— (i) income chargeable to tax has been under-assessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.]”

6.4 Thus, for invoking provisions of Section 147 of the 1961 Act , the AO

shall have reasons to believe that income chargeable to income-tax has

escaped assessment and there should be tangible incriminating material

before AO having live link and nexus with formation of belief that income

chargeable to tax has escaped assessment. In instant case before us , it is

an admitted position that original scrutiny assessment was framed by

Revenue u/s 143(3) read with Section 143(2) of the 1961 Act and

reopening of the concluded assessment was sought to be done by

Revenue by invocation of provisions of Section 147 of the 1961 Act within

four years from end of the relevant assessment year and hence proviso to

Section 147 of the 1961 Act is not applicable to instance case before us.

Thus, if any tangible incriminating material come to possession of the AO

which prima-facie reflect escapement of income chargeable to tax could be

a basis for AO to have reasons to believe that income chargeable to tax

has escaped income and then to initiate reopening proceedings u/s

147/148 of the 1961 Act. At this stage for invoking provisions of Section

147 of the 1961 Act to initiate reassessment proceedings what is required

is a prima-facie view that income chargeable to tax of the assessee has

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escaped assessment based on tangible incriminating material in

possession of the AO having live link/nexus with formation of belief that

income of the assessee chargeable to tax has escaped assessment. Thus,

at the stage of invocation of provision of Section 147 of the 1961 Act for

initiating reopening of the concluded assessment what is required is prima

facie material to show income has escaped assessment and not conclusive

proof with evidence that income chargeable to tax of the assessee has

escaped assessment. The Courts cannot go into sufficiency or correctness

of the material before upholding invocation of provisions for initiating

reopening of concluded assessment u/s 147 of the 1961 Act. The decision

of Hon’ble Supreme Court in the case of Raymond Woolen Mills Limited v.

ITO reported in (1999) 236 ITR 34(SC) is relevant , wherein Hon’ble

Supreme Court held as under:

“In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs.”

6.5 At this stage it will be relevant to refer to decision of Hon’ble Supreme

Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers Private Limited

reported in (2007) 291 ITR 500(SC) , wherein Hon’ble Supreme Court

dealt with amended provisions of Section 147 of the 1961 Act and held as

under:

“16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment

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year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC). 17. The scope and effect of section 147 as substituted with effect from 1-4-1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. 18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued.”

6.6 It is also pertinent to mention at this stage , decision of Hon’ble

Bombay High Court in the case of Rabo India Finance Limited v. DCIT

reported in (2013) 356 ITR 200(Bom.), wherein Hon’ble Bombay High

Court elaborately discussed conditions required for reopening of the

concluded assessment by invoking provisions of Section 147 of the 1961

Act within four years from the end of assessment year and observed that

reopening based on tangible material found during the course of

assessment proceedings of subsequent year , leading to a prima facie

belief that income chargeable to tax for earlier ay’s have escaped

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assessment could be basis for reopening of concluded assessment for

earlier ay’s, wherein Hon’ble Bombay High Court held as under:

“4. In the present case, the assessment is sought to be reopened within a period of four years of the end of the relevant Assessment Year. Where an assessment is sought to be reopened beyond a period of four years, the proviso to Section 147 stipulates as a jurisdictional requirement that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that Assessment Year. Such a requirement which the proviso to Section 147 stipulates in respect of a reopening beyond a period of four years is evidently not extrapolated to a situation where as in the present case the reopening is within a period of four years. Where a reopening of an assessment under Section 148 takes place within a period of four years, the test that has been laid down by the Supreme Court in the CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 is whether the Assessing Officer had tangible material to come to the conclusion that there is an escapement of income from assessment. The Supreme Court has held that the "reason to believe" that any income chargeable to tax has escaped assessment cannot be founded on a mere change of opinion. The power to reassess is not in the nature of a power to review. Hence, the true test to be applied, where a reopening takes place within a period of four years, as in the present case, is whether there exists tangible material on the basis of which the Assessing Officer has proceeded to reopen the assessment. That determination has to be made on the basis of the reasons which are disclosed to the assessee. For it is those reasons which form the foundation of the action of the Assessing Officer and form the basis on which the belief that income has escaped assessment is formed. Hindustan Lever Ltd v. R.B. Wadkar, Asstt. CIT [2004] 268 ITR 332/137 Taxman 479 (Bom.). 5. The judgments of the Supreme Court on the subject contain a clear elaboration of principle in which it has been held that an Assessing Officer acts within jurisdiction in reopening an assessment on the basis of information which comes to him after the original assessment and during the course of the assessment proceedings for a subsequent assessment year. This principle was laid down in a judgment of the Supreme Court in Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 while construing the expression "information" in Section 34(1)(b) of the Income Tax Act 1961. A similar principle of law was enunciated in a subsequent decision of the Supreme Court in Claggett Brachi Co. Ltd. v. CIT [1989] 177 ITR 409/44 Taxman 86 where the Income tax Officer came to realise that income had escaped assessment for two assessment years when he was in the process of making an assessment for a subsequent assessment year. While making that assessment, he came to know from the documents pertaining to that assessment that the overhead expenses related to the entire business including the business as commission agents and were not confined to the business of purchase and sale. The Supreme Court held that it is true that this information could have been acquired by the Income-tax Officer if he had exercised due diligence at the time of the original assessment itself. The reopening of the assessment was upheld, on the basis of information which came into the possession of the Assessing Officer when taking assessment proceedings for the subsequent year. 6. In Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC) an assessment was sought to be reopened and the reasons recorded for reopening under Section 147(a) of the Income Tax Act 1961 showed that according to the Revenue the assessee was charging to its Profit and Loss Account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc. However, while valuing its closing stock, the elements of fiscal duty and other direct manufacturing costs were not included, as a result of which there was an undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in an assessment proceeding of a subsequent assessment year. While upholding the reopening, the Supreme Court observed as follows : "In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed."

ITA No.1503/Chny/2014 :- 19 -:

6.7 The decision of Hon’ble Bombay High Court in the case of Export

Credit Guarantee Corporation of India Limited v. Addl. CIT reported in

(2013) 350 ITR 651(Bom) is also relevant.

6.8 The assessee has relied upon decision of Hon’ble Madras High Court in

the case of Tanmac India(supra) , this case was decided by Hon’ble

jurisdictional High Court on facts of that case which are distinguishable as

to present case before us , as in that case return of income was processed

u/s 143(1)(a) in the year 1998 when there was manual processing of the

returns and thus, while processing the return , the Court observed that

the AO must have gone through the return of income and its enclosure,

while electronic processing of return of income only came in 2003 was the

observation of the Hon’ble High Court. We are concerned with ay: 2005-

06 wherein electronic processing of returns was undertaken. Secondly

Hon’ble High Court observed that AO has reopened the assessment based

ITA No.1503/Chny/2014 :- 20 -:

on same stale material which was available with the AO while processing

of return of income u/s 143(1)(a) and there was no tangible material

available with AO to have prima facie reason to believe that income of the

tax-payer has escaped assessment. Thirdly, the partner of the tax-payer

firm retired from the assessee firm in that case and the same person also

retired from two other partnership firms as partner and assessment in

case of both the firms were made by Revenue u/s 143(3) of the 1961 Act ,

while later on provisions of Section 148 of the 1961 Act were invoked by

Revenue, and in both these cases, the tribunal held that the Revenue

lacks jurisdiction to reopen concluded assessment and reopening was held

to be bad in law by tribunal.

6.9 The assessee had also relied upon judgment of Hon’ble Madras High

Court in case of Tenzing Match Works v. DCIT in Tax Case(Appeal) No

702, vide judgment dated 11.07.2019 to contend that reopening is bad in

law. In this case, reopening of the concluded assessment by invoking

provisions of Section 147 of the 1961 Act was done after four years from

the end of relevant ay :2001-02, by issuance of notice dated 22.11.2006,

u/s 148 of the 1961 Act and hence proviso to Section 147 is applicable

and reopening can be validly done in such cases only when there is an

failure on the part of the assessee to disclose truly and fully material all

material facts in the return of income filed with the Revenue, which are

necessary for framing assessment, for that assessment year. However, in

the instant case before us , the reopening is done within four years from

ITA No.1503/Chny/2014 :- 21 -:

the end of assessment year and proviso to Section 147 of the 1961 Act is

not applicable. Thus, this case is distinguishable.

6.10 The assessee has also relied upon decision of Hon’ble Supreme Court

in the case of GKN Drive Shaft(supra), even on being asked by the Bench,

the learned counsel for the assessee could not demonstrate whether the

assessee asked for reasons for reopening of the concluded assessment or

objected to reopening of the concluded assessment before the AO , as the

assessee also chose not to file any paper book with the tribunal.

6.11 In the instant case before us, the AO is in possession of tangible

incriminating material that assessee had received loans/advances from its

subsidiary company namely M/s Empee Distilleries Limited to the tune of

Rs ` 5,45,76,988/- in which assessee held 41.78% shares and the said

subsidiary company possessed accumulated profits to the tune of `

6,69,15,506/- , during year under consideration , thus, the assessee has

infringed provisions of Section 2(22)(e) of the 1961 Act. The assessee on

its part has not included in its return of income , the aforesaid amount as

deemed dividend as its income chargeable to tax being hit by provision of

Section 2(22)(e) of the 1961 Act . The AO might have received aforesaid

tangible information as to escapement of income chargeable to tax from

records itself before it but the same is valid for invocation of provisions of

Section 147 of the 1961 Act as there is no estoppel against law, more-so

provisions of Section 147 are invoked within four years from the end of

assessment year and proviso to Section 147 of the 1961 Act is not

ITA No.1503/Chny/2014 :- 22 -:

applicable . Thus, in our considered view, the AO has rightly invoked

provisions of Section 147 of the 1961 Act in reopening the concluded

assessment and we uphold reopening of the concluded assessment by the

AO on legal ground.We order accordingly

6.12 On merits, we have observed that the assessee had received

loans/advances from its subsidiary company M/s Empee Distilleries

Limited to the tune of ` 5,45,76,988/- during the year under consideration

in which subsidiary company, the assessee held 41.78% of shareholding

of that company, M/s Empee Distilleries Ltd.. The said subsidiary company

possessed accumulated profits to the tune of ` 6,69,15,506/- which is far

in excess of loans/advances granted to the assessee during the year under

consideration . Provisions of Section 2(22)(e) of the 1961 Act creates a

deeming fiction wherein it provides , inter-alia, that any payments of loans

and advances by a company, not being a company in which the public are

substantially interested to a shareholder being a person who is beneficial

owner of shares holding not less than 10% of the voting power , to the

extent to which the company possess accumulated profits shall be deemed

to be dividend and chargeable to tax in the hands of shareholder. The

purpose and intent behind the enactment of this provision is to curb

distribution of accumulated profits by closely held companies to its

shareholders holding shareholding in excess of prescribed percentage,

without payment of income-tax in the guise of loans/advances , to evade

taxes. Distribution of dividend is subject to payment of dividend

ITA No.1503/Chny/2014 :- 23 -:

distribution tax as also it is also taxable in certain situations in the hands

of recipients. The said Section 2(22) of the 1961 Act is reproduced

hereunder:

“ (22) 83-84“dividend” 85 includes—

***

***

(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) 88[made after the 31st day of May, 1987, by way of advance or loan to a shareholder 89, 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 87 ; but “dividend” does not include— (i) *** [(ia) *** (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; [(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A 94 of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).] Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. 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, [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]. [Explanation 3.—For the purposes of this clause,— (a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;]”

6.13 It is not the case of the assessee that payment of loan/advances

were made by said subsidiary company namely M/s Empee Distilleries

Limited to assessee in its ordinary course of business and covered by

exclusion to the ‘dividend’ under Section 2(22) of the 1961 Act. The

assessee has strenuously argued that the payment of loan/advances were

made by assessee’s subsidiary company namely M/s Empee Distilleries

Limited to assessee for business purposes governed by business

ITA No.1503/Chny/2014 :- 24 -:

expediency but what is the business purposes and/or business expediency

in granting these loans/advances are not brought on record by the

assessee even before us. Merely bald statements are made to this effect

that these transactions between assessee and its subsidiary company

namely M/s Empee Distilleries Limited were governed by business

expediency/business purposes and no cogent material/evidences are

brought on record to substantiate the commercial expediency or business

purposes for which loans/advances were granted. Merely stating that it is

a transaction between subsidiary company and holding company which

automatically leads to presumption that these are commercial transactions

for business purposes is not sufficient as it is only for such purposes to

curb this menace of transfer of accumulated profits in the garb of

advances/loans to shareholders holding shares above threshold limits by a

closely held company instead of distributing dividend after paying taxes,

this provisions of Section 2(22)(e) was brought into statute .The onus was

on assessee to demonstrate by cogent evidences that these receipt of

loan/advances during the year under consideration from its subsidiary

company was for business purposes governed by commercial expediency

which except from making bald statements by assessee even before us,

no evidence whatsoever is brought on record by the assessee. It is also an

admitted position that the AO did not made any enquiry during the course

of original assessment proceedings as to these transactions between

assessee and its aforesaid subsidiary company , nor did assessee placed

any material before the AO during the course of original assessment

ITA No.1503/Chny/2014 :- 25 -:

proceedings conducted by the AO u/s 143(3) read with Section 143(2) of

the 1961 Act on this issue . Thus, no material/evidence is brought on

record to prove that AO made enquiries during the course of original

assessment proceedings on this issue. Thus, there is no question of

change of opinion as no opinion was formed by AO during course of

original assessment proceedings on this issue. The reopening in the

instant case is sought to be done within four years from the end of

relevant assessment year and proviso to Section 147 is not applicable. It

will be relevant to produce decision of Hon’ble Gujarat High Court in the

case of Chunibhai Ranchhodbhai Dalwadi v. ACIT reported in (2016) 388

ITR 130(Guj.) , wherein Hon’ble Gujarat High Court held as under:

“7. Regarding the validity of reassessment proceedings, we may recall the Assessing Officer in his reasons had stated that the assessee had sold immovable property vide sale deed dated April 19, 2006. The sale value declared was Rs. 87.71 lakhs (rounded off). However, the sale deed was registered with the Sub-Registrar, Nadiad on April 19, 2006 on which registration charge of Rs. 1.32 lakhs (rounded off) and stamp duty of Rs. 11.92 lakhs (rounded off) was paid. He therefore, noted that as per the stamp duty, sale value determined by the stamp authorities would come to Rs. 2.12 crores (rounded off). He therefore, invoked section 50C and desired to treat the difference of Rs. 1.25 crores (rounded off) by way of deemed long term capital gains. He therefore, recorded the reason to believe that income chargeable to tax to the extent of Rs. 1.25 crores had escaped assessment. We do not find that the Assessing Officer lacked jurisdiction to reopen the assessment. It appears that the assessee had declared the sale consideration of the land in question as Rs. 87.71 lakhs where as had accepted the stamp valuation which would come to Rs. 2.12 crores considering the stamp duty of Rs. 11.92 lakhs affixed on the sale deed. It was in this background, the Assessing Officer invoked section 50C of the Act treating the difference as deemed long-term capital gains. When these facts were not on record, when the sale deed was not on record during the original assessment, this certainly is a case where the assessee failed to disclose truly and fully material facts necessary for assessment. In the order dated March 25, 2015, the Assessing Officer while disposing of the objections of the petitioner made the following observations : "The registered agreement (banakat) as claimed by you and referred to now, nowhere indicates that the land in question was agricultural land, it only gives the revenue survey details. Even during the assessment proceedings, no submission has been made to indicate that the land in question was agriculture land. You have submitted 7/ 12 extracts along with this letter dated March 23, 2015. The banakat as submitted during the assessment proceedings specifically contains that the land in question was agreed to be sold at Rs. 87,71,765 out of which an amount of Rs. 17,87,454 received as banakat and the assessee would not claim anything more than the agreed consideration. However, it is to bring to your notice the terms as mentioned in the banakat page 4 para 2 that the possession of the land agreed to be sold would not be given to the purchasers till the final registration is complete…… In the above background and the circumstances as mentioned in detail as above, it is clear that at the point of time when the sale deed was registered the land in question was non- agricultural land (which was duly converted by paying the necessary conversion charges by the purchasers) and accordingly as per the terms of the registered banakat the possession of the non-agricultural land was given to the purchasers, thus completing the sale and transfer of the land. Hence, the land in question purchased was non-agricultural land and accordingly the stamp registering authority had rightly applied the rates for non-agricultural land at the time of execution of the sale deed. In view of the above, the stamp rates charged by the

ITA No.1503/Chny/2014 :- 26 -:

Stamp Authority was for non-agricultural land and the Sub Registrar accordingly worked out the document value as Rs. 2.12,86,400. Thus. from the above it becomes amply clear that you have sold non-agricultural land whereas you have paid capital gains on agriculture land. The registration of banakat appears only to circumvent the due process of law to pay capital gains on non-agricultural land. By registering the banakat without releasing the possession of the land to the purchasers, you have in fact retained all the incumbent rights on the said land. It appears that by asking the purchasers to convert the said land into non-agricultural land you have tried to avoid incurring the cost of taking non-agricultural permission. Another pertinent point to mention in this sale transaction is that the purchasers are a charitable trust and agricultural land as claimed by you could not be purchased by them. Thus, the land. in question had to be compulsorily an non-agricultural land for the purchasers to take possession of the same. In view of the same, the above transaction of sale and transfer of the land as mentioned by you is non-agricultural land only and stamp duty rates have rightly been applied accordingly. Therefore, the capital gains on the land sale is as mentioned in the reasons for reopening the assessment proceedings." 8. Undisputedly, this issue was never examined by the Assessing Officer during the original assessment proceedings. Further, as noted, necessary and relevant information was not placed by the assessee during such proceedings. Reopening within four years was therefore, permissible. Regarding the question of invalidity or improper notice, such a contention has not been taken in the petition. Reassessment has already been framed. We leave it for the petitioner to raise the same in appellate proceedings, if so advised. Such contention is therefore, not examined in the present proceedings”

6.14 Further, the assessee has contended that profits on sale of Palakkad

Units which formed part of ‘General Reserves’ cannot be considered for

making additions u/s 2(22)(e) of the 1961 Act, we are afraid that this

contention of the assessee is fallacious as the intent and purpose of

Section 2(22)(e) of the 1961 Act is to curb the menace of distribution of

accumulated profits by a closely held company in which public are not

substantially interested by way of loans and advances to its shareholders

holding shares above threshold limits instead of distributing said

accumulated profits by way of dividend which are subject to tax by way of

dividend distribution tax or chargeable to tax in the hands of recipients in

certain cases. Thus, this contention of the assessee lacks merit and is

hereby rejected. Our view is supported by definition of accumulated profits

which is defined in Section 2(22)(e) of the 1961 Act itself in Explanation 1

and 2 , as under:

“Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. 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

ITA No.1503/Chny/2014 :- 27 -:

those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, 95[but shall not, where the liquidation is consequent on the compulsory acqui- sition 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].” 6.15 Thus, clearly capital gains except arising before 01st April , 1946 , or after 31st March, 1948 , and before 1st April , 1956, all other capital

gains are to be included. Thus, we hold that profit on sale of profits on

sale of Palakkad unit shall be included while computing accumulated

profits for making disallowance u/s 2(22)(e) of the 1961 Act, unless it falls

into exception as provided under Explanation 1 to Section 2(22)(e) of the

1961 Act. Thus, we direct AO to verify this limited point as to whether

capital gains on sale of Palakkad unit falls in the exempted period per

Explanation 1 to Section 2(22)(e) of the 1961 Act or not and then to bring

to tax said amount in the hands of the assessee u/s 2(22)(e) of the 1961

Act. Thus, on our considered view, the assessee does not have any case

on merit too . The assessee fails in this appeal. We order accordingly.

Chny/2014 for ay: 2005-06 stands dismissed.

Order pronounced on the 07th November, 2019 in Chennai.

Sd/- Sd/- (जॉज� माथन) (र$मत कोचर) (GEORGE MATHAN) (RAMIT KOCHAR) �या�यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER चे�नई/Chennai, 2दनांक/Dated: 07th November, 2019. TLN

ITA No.1503/Chny/2014 :- 28 -:

आदेश क- +�त$ल3प अ4े3षत/Copy to: 4. आयकर आयु5त/CIT 1. अपीलाथ*/Appellant 5. 3वभागीय +�त�न�ध/DR 2. +,यथ*/Respondent 6. गाड� फाईल/GF 3. आयकर आयु5त (अपील)/CIT(A)