ITO 24(1)(2), MUMBAI vs. ANUSHREE V. KHETAN, MUMBAI

आयकर अपील�य अ�धकरण “एफ” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SING, JM आयकर अपील सं./I.T.A. No. 4975/Mum/2016 (�नधा�रण वष� / Assessment Year: 2006-07) The ITO-24(1)(2) Smt. Anushree V. Khetan बनाम/ 2nd Floor, Khetan Bhavan, 605, Piramal Chambers, Lalbaug, Mumbai-400 012 78, J. B. Nagar, Andheri (E), Vs. Mumbai-400 049 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. AOCPK 8810 J (अपीलाथ� /Appellant) (��यथ� / Respondent) : अपीलाथ� क� ओर से / Appellant by : Shri Ram Tiwari ��यथ� क� ओर से/Respondent by : Shri Rakesh Joshi

सुनवाई क� तार�ख / : 22.03.2018 Date of Hearing घोषणा क� तार�ख / : 01.06.2018 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This appeal by the Revenue is directed against order of the ld. Commissioner of Income Tax (Appeals) dated 31.05.2016 and pertains to assessment year 2006-07.

2 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan 31.01.2005. The MOU is singed before the allotment of the said property was an afterthought to avoid the provisions of section 2(22)(e) of the Income Tax Act, 1961."

which reads as under:

1) On the facts and circumstances of the case as wed as in taw, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in reopening the assessment completed u/s.143(3) of the Income Tax Act, 1961, without considering the facts and circumstances of the case.

assessment year 2006-07 on 30.07.2006, declaring total income of Rs.1,13,288/-. The

assessment order u/s 143(3) of the Act was passed on 03-07-2008 by assessing total

income at Rs.30,46,269/-. In this case an intimation has been received from the DCIT-

8(2), Mumbai vide letter dated 05.01.2011 received on 07.01.2011 stating that perusal of

case records of M/s. Krishna Developers P. Ltd. it was observed that Ms. Anushree

Khetan is holding 50,000 shares in M/s. Krishna Developers P. Ltd. company out of

total 2,00,000 shares, hence Ms. Anushree Khetan is holding 25% shares of the company

and company had given Rs.1,50,28,000/- as loan and advances to Ms. Anushree Khetan

for A.Y. 2005-06. M/s. Krishna Developers P. Ltd has reserves and surplus of

Rs.4,45,15,729/- as on 31.03.2005. A company in which public are not substantially

interested has given loans and advances to a share holder holding more than 10% shares

and the appellant company is having accumulated profits. Therefore, Assessing Officer

recorded reasons to believe that deemed dividend can be invoked since, all the conditions

stipulated u/s. 2(22)(e) of the Act are satisfied. Hence, the entire amount of loans and

3 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan advances given during FY 2005-06 needs to be taxed as "Deemed Dividend" in the hands

of the recipient i.e. Ms. Anushree Khetan in AY 2006-07. Assessing Officer also pointed

that during the course of assessment proceedings for A.Y. 2005-06 assessee had mislead

the department by stating that she had only 9% voting power shares in M/s. Krishna

Developers Pvt. Ltd during FY 2004-05. Assessing Officer also pointed out that the

income of the assessee is more than Rs.1 lakh chargeable to tax has escaped assessment

within the meaning of section 147 of the Act for the failure on the part of the assessee to

disclose fully and truly all material facts necessary for assessment for the previous year

relevant to the AY 2006-07. The case was subsequently reopened u/s. 147 of the Act and

a notice u/s. 148 of the Act was issued on 16.01.2013 after duly recording the reasons for

the same and obtaining necessary sanctions. The income for the AY 2006-07 has escaped

assessment of more than Rs.1 lakh. Notice u/s. 148 of the Act was issued and served on

appellant.

with questionnaire dated 19.07.2013 and served to the assessee. The authorized

representative of the assessee was asked by Assessing Officer to show cause as to why

the amount of Rs.60,50,000/- should not be considered as deemed dividend u/s. 2(22)(e)

of the Act. In response to this show cause, the assessee filed a reply dated 24.10.2013 that

(i) assessee owned 18000 shares of the Company known as M/s. Krishna Developers Pvt.

Ltd. as on 31-07-2001 which formed 9% of the voting power, (ii) on 30-08-2005, which

falls under the relevant Assessment Year, she acquired 17000 shares of Krishna

4 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan developers Pvt Ltd raising her stake to 35000 shares which formed 17.5 % of the voting

power. It can therefore be stated that as on 30-08-2005 she became substantial

shareholder owning more than 10% stake in the company, (iii) further she asked to note

that in the above assessment year she had an opening credit balance of Rs.1,44.34,000/-

of advances as on 01-04-2005, (iv) as on the date before she became a substantial

shareholder i.e. on 17-08-2005 advanced to her was Rs.l,79,84,000/-, (v) without

prejudice to the above, she submitted that these amounts were given for acquiring

property and therefore the provisions of section 2(22)(e) of the Act are not attracted, (vi)

the said property was purchased by her from M/s. Avas Real Estate Pvt. Ltd. Since the

said transaction is a business transaction and not a loan taken from the company, hence,

section 2(22)(e) of the Act would not get attracted. The assessee relied on the judgment

of CIT vs Arvind-Kumar Jain (Delhi High Court).

pointed out that the assessee herself is holding 17.5% shares in M/s. Krishna Developers

Pvt. Ltd. The transaction of the assessee with the said company M/s. Krishna Developers

Pvt. Ltd. squarely falls within the mischief of the provision u/s 2(22)(e) of the Act and is

hence held to be “Deemed Dividend” as per the provisions of Section 2(22)(e) of the Act.

Accordingly taking into account the overall movement of funds and the direct nexus of

funds utilized, deemed dividend u/s.2(22)(e) of the Act is taxed at Rs.60,50,000/-. The

working of the deemed dividend was worked out by him as under:

5 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan Ms. ANUSHREE KHETAN (Amount in Rs.) Date Narration Dr Cr Balance 01/04/02005 Opening balance 0 28/04/2005 Payment through bank 225000 -225000 14/05/2005 Payment through bank 750000 -975000 23/06/2005 Payment through bank 350000 -1325000 28/06/2005 Payment through bank 50000 -1375000 12/07/2005 Receipt 25000 -1350000 25/07/2005 Receipt 180000 -1170000 29/07/2005 Receipt 5000000 3830000 04/08/2005 Payment through bank 2500000 1330000 06/08/2005 Receipt 1000000 2330000 06/08/2005 Receipt 725000 3055000 11/08/2005 Receipt 600000 3655000 16/08/2005 Payment through bank 35000 3620000 17/08/2005 Payment through bank 70000 3550000 05/09/2005 Receipt 2500000 6050000 17/09/2005 Payment through bank 1200000 4850000 19/09/2005 Payment through bank 975000 3875000 20/09/2005 Payment through bank 1500000 2375000 20/09/2005 Payment through bank 1500000 875000 21/09/2005 Payment through bank 1500000 -625000 22/09/2005 Payment through bank 1225000 -1850000 22/09/2005 Pament through bank 3100000 -4950000 23/09/2005 Payment through bank 1250000 -6200000 24/09/2005 Payment through bank 1200000 -7400000 26/09/2005 Payment through bank 300000 -7700000 26/09/2005 Payment through bank 3000000 -10700000 26/09/2005 Payment through bank 100000 -10800000 05/10/2005 Payment through bank 3734000 -14534000 10/11/2005 Receipt 100000 -14434000

(229 ITR 444) (SC) wherein it was held that what triggers the liability under this fictional

provision is the fulfillment of the requisite conditions for taxability hereunder at any time

during the relevant year under consideration. The moment the requisite conditions are

fulfilled, the taxability is triggered irreversibly. Hence, it would be an immaterial fact in

6 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan this regards if the loans/ advance obtained during the year under consideration has been

paid back by the end of the relevant year.

decisions in the case of Walchand & Co. Ltd. us. CIT (1975) 100 ITR 598 (Bom) VKJ

Walchand & Co. (P) Ltd vs CIT (1993) 204 ITR 146 (Bom) that even if the loan is repaid

within a few days, it will still be caught in the mischief of section 2(22)(e) of the Act and

the shareholder will have to pay lax. For instance, a shareholder takes a loan of Rs. 5

Lakhs from a company which he returns back within a week. He is saddled with liability

of paying tax on Rs. 5 Lakhs. The Assessing Officer also referred to several other case

laws and made the impugned addition.

both the reopening as well as merits of the addition.

observation as under:

5.1.1. I have considered the above submissions made by the appellant and the impugned assessment order on this issue. In my opinion there is no substance in the above argument of the Appellant. The AO has duly provided the reasons recorded for reopening u/s 148 of the Act. He has given sound reasoning as noted in para. 1 of the assessment order and provided reasons recorded to the appellant on the basis of fresh material received from DCIT (8)(2), Mumbai. Hence, the AO has properly followed the procedure prescribed under the law to reopen the case as per the provisions of section 147/148 of the Act. 5.1.2. The position of law is well-settled in respect of reopening of case u/s 147/148. Under two situations the AO has the right to reopen a completed assessment. In the first situation, a completed assessment can be reopened either, if there was omission or failure on the part of the assessee to disclose fully and

7 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan truly all material and relevant facts and the AO must have in his possession, before he issues notice, some material from which he can reasonably form a belief that there has been escapement of income due to some failure or omission on the part of the assessee to disclose fully all relevant or material facts. 5.1.3. In the second situation the AO has the right under Explanation 2, sub- clause(c) of section 147 of the Act, which empowers the AO to reopen a completed assessment. The AO can resort to reopening under clause (c) of section 147 notwithstanding the fact that there was no omission or failure on the part of the assessee, either to make a return or to disclose fully and truly all material facts, but the AO in consequence of information in his possession subsequent to the first assessment, has reason to believe that income chargeable to tax has been under assessed and consequently has escaped assessment. 5.1.4. In the instant case, the AO noticed after completion of the original assessment and on the fresh material supra that Ms. Anushree Khetan is holding 50,000 shares in M/s. Krishna Developers P. Ltd. company out of total 2,00,000 shares, hence Ms. Anushree Khetan is holding 25% shares of the company and company had given Rs. 1,50,28,0007- as loan and advances to Ms. Anushree Khetan for A.Y. 2005-06. M/s. Krishna Developers P. Ltd has reserves and surplus of Rs.4,45,15,7297- as on 31.03.2005. A company in which public are not substantially interested has given loans and advances to a share holder holding more than 10% shares and the appellant company is having accumulated profits. Therefore, AO recorded reasons to believe that deemed dividend can be invoked since, all the conditions stipulated u/s. 2(22)(e) of the Act are satisfied. Hence, the entire amount of loans and advances given during FY 2005-06 needs to be taxed as "Deemed Dividend" in the hand of the recipient i.e. Ms. Anushree Khetan in AY 2006-07. AO also pointed that during the course of assessment proceedings for A.Y. 2005-06 appellant had mislead the department by stating that she had only 9% voting power shares in M/s. Krishna Developers Pvt. Ltd during FY 2004-05. AO also pointed out that the income of the appellant is more than Rs.1 lakh chargeable to tax has escaped assessment within the meaning of section 147 of the Act for the failure on the part of the appellant to disclose fully and truly all material facts necessary for assessment for the previous year relevant to the AY 2006-07. 5.1.5. Non-compliance of the expressed provisions of the Act gave the AO a definite reason to believe that the income chargeable to tax has escaped assessment. Once such reason to believe is formed by the AO on the basis of material available with him showing the under assessment of the income of the appellant, he is well within his powers to issue notice u7s 148 as per procedure prescribed in that section. "There should be facts before the ITO that reasonably give rise to the belief. The belief held by him must of course be in good faith. It cannot be a mere pretence; but the facts on the basis of which he entertained the belief need not at this stage be irrebuttably conclusive to support his tentative

8 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan conclusion. Where such an inference can be drawn, sufficiency of reasons cannot be questioned at the preliminary stage." [S. Narayanappa vs. CIT (1967) 63 ITR 219 (SC): TC51R.651A]. 5.1.6. The aforesaid fact regarding under assessment of income was a tangible material, which gave the AO reason to believe that the income of the appellate has escaped assessment. What is important at the time of formation of belief by the A.O. regarding the escapement or under assessment of income is sufficiency of the reasons for re-opening of the assessment and not its accuracy that cannot be questioned at that time. Therefore objection of the appellant to the reopening of the case and stating the same as bad in law cannot be accepted and cases relied upon by appellant do not hold good. 5.1.7. In the case of Praful Chunilal Patel Vs. ACIT (1998) 148 CTR 62 (Guj.): (1999) 236 ITR 832 (Guj), it has been held by the Hon'ble Gujarat High Court that "If the AO honestly comes to a conclusion that a mistake has been made, it matters nothing so far as his jurisdiction to initiate the proceedings under s. 147 is concerned, that he may have come to an erroneous conclusion whether on law or on facts. His jurisdiction to initiate proceedings under s. 147 for assessment and reassessment is, even in such case correctly and rightly exercised, though he may have taken an erroneous view of the law with regard to the mistake committed at the first assessment proceedings that he has found out Therefore, unless it is shown that the AO never enquired into the matter at all or that he never honestly believed that a mistake has been made, the result of his investigation and initiation of the proceedings under s. 147 cannot be challenged on the ground of want of jurisdiction. The AO has to determine the facts and the law in order to give him jurisdiction to proceed and if in the determination of this he goes wrong, the proper remedy for the assessee would be to go up in appeal and to have the case referred to the High Court under the provisions of the Act."

5.1.8. What is necessary at the time of issuance of the notice u/s 148 is the reason to believe by the AO that income has escaped assessment and the actual discovery of escapement is not essential. With such facts, as mentioned above, placed on record by the AO before the issue of the notice for reopening of the case, there is no strength in the argument of the appellant that since he had at the time of original scrutiny assessment submitted ail the documents & explanations required by the AO in respect of deemed dividend & AO after applying his mind accepted appellant's plea. AO specifically pointed that during the course of assessment proceedings for A.Y. 2005-06 appellant had mislead the department by stating that she had only 9% voting power shares in M/s. Krishna Developers Pvt. Ltd during FY 2004-05. The violation of expressed provisions of the Act by the appellant constitute sufficient material in the possession of the AO to form the reason to

9 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan believe regarding the escapement of income at the time of reopening of assessment, which escaped in the original assessment order. 5.1.9. The facts of the case laws relied upon by the AR of the appellant are not identical to the facts of the instant case and therefore of no help. The ground of appeal regarding the objection to the reopening of the case of the appellant for the year under consideration, therefore, is not valid and dismissed. /

(Appeals) accepted that the amount of loan was actually a trade advance by accepting the

copy memorandum of understanding between the company and the assessee submitted.

He held as under:

5.2.3. I have carefully considered the contention of the appellant, assessment order and written submission. On examination of the AO's order and the submission, it is clear that it is an advance for purchase of property. Appellant during assessment proceedings submitted that she owned 18000 shares of the Company known as M/s. Krishna Developers Pvt. Ltd. as on 31-07-2001 which formed 9% of the voting power. On 30-08-2005, which falls under the relevant Assessment Year, she acquired 17000 shares of Krishna developers Pvt. Ltd raising her stake to 35000 shares which formed 17.5 % of the voting power. It can therefore be stated that as on 30-08-2005 she became substantial shareholder owning more than 10% stake in the company. Further she pointed to note that in the above AY she had an opening credit balance of Rs.1,44.34,000/- of advances as on 01-04-2005 and as on the date before she became a substantial shareholder i.e. on 17-08-2005 advances to her were at Rs.l.79,84,000/-. Without prejudice to the above, she submitted that these amounts were given for acquiring property and therefore the provisions of section 2(22)(e) of the Act are not attracted. The said property was purchased by her from M/s. Avas Real Estate Pvt. Ltd. Since the said transaction is a business transaction and not a loan taken from the company, hence, section 2(22)(e) of the Act would not get attracted. The appellant relies on the judgment of CIT vs. Arvind Kumar Jain (Delhi High Court), wherein it was held that trade advances are not loans and advances for the purpose of sec. 2(22)(e) of the Act. When there was a running business relationship between the appellant and the company and the said amount was not a loan but was the result of those business transaction, section 2(22)(e) of the Act would not get attracted. The Copy of the Memorandum of Understanding entered between the parties i.e. appellant and the said company was before the AO. It is pertinent to mention here that MOD for the property was entered and signed on 25.01.2005 and the said property was allotted to the appellant vide letter dated 31.01.2005. The AO has failed to rebut the contention of appellant raised before him and has not proved the same to be false

10 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan or incorrect. Reliance by AO on the case of Dr. Shiv Kant Mishta vs. DCIT 118 ITD 347 (Luck) is misconceived as in this case, in fact, the appellant deployed the Loan or Advances for purchase of a personal Bentley Motor Car which was claimed duly reflected in his personal balance sheet. Here in the instant case facts are different. Other case laws relied by the AO are on different footings and facts. In view of the various judicial pronouncements brought out by the Appellant which clearly states that loan or advance given to shareholder or to any sister concern as a consideration for the goods or for purchase of a capital asset, which indirectly would benefit the company advancing the loan, the same cannot be treated as deemed dividend u/s 2(22)(e) of the Act. In view of above, the addition made by AO of deemed dividend is hereby deleted.

assessee has objected to the confirmation of reopening under rule 27 of the ITAT rules.

ground of appeal raised by the Revenue which reads as under:

find that section 2(22)(e) provides that following would be treated as dividend and thus

would be taxable in the hands of the recipient:

2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in

11 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan

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 ;

more than 10% of the share capital in the company M/s Krishna Developers Pvt. Ltd.

(hereinafter referred as “company”). The assessee has also received a loan of

Rs.1,50,28,000/- from the said company. The assessee never disclosed this aspect in the

return of income. Thereafter when the assessing officer received information in this

regard, he reopened the assessment. In the reassessment proceedings, the assessee came

up with the plea that she had entered into an MOU with the said company for acquiring

her property. As evident from the grounds raised above by the Revenue, the assessee was

allotted the said property on 31.01.2005 from M/s. Awas Reaal Estate. The said MOU

between the company and the assessee for the same property was signed on 25.01.2005.

Hence it has rightly been pointed out by the Revenue that it was an afterthought. We

agree that the ld. Commissioner of Income Tax (Appeals) has erred in accepting this

MOU and accepting that the transaction of loan between the company and the assessee

was a trade transaction. We further find that there is no other detail as to whether the said

MOU was finally acted upon by the parties or not. In our considered opinion, this issue

needs to be remitted to the file of the assessing officer to examine the subsequent fate of

the said MOU as to whether finally the said property was transferred to the company or

not. In the event that the said property was not transferred, it would be clear that the said

12 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan MOU is an afterthought and having no evidentiary value to prove that the transaction

between the company and the assessee was a trade transaction.

ITAT in the case of ITO vs. Sagar Sahil Investment (P.) Ltd. [2010] 37 SOT 1

(Mumbai)(URO) for the proposition that if the assessee became registered shareholder

subsequent to the event of loan, section 2(22)(e) would not be involved. We find that the

above case law is not applicable in view of the Hon’ble Apex Court decision relied upon

by the assessing officer in the case of Miss P. Sarada vs. CIT [1998] 229 ITR 444 (SC),

wherein it was held that what triggers the liability under this fictional provision is the

fulfillment of the requisite condition for taxability hereunder at any time during the

relevant year under consideration. Hence, in view of this case law from Hon’ble Apex

Court, the ITAT ruling referred by the assessee's counsel is not applicable.

Assessing officer is directed to consider the issue afresh in light of our directions and

discussions as above. Needless to add, the assessee should be granted adequate

opportunity of being heard.

validity of reopening, we are of the considered opinion that the ld. Commissioner of

Income Tax (Appeals)’s order is a correct one. The assessee in this case was holding

more than 10% of the shares of the said company. The said information was not provided

by the assessee. When the assessing officer came into possession of the information in

13 ITA No. 4975/Mum/2016 Smt. Anushree V. Khetan this regard, the assessment was reopened. The assessee having received loan amount from said company, the said transaction was falling under the realm of provisions of section 2(22)(e). Hence, the reopening of the case on the facts and circumstances was clearly justified. Hence, we are of the opinion that the ld. Commissioner of Income Tax (Appeals)’s elaborate consideration and reliance upon the case laws are germane. Accordingly, we uphold the validity of reopening in this case.

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai