NARENDRA M. RUIA,MUMBAI vs. INCOME TAX OFFICER 10(3)(1), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-13, Mumbai, dated 17.11.2017, which in turn arises from the order passed by the A.O under Sec. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (for short „Act‟), dated 30.03.2015. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal:

The appellant craves leave to add amend or alter any or all the grounds of appeal.”

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee, at the very outset of the hearing of the appeal objected to the assumption of jurisdiction by the A.O for reopening of the case under Sec.147 of the Act. The ld. A.R took us through the copy of the notice issued by the A.O under Sec. 148 of the Act, dated 25.03.2014 (Page 10) of assesses „Paper book‟ (for short „APB‟), and vehemently submitted that as the same was a „blank notice‟, thus nothing could be gathered therefrom. In the backdrop of his aforesaid contention, it was submitted by the ld. A.R that the assessment framed by the A.O on the basis of a vague notice issued under Sec.148, could not be sustained and was liable to be vacated. In support of his aforesaid contention, the ld. A.R relied on the judgment of the Hon‟ble High Court of Allahabad in the case of Madanlal Aggarwal Vs. CIT, Kanpur (1983) 144 ITR 746 (All). Further, the ld. A.R took us through the copy of the „reasons to believe‟ (Page 11-12 of „APB‟). It was submitted by the ld. A.R that there was no mention of the approval having been accorded by the CIT(A) under Sec. 151 of the Act. The ld. A.R further taking us through the approval obtained by the A.O from the Commissioner of Income-tax-8, Mumbai, dated 14.03.2014, submitted that the CIT while granting the sanction had adopted a casual approach and had at Column No. 12 merely scrolled “Yes” against the same. It was the contention of the ld. A.R that a bare perusal of the approval granted by the CIT revealed that he had adopted a casual approach, and the application of mind on his part was clearly amiss. On the basis of his aforesaid contention, it was averred by the ld. A.R that the very assumption of jurisdiction by the A.O for reopening the P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) case of the assessee under Sec.147 was devoid of any force of law, and thus liable to be vacated. The ld. A.R further took us through the relevant extract of the letter dated 13.03.2015 of the A.O, wherein the objection raised by the assessee as regards the reopening of his case under Sec.147 was disposed off by him. In the backdrop of the aforesaid contentions, it was the claim of the ld. A.R that the A.O had adopted a casual approach for reopening the case of the assessee, which not being in conformity with the settled position of law could not be sustained. In support of his aforesaid contention the ld. A.R relied on the following judicial pronouncements:

We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We shall first advert to the contentions advanced by the ld. A.R as P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) regards the validity of the jurisdiction assumed by the A.O for reopening the case of the assessee under Sec. 147 of the Act. We have perused the copy of the notice issued by the A.O under Sec.148 of the Act, dated 25.03.2014 (Page 10 of APB). We find that in the aforementioned notice, it was clearly mentioned that as the A.O has „reasons to believe‟ that the income of the assessee chargeable to tax for assessment year 2007-08 had escaped assessment within the meaning of Sec. 147 of the Act, thus on the said ground the assessee was called upon to furnish his return of income in the prescribed form within a period of 30 days from the date of service of the notice. Further, it was clearly mentioned in the notice that the same was being issued after obtaining the satisfaction of the Commissioner of Income Tax-8, Mumbai. We have deliberated at length on the contentions advanced by the ld. A.R as regards the validity of the aforesaid notice, and are unable to persuade ourselves to subscribe to the same. We are of the considered view that in no way the aforementioned notice which clearly spells out the requisite details can be held as vague as canvassed by the ld. A.R before us. Further, we are also not impressed with the contention of the ld. A.R that the notice issued by the A.O under Sec. 148 of the Act was a “blank notice”. The reliance placed by the ld. A.R on the judgment of the Hon‟ble High Court of Allahabad in the case of Madanlal Aggarwal Vs. CIT Kanpur (1983) 144 ITR 745 (All), being distinguishable on facts would not advance the case of the assessee. We find that in the aforementioned case as the A.O had failed to mention in the notice that the same was being issued to the assesses HUF, thus taking cognizance of the said material fact that the High Court had observed that the notice issued was clearly vague, and thus the proceedings following such an invalid notice would stand vitiated. Unlike the facts involved in the aforementioned case, no such infirmity does emerge from the notice issued by the A.O under Sec. 148 in the case before us. We, thus, in terms of our aforesaid observations decline to accept the contention of the ld. A.R that as the assessment was framed on the basis of a vague notice, thus the same was liable to be vacated.

Rather, we are of a strong conviction that what is expected on the part of the sanctioning authority at the time of granting of approval under Sec. 151(1) of the Act, is an expression of his satisfaction on the reasons recorded by the A.O, that it is a fit case for issuance of a notice under Sec.148 of the Act. We are of the considered view, that as the necessary satisfaction of the CIT-8, Mumbai is clearly discernible from a perusal of the “form for obtaining the approval” to which our attention has been drawn by the ld. A.R, thus no infirmity as regards the grant of sanction by the aforementioned authority does emerge from the record.

We have perused the judicial pronouncements relied upon by the ld. A.R, in order to impress upon us that the A.O had wrongly assumed jurisdiction for reopening of the case of the assessee under Sec.147 of the Act. We are of the considered view that the judicial pronouncements relied upon by the ld. A.R being distinguishable on facts would thus not assist the case of the assessee before us. In the case of Dulraj U. Jain Vs. ACIT & Ors. (C.W.P No. 1641 of 2018; dated 06.07.2018), the Hon‟ble High Court taking P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) cognizance of the fact that the „reasons to believe‟ recorded by the A.O merely endorsed the belief of the DDIT, and further did not indicate any application of mind and/or further processing of the information on his part to come to a reasonable belief that income chargeable to tax has escaped assessment, thus it was in the backdrop of the said facts that the Hon‟ble High Court had arrived at a prima facie view that the notice issued under Sec. 148 was without jurisdiction. We are of the considered view, that as observed by us hereinabove, the „reasons to believe‟ in the case before us clearly has an inextricable nexus with the „material‟ available on record of the A.O. In the backdrop of our aforesaid observations, it can safely be concluded that the facts involved in the case before us are clearly distinguishable from those which were there in the aforementioned case. Further, in the case of Piramal Enterprises Ltd. Vs. DCIT [C.W.P No. 2958 of 2016; dated 16.02.2017], the notice issued by the A.O under Sec.148 was held by the Hon‟ble High Court as being without jurisdiction, for the reason that the A.O had reopened the case of the assessee only on the basis of the information received from the office of the Chief Commissioner of Income Tax, without applying his mind to the „material‟ available before him and arriving at an independent view that the income of the assessee chargeable to tax had escaped assessment. We are of the considered view, that as in the case before us there is a clear application of mind by the A.O while arriving at a bonafide belief that the income of the assessee chargeable to tax as „deemed dividend‟ has escaped assessment, thus the aforesaid judgment so relied upon by the ld. A.R would not assist him in the present case before us. We further find that Hon‟ble High Court of Delhi in the case of PCIT Vs. Minakshi Overseas Pvt. Ltd. (2017) 395 ITR 677 (Del) had struck down the proceedings initiated by the A.O under Sec.147, for the reason that he had merely reproduced the investigation report in the reasons recorded, and there was nothing from where it could be gathered that he had arrived at an independent belief on his part that the income of the assessee chargeable to tax had escaped assessment. Further, in the case of Harkishan Sundarlal Virmani Vs. DCIT (2017) 394 ITR 146 (Guj), the reopening of the case under Sec.147 was inter alia vacated for the reason that the A.O after receiving the P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) information /material from an external source, had thereafter failed to form an independent belief on the basis of „material‟ available on record, that the income of the assessee chargeable to tax had escaped assessment. In so far, the reliance placed by the ld. A.R on the case of Pioneer Town Planners Pvt. Ltd. Vs. DCIT (ITA No. 132/Del/2018; dated 06.08.2018) is concerned, we are unable to persuade ourselves to be in agreement with the contention of the ld. A.R that Commissioner of Income-tax-8, Mumbai, without being satisfied on the reasons recorded by the A.O, had accorded his sanction for issuance of notice under Sec. 148 of the Act. On a perusal of the “Form for obtaining of the approval of the Addl. CIT/Commissioner of Income-tax/ Central Board of Direct taxes”, it emerges that the “Reasons to believe” on the basis of which sanction of the CIT-8, Mumbai to issue Notice u/s 148 was sought by the A.O i.e DCIT-8(3), Mumbai, and forwarded through the office of the Addl. CIT, Range 8(3), Mumbai on 14.03.2014, formed part of the said „Form‟ as Annexure „A‟. It is in the backdrop of the aforesaid material facts, that the satisfaction arrived at by the CIT-8, Mumbai on the reasons recorded by the A.O has to be deliberated upon. Admittedly, the CIT-8, Mumbai as on 19.03.2014 had against Column No. 12 of the „Form‟, answered in affirmative as regards his satisfaction on the reasons recorded by the A.O, that it was a fit case for the issuance of a notice under Sec. 148 of the Act, by stating “Yes” against the same. We are of the considered view, that the aforesaid sanction granted by the CIT-8, Mumbai cannot be divorced from the remaining contents of the „Form‟, on the basis of which it can safely be gathered that the CIT-8, Mumbai after perusing the exhaustive “Reasons to believe”, and applying his mind to the same, therein accorded his sanction for issuance of a Notice u/s 148 on 19.03.2014. We are unable to persuade ourselves to subscribe to the contention of the ld. A.R, who we find by divorcing the term “Yes” from the remaining part of the aforesaid “Form”, had therein tried to impress upon us that the CIT-8, Mumbai has accorded his sanction for issuance of the notice under Sec. 148 in a mechanical manner. In the backdrop of our aforesaid observations, as the case laws relied upon by the ld. A.R are distinguishable on facts, thus the same would in no way assist his case.

We shall now advert to the contention of the ld. A.R that as the assessee had in the „annexure‟ forming part of his „balance sheet‟ for the year under consideration viz. A.Y 2007-08 disclosed the fact that he was holding the shares of the aforementioned companies viz. M/s Arco Electro Technologies Pvt. Ltd. and M/s Narmina Trade Investment Pvt. Ltd., thus, its case could not have been reopened after the expiry of a period of 4 years from the end of the relevant assessment year. We are unable to persuade ourselves to subscribe to the aforesaid contention of the ld. A.R. We are of the considered view, that the first proviso of Sec. 147 of the Act would come to the rescue of an assessee, only in a case where an assessment under Sec.143(3) or under Sec.147 had earlier been framed. In so far, the case of the assessee is concerned, as the issuance of notice under Sec.148 was not preceded by an assessment under Sec. 143(3) or under Sec. 147 of the Act, thus, the exception carved out in the first proviso of Sec. 147 in context of reopening of a case beyond a period of four years from the end of the relevant assessment year would not come to his rescue. We thus, without adverting to the merits of the case in context of the aforesaid contention so raised by the ld. A.R, reject the same.

We find that the ld. A.R has further averred that as the assessee had advanced loans to the aforementioned companies viz. M/s Arco Electro Technologies Pvt. Ltd. and M/s Narmina Trade Investment Pvt. Ltd, thus it was incorrect on the part of the lower authorities to conclude that the assessee was in receipt of loans from the said companies. We are not impressed with the said contention of the ld. A.R. We are of the considered view, that an independent transaction of receipt of loan by a shareholder, either directly or through another concern in which he has a substantial interest, would suffice for bringing the same within the sweep of Sec. 2(22)(e) of the Act, and characterizing the it „deemed dividend‟ in his hands. In our considered view, an independent transaction of advancing of an amount by such a person holding substantial interest to the company, would in no way have any bearing on the characterisation of the aforementioned amounts so P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) received as deemed dividend in his hands. Be that as it may, the aforesaid contention of the assessee would even otherwise fail on merits. We find that the issue under consideration revolves around the characterisation of an amount of Rs. 2,24,45,000/- advanced by M/s Arco Electro Technology Pvt. Ltd. to M/s Narmina Trade Investment Pvt. Ltd., wherein an amount of Rs.1,08,75,412/- on a pro rata allocation has been held as deemed dividend under Sec.2(22)(e) in the hands of the assessee, who was admittedly having substantial interest in both of the aforesaid companies. On a perusal of the „balance sheet‟ of the assessee (Page 2 of APB), it emerges that as on 31.03.2007 an amount of Rs.70,000/- was recoverable by the assessee from M/s Arco Electro Technologies Pvt. Ltd. Thus, in the backdrop of the fact that only an amount of Rs. 70,000/- was recoverable by the assessee from M/s Arco Electro Technologies Pvt. Ltd., we are not inclined to accept the contention of the ld. A.R that now when the assessee himself had advanced funds to M/s Arco Electro Technologies Pvt. Ltd., thus it would be wrong to infer that the assessee had received a loan from the said company. In terms of our aforesaid observations, the contention advanced by the assessee fails.

We have further deliberated on the contention advanced by the ld A.R, that as the entire amount of Rs.2,35,25,226/-received by M/s Narmina Trade Investment Pvt. Ltd. from M/s Arco Electro Technologies Pvt. Ltd. was squared up and reduced to nil during the year, thus the receipt of the said amount could not have been characterised as „deemed dividend‟. We are of the considered view, that the very stance of payment by a company by way of an advance or a loan to a shareholder, being a person who is the beneficial owner of shares holding not less than 10% 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, 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 possess accumulated profits, would suffice for characterisation of the said amount as a „deemed dividend‟ in the hands of the shareholder. We have deliberated on the contention advanced by the ld. A.R and are unable to persuade ourselves to subscribe to the P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) same. We are of the considered view, that the subsequent squaring up/repayment of the amounts would not have any bearing on the characterisation of the receipt as a deemed dividend in the hands of the shareholder. We thus, decline to accept the aforesaid contention of the assessee and reject the same.

We shall now advert to the contentions advanced by the ld. A.R as regards the merits of the case. The ld. A.R has averred, that the amount advanced by M/s Arco Electro Technologies Pvt. Ltd. to the recipient company viz. M/s Narmina Trade Investment Pvt. Ltd. was in the course of the regular business transactions inter se the said concerns, and not in the nature as that of a loan transaction. However, the ld. A.R has failed to place on record any such material which could persuade us to conclude that the transaction between the aforesaid concerns was a „commercial transaction‟ , and thus accept his aforesaid contention. Rather, a perusal of the copy of account of M/s Narmina Trade Investment Pvt. Ltd. speaks for itself, and clearly reveals that the same were in the nature of money transactions, which in no way could be held as business transactions. We thus, not finding any force in the aforesaid contention of the ld. A.R, reject the same.

We have further deliberated on the reliance placed by the ld. A.R on the judgment of the Hon‟ble Supreme Court in the case of National Travel Services Vs. CIT, Delhi-VIII (Civil Appeal No. 2068-2071 of 2012; dated 18.01.2018). We find that the reliance placed by the ld. A.R on the aforesaid judgment is absolutely misconceived in context of the facts involved in his case. The issue before the Hon‟ble Apex Court was as to whether for attracting the provisions of Sec. 2(22)(e), both the conditions have to be satisfied, namely, that the shareholder must first be a „registered shareholder‟ and thereafter, also be a „beneficial owner‟. It is in context of the aforesaid issue, that the matter had been placed before the Hon‟ble Chief Justice of India in order to constitute a larger bench for having a relook at the entire question. We are unable to comprehend as to in what context the aforesaid order of the Hon‟ble Apex Court had been relied upon by the P a g e | Mr. Narendra M. Ruia Vs. Income Tax Officer-10(3)(1) assessee before us. The facts and the issue involved in the case before us are absolutely distinguishable, as against those which were there before the Hon‟ble Apex Court. Interestingly, the assessee before us is both the registered and the beneficial owner of the shares of M/s Arco Electro Technologies Pvt. Ltd. holding more than 10% of the total shareholding of the company. Further, the assessee who is holding more than 25% of the total shareholding of M/s Narmina Trade Investment Pvt. Ltd., has substantial interest in the latter company to whom loan has been advanced. In the backdrop of our aforesaid observations, we are of the considered view that the issue and the facts involved in the case before the Hon‟ble Apex Court in the case of National Travel Services (supra), being distinguishable, would thus not assist the case of the assessee before us. Further, reliance placed by the ld. A.R on the order of the ITAT “B” Bench, Kolkata in the case DCIT, Kolkata Vs. The Hoogly Mills Company Ltd. (ITA No. 421/Kol/2014; dated 01.03.2017) is also found to be distinguishable on facts. The Tribunal in the aforementioned case had observed that where both the parties, namely, the company and the shareholder mutually benefit from a transaction, the same would take the character of a commercial transaction and would fall beyond the sweep of „deemed dividend‟ contemplated under Sec. 2(22)(e) of the Act. The ld. A.R has failed to demonstrate as to how the view taken by the Tribunal in the aforementioned case would assist its case. We thus, are of the considered view that the reliance placed by the ld. A.R on the aforesaid order of the coordinate bench of the Tribunal being absolutely misconceived, would thus not assist its case.