Gujarat H.C : Where assessee claimed that no amount could be taxed in hands of assessee treating it as deemed dividend if it was not a shareholder of payee company but had not disputed that other conditions of section 2(22)(e) were satisfied in its case and return of assessee was accepted without scrutiny, reassessment was justified

High Court Of Gujarat

Sunrise Broking (P.) Ltd. Vs. ITO

Sections 2(22), 148

Akil Kureshi And Biren Vaishnav, JJ.

Special Civil Application No. 19091 Of 2016

September 20, 2017

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a notice of reopening of the assessment dated 31.3.2016 issued by the respondent Assessing Officer to reopen the petitioner’s assessment for the assessment year 2009-2010.

2. Brief facts are as under. The petitioner is a private limited company and is engaged in the business of brokerage. For the assessment year 2009-2010, the petitioner had filed return of income on 29.9.2009 showing the total income of Rs. 5.75 lacs (rounded off). The return was processed under section 143(1) of the Act and accepted without scrutiny. To reopen such assessment, the Assessing Officer issued the impugned notice. In order to do so, he had recorded the following reasons :

“The assessee company did not file its return of income for AY 2009-10 as per the information available with the ITD system.

As per the information received from DCIT, Cir.1(3), A’bad, that the assessee has received an amount of Rs. 14,85,16,000/- from M/s. C.D. Integrated Services Ltd during AY 2009-10. As per the provisions of section 2(22)(e) of the Act, this advance is to be taxed in the hands of the assessee as deemed income as per section 2(22)(e) of the Act. On verification of the return of income filed by the assessee, it seen that no such income is offered to tax. Thus, the assessee has concealed an income to the tune Rs. 14,85,16,000/- within the meaning of section 147 of the Act.

On the basis of material available on records as above, I am satisfied and I have reason to believe that this is a fit case for issue of the notice u/s.148.

As the assessment sought to be reopened is beyond 4 years, approval of the Pr. CIT-4 A’bad has been obtained as required u/s. 151 of the Act, vide letter No. PCIT- 4/HQ/151/Approval/15-6 dated 31.03.2016.”

3. The assessee raised the objections to the notice of reopening under communication dated 19.9.2016. It was contended that the amount received from M/s. C. D. Integrated Services Ltd. cannot be treated as a deemed dividend under section 2(22)e of the Act. Decisions of various High Courts were cited for such purpose. It was therefore, contended that reasons themselves lack validity.

4. The Assessing Officer disposed of such objections by an order dated 14.10.2016. It was noticed that the original assessment was not framed after scrutiny. The Assessing Officer was therefore, of the opinion that notice for reopening for the reasons stated was valid. He referred to and relied upon the decisions of the Supreme Court in case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) and Dy. CIT v. Zuari Estate Development and Investment Co. Ltd. [2015] 373 ITR 661/63 taxmann.com 177/[2016] 236 Taxman 1 (SC).

5. Learned counsel for the petitioner submitted that the issue is not raised by the Assessing Officer of the present assessor, but the same was brought to his notice by the Assessing Officer of another assessee. Thus, the Assessing Officer in the present case has proceeded on borrowed satisfaction and it is not his own satisfaction that income chargeable to tax has escaped assessment. Counsel took us to the documents on record and contended that it was well settled through series of decisions of various High Courts that with the aid of section 2(22)e of the Act, no amount can be taxed in the hands of the assessee treating it as deemed dividend, if the assessee is not the shareholder of the payee company. In other words, the deeming fiction of a loan or advance being taxed as deemed dividend can be applied only in case of a shareholder of a company and not in case of any one who is not a shareholder. In this respect counsel relied on the decision of Delhi High Court in case of CIT v. Ankitech (P.) Ltd. [2012] 340 ITR 14/[2011] 199 Taxman 341/11 taxmann.com 100 (Delhi) and of this Court in case of CIT v. Daisy Packers (P.) Ltd. [2013] 40 taxmann.com 480/[2014] 220 Taxman 331 (Gujarat). Counsel submitted that as held by this Court in case of Gujarat Fluorochemicals Ltd. v. Asstt. CIT [2013] 353 ITR 398 (Guj.), even in a case where previously no assessment was framed under section 143(3) of the Act, to reopen the assessment, the requirement that the Assessing Officer had the reason to believe that income chargeable to tax had escaped assessment, would apply. Since the reasons recorded by the Assessing Officer lack validity, the notice should be quashed. Our attention was drawn to the judgment of Division Bench of this Court in case of Gujarat Mall Management Co. (P.) Ltd. v. ITO [2017] 84 taxmann.com 242 in which for similar reasons the notice for reopening of the assessment was quashed.

6. On the other hand, learned counsel Shri Nitin Mehta opposed the petition contending that the return filed by the assessee was accepted without scrutiny. The question of change of opinion therefore, would not arise. The scope of reopening of the assessment would be much wider. At this stage, all that was needed was a bona fide formation of belief by the Assessing Officer that income chargeable to tax had escaped assessment. He does not have to demonstrate conclusively that the income would certainly be brought to tax. Our attention was drawn to the decision of Delhi High Court in case of CIT v. National Travel Services [2012] 347 ITR 305/[2011] 202 Taxman 327/14 taxmann.com 14 (Delhi) in which the decision in case of Ankitech (P.) Ltd. (supra) was considered and explained. Counsel also relied on the judgment of the Supreme Court in case of Gopal & Sons (HUF) v. CIT [2017] 391 ITR 1/245 Taxman 48/77 taxmann.com 71 (SC), to contend that section 2(22)(e) of the Act can be applied even in case of a non shareholder. Counsel further pointed out that the department has not accepted the decision of the Delhi High Court in case of Ankitech (P.) Ltd. (supra) and SLP is filed which is admitted and pending.

7. Dealing with the first contention of the assessee, there is nothing on record to suggest that the Assessing Officer was acting as per the directives of the audit party or any other officer or authority. Merely because the relevant material was brought to his notice by an Assessing Officer of another assessee would not per-se vitiate his satisfaction that income chargeable to tax has escaped assessment. This aspect of law is sufficiently clear. Reference in this respect can be made to the decision of the Supreme Court in case of CIT v. P.V.S. Beedies (P.) Ltd. [1999] 237 ITR 13/103 Taxman 294 (SC).

8. Coming to the main challenge of the petitioner, we may recall that the return filed by the assessee was not taken in scrutiny and accepted under section 143(1) of the Act. There was therefore, no examination of various issues. The Assessing Officer had not formed any opinion on any such issues. In case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra), the Supreme Court observed 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 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 Delhi High 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) fulfillment 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 (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ; Raymond Woollen Mills Ltd. v. ITO [1999 (236) ITR 34 (SC)].’

These aspects were reiterated in case of Zuari Estate Development and Investment Co. Ltd. (supra).

9. Coming to the facts on hand, the Assessing Officer in the reasons recorded noted that the assessee had received an amount of Rs. 14.85 crores from M/s. C. D. Integrated Services Ltd. during the period relevant to the assessment year 2009-2010. Such advance had to be taxed in the hands of assessee under section 2(22)(e) of the Act as deemed dividend whereas from the return of the income it appears that the assessee had not offered such income to tax.

10. Under section 2(22)(e) of the Act, any payment by a company not being a company in which the public are substantially interested of any sum by way of advance or loan to a shareholder being a person who is the beneficial owner of the shares holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has 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 possesses accumulated profits, would be treated as dividend. The petitioner has not disputed that the other conditions of section 2(22)(e) of the Act are satisfied in the present case. Contention of the petitioner however, is that by virtue of judgment of Delhi High Court in case of Ankitech (P.) Ltd. (supra) and this Court in case of Daisy Packers (P.) Ltd. (supra), such income cannot be taxed in the hands of a person who is not a shareholder of the company. In case of Ankitech (P.) Ltd. (supra), Division Bench of Delhi High Court noted that all the conditions stipulated in section 2(22)(e) of the Act were satisfied. However, it was a case where the payment was not made to the shareholders directly but to the assessee which was a concern in which such shareholders were also members/shareholders and they had substantial interest in the assessee. In that view of the matter, the Court held that with the aid of said provision, the amount cannot be taxed in the hands of the assessee because if the intention of the legislature was to tax such loan or advance as deemed dividend in the hands of deeming shareholder, then legislature would have so provided. This decision was followed by this Court in case of Daisy Packers (P.) Ltd. (supra). However, the decision in case of Ankitech (P.) Ltd. (supra) was considered by the Delhi High Court in case of National Travel Services (supra), in which case facts were that a loan was given by the company to the shareholder. The shareholder was a partner of the firm and was holding the shares on behalf of the firm. Since other conditions of Section 2(22)(e) of the Act were satisfied, the question arose whether the payment made to the shareholders can be treated as deemed dividend under the said section in hands of the firm. Distinguishing the judgment in case of Ankitech (P.) Ltd. (supra), Delhi High Court observed as under :

’21. If the contention of the assessee is accepted than the very object for which Section 2 (22) (e) of the Act was amended would get frustrated qua the partnership firm leading to absurd results. It is a very well established principle of construction that where the plain literal interpretation of a statutory provisions produces manifestly absurd and unjust results which could never have been intended by the Legislature, the Court must modify the language used by the Legislature or even “do some violence” to it, so as to achieve obvious intention of the Legislature. Reference is made to the decision of the Supreme Court in the Case of K.P. Varghese v. ITO 131 ITR 597 (SC).

22. No doubt, when Section 2 (22) (e) of the Act enacts a deeming provision, it has to be strictly construed. At the same time, it is also trite that such a deeming provision has to be taken to its logical conclusion. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non legal entity, it would be impossible for such a condition to be fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated 13th March, 1975 interpreting Section 187 (c) of the Companies Act, relied by the learned counsel for the assessee himself, a partnership firm is not a person capable of being a member’ within the meaning of Section 47 of the Companies Act. It is further explained that since a partnership firm is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the Register of Members. Obviously then, with the purchase of shares by the firm in the name of its partners, it is the firm which is to be treated as shareholder for the purposes of Section 2 (22)(e) of the Act.

23. It would be difficult to accept the contention of Mr. Syali, predicated on the provision of Companies Act as wherever a partnership firm wants to come out of the rigors of Section 2 (22)(e) it can easily do so by not entering the names of all the members of the partnership firm in the Register of Members. In this case itself, it could be seen that Mr. Naresh Goyal holds 44.58% of shareholding in M/s Jet Air (P) Ltd. as a partner of the appellant firm. On the other hand, the said Mr. Narersh Goyal derives 35% of the profit sharing ratio in the assessee firm. In other words, Mr. Naresh Goyal has substantial interest in the assessee firm too. Thus, he is a person who not only has substantial interest but also holds sufficient influence. Since the partnership firm is the beneficial owner and it has to per force purchase the shares in the name of the partners, it is very easy for a person like him to ensure that only the names of partners in whose name shares are purchased is entered in the records of the company and the names of all the partners are not recorded so that provisions of Section 187C of the Companies Act are not fulfilled. Likewise, it can also be ensured that for the purpose of Section 41 (3) of the Act, the name of the partnership firm is not specifically entered as beneficial owner in the records to the depository to make partnership firm as deemed member of the concern company within the meaning of Section 41 (3) of the Act. Such a situation cannot be countenanced.

24. We are, therefore, of the opinion that for the purpose of Section 2 (22) (e) of the Act, partnership firm is to be treated as the shareholder and it is not necessary that is has to be “registered shareholder”. We thus answer the questions formulated in favour of the Revenue and against the assessee as a result, this appeal is allowed setting aside the order of the Tribunal and restoring that of the Assessing Officer.’

11. In case of Gopal and Sons (HUF) (supra), the question considered by the Supreme Court was whether a payment can be taxed in the hands of a HUF under section 2(22)(e) of the Act when the shareholder was a Karta of the HUF. The other conditions of the said section being satisfied, the Supreme Court observed as under :

“16. In the instant case, the payment in question is made to the assessee which is a HUF. Shares are held by Shri. Gopal Kumar Sanei, who is Karta of this HUF. The said Karta is, undoubtedly, the member of HUF. He also has substantial interest in the assessee/HUF, being its Karta. It was not disputed that he was entitled to not less than 20% of the income of HUF. In view of the aforesaid position, provisions of Section 2(22)(e) of the Act get attracted and it is not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company.

17. It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards share holding in the Company was given by the assessee/HUF. Though, the share certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder. In any case, it cannot be doubted that it is the beneficial shareholder. Even if we presume that it is not a registered shareholder, as per the provisions of Section 2(22)(e) of the Act, once the payment is received by the HUF and shareholder (Mr. Sanei, karta, in this case) is a member of the said HUF and he has substantial interest in the HUF, the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act. This is the effect of Explanation 3 to the said Section, as noticed above. Therefore, it is no gainsaying that since HUF itself is not the registered shareholder, the provisions of deemed dividend are not attracted. For this reason, judgment in C.P. Sarathy Mudaliar, relied upon by the learned counsel for the appellant, will have no application. That was a judgment rendered in the context of Section 2(6-A)(e) of the Income Tax Act, 1922 wherein there was no provision like Explanation 3.”

12. The judgment of the Supreme Court in case of Gopal and Sons (HUF) (supra) was cited before this Court in case of Gujarat Mall Management Co. (P.) Ltd. (supra). The Court referring to the observations of the Supreme Court in paragraph no. 16 and 17, noted above, observed as under :

“11. This decision of the Supreme Court in case of Gopal and Sons (supra) undoubtedly brings in an entirely new dimension to the controversy. Reading of paragraph no. 16 suggests at first blush that the court did apply Section 2(22)(e) of the Act in a case where the assessee was not a share holder but the Karta of the assessee HUF having more than 20% right to receive income thereof had substantial interest in the lender company. Before the Supreme Court, decisions of this court and that of Delhi High Court in case of Ankitech (P.) Ltd. (supra) were not cited. Whether this decision of Supreme Court impliedly overrules all these judgements is a question we are not inclined to go into in the present petition and leave it open to be decided in an appropriate case.”

However, the notice for reopening was quashed in the said case on the ground that the same was issued beyond a period of four years from the end of the relevant assessment year when the original assessment was framed after scrutiny and there was no failure on part of the assessee to disclose truly and fully all material facts.

13. It can thus be seen that the issue of applicability of section 2(22)(e) of the Act when the recipient of loan or advance by the company is not a shareholder but is a concern in which the shareholders are having substantial interest, is not free from any doubt. The judgment of Delhi High Court is not accepted by the department and is in challenge before the Supreme Court. The Supreme Court itself in the later judgment in case of Gopal and Sons (HUF) (supra), had opened a new dimension to the whole controversy.

14. In the present case, the return of the petitioner was accepted under section 143(1) without scrutiny. Considering such facts, we cannot hold that the reasons recorded by the Assessing Officer for issuing notice of reopening lack validity so that the notice for reopening can be terminated at this stage itself on such ground.

15. Petition is dismissed. Interim relief, if any, stands vacated. Rule is discharged.

[Citation : 400 ITR 337]