GSEC Limited Vs DCIT (Gujarat High Court)
The Gujarat High Court considered a petition under Article 226 of the Constitution challenging the notice dated 27.03.2021 issued under Section 148 of the Income Tax Act, 1961, and the order disposing of the Petitioner’s objections. The Petitioner had filed its return for Assessment Year 2014-15 on 27.11.2014 declaring total income of Rs.3,44,45,390/-. The return was selected for scrutiny, notices under Section 142(1) were issued on 12.04.2016 and 24.06.2016, and the assessment order was passed on 18.11.2016.
After receiving the Section 148 notice, the Petitioner filed its return and requested the reasons recorded for reopening on 20.04.2021. Instead of providing the reasons, the Department issued a notice under Section 143(2) on 06.05.2021. The Petitioner subsequently filed objections on 25.08.2021, which were disposed of on 21.12.2021.
The Petitioner contended that the recorded reasons themselves showed that reopening was based on scrutiny of the case records, balance sheet, profit and loss account and computation of income, without any fresh material. The Revenue had relied on the shareholding pattern involving GSEC Aviation Ltd. and Komal Infotech Private Limited and proposed that a loan of Rs.16,55,41,554/- received by the Petitioner from GSEC Aviation Ltd. was liable to be treated as deemed dividend under Section 2(22)(e).
The Petitioner submitted that it was not a shareholder of GSEC Aviation Ltd. and therefore the loan could not be treated as dividend in its hands. Reliance was placed on Commissioner of Incometax v. Daisy Packers (P) Ltd., reported in (2013) 40 taxmann.com 480(Gujarat). It was also argued that all material facts had been fully and truly disclosed and that the issue concerning the loan had been examined during the original scrutiny assessment. Accordingly, reopening after more than four years was contended to be a case of change of opinion. The Petitioner relied on CIT vs. Kelvinator of India Ltd, reported in (2010) (320 ITR 561).
The Revenue supported the reopening, contending that there was reason to believe that income had escaped assessment and that Section 2(22)(e) was attracted. Reliance was also placed on Dishman Pharmaceuticals & Chemicals Ltd vs. Deputy Commissioner of Income Tax (OSD)(1).
The High Court examined the recorded reasons and found that the Revenue’s basis for reopening was the “scrutiny of the case records, balance-sheet, Profit & Loss Account and computation of income.” The Court held that there was no fresh or new tangible material available with the Revenue for reopening the assessment.
The Court also noted from the records that the Petitioner was not a shareholder of GSEC Aviation Ltd., from which the loan had been received. The judgment referred to Daisy Packers, which had considered Section 2(22)(e) and relied upon Commissioner of Incometax v. Ankitech (P) Ltd., reported in [2011] 11 taxmann.com 100 (Delhi). The supplied judgment further referred to Commissioner of Incometax vs. Madhur Housing & Development Co., reported in [2018] 93 taxmann.com 502 (SC), concerning the application of Section 2(22)(e).
The High Court observed that Kelvinator of India established that the reason for reopening must have a link with the formation of the belief. In the present case, the reasons were based on material already available in the assessment records and did not disclose any fresh tangible material.
Consequently, the High Court quashed and set aside the notice dated 27.03.2021 issued under Section 148 and the order disposing of the objections. The petition was allowed and the Rule was made absolute to that extent.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Rule returnable forthwith. Mr.Varun K Patel, learned Senior Standing Counsel waives service of rule on behalf of the respondent. With consent of the learned advocates appearing for the respective parties, the matter is taken up for final hearing today.
2. By way of this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 27.03.2021 issued under section 148 of the Income Tax Act, 1961, and the order disposing of the objections.
3. Facts in brief are as under:
3.1 The petitioner filed return of income for the Assessment Year 2014-15 on 27.11.2014 declaring total income of Rs.3,44,45,390/-. The return was taken up for scrutiny. Notices under sec.142(1) was issued on 12.04.2016 and 24.06.2016. The assessment order was passed on 18.11.2016.
3.2 It is the case of the petitioner that after the notice under sec.148 of the Act issued on 27.03.2021, the petitioner filed return and sought for reasons recorded for reopening by a letter dated 20.04.2021. Instead of providing reasons for reopening, a notice under Sec.143(2) dated 06.05.2021 was issued. The petitioner replied vide letter dated 21.05.2021, filed objections on 25.08.2021, which were disposed of on 21.12.2021.
4. Mr.B.S.Soparkar, learned counsel appearing for the petitioner, would take us through the reasons recorded and submit as under:-
4.1 The reasons itself would indicate that the reopening of the assessment is based on scrutiny of the case records, balance-sheet, profit & loss account and computation of income.
4.2 Mr.Soparkar, learned counsel, from the reasons recorded, would submit that it is the case of the revenue that it is noticed from the shareholding pattern of GSEC Aviation Ltd., that Komal Infotech Private Limited held 99.98% shares of GSEC Aviation Limited and that it was observed from the share holding pattern of the assessee that Komal Infotech Private Limited held 63.36% of shares. According to the revenue, as per Explanation 3, below Sec.2(22)(e) of the Income Tax Act, the loan / advance accepted by the petitioner from GSEC Aviation Ltd., would be treated as deemed dividend in the hands of the petitioner.
4.3 Mr.Soparkar, learned counsel, would submit that the petitioner had received the money not as a shareholder, and therefore, there was no questiion of the loan being classified as “Dividend”. He would rely on a decision in the case of Commissioner of Incometax v. Daisy Packers (P) Ltd. reported in (2013) 40 taxmann.com 480(Gujarat). He would submit that there was no escapement of income. The petitioner had fully and truly disclosed all material facts. It was the case where for the Assessment Year 2014-15, notice under Sec.148 was issued on 27.03.2021 after a period of four year, and therefore, not only full disclosure of material facts, but there was true and full disclosure of facts which were examined in detail at the time of scrutiny assessment.
4.4 Mr.Soparkar, learned counsel, would further submit that all the books of accounts were not thoroughly examined by the then Assessing Officer. Specific queries regarding the loans were also raised at the time of original assessment. He therefore submitted that once the issue of loan was thoroughly examined in detail, and having formed the opinion, it was a clear case of “change of opinion”. Mr.Soparkar, learned counsel, would therefore submit that the notice under section 148 and the order rejecting the objections is bad in light of the decision in the case of CIT vs. Kelvinator of India Ltd reported in (2010) (320 ITR 561) as it was a case of “change of opinion”.
5. Mr.Varun Patel, learned Senior Standing Counsel appearing with Mr.Dev D. Patel, learned advocate for the revenue, would support the notice and the order disposing of the objections. Mr.Patel, would submit that there was basis of forming reason to believe that there was escapement of income and that was crystal clear that sec. 2(22)(e) of the Incometax Act was attracted. He would rely on a decision of this Court in the case of Dishman Pharmaceuticals & Chemicals Ltd vs. Deputy Commissioner of Income Tax (OSD)(1). He would rely on paragraphs, wherein, the Court has observed that it is not the language but the contents of the reasons recorded which is important. There were reasons which emerged from the record. It was a clear case where though there was a scrutiny under Sec.142, from the return submitted by the assessee, nowhere could the fact of reasons recorded could be ascertained, and therefore, an inquiry had to be made so as to come to the conclusion that the amount of loan have to be treated as “deemed dividend”.
6. Having considered the submissions made by the learned counsels appearing for the respective parties, perusal of the reasons recorded indicate that the basis and the reasons to believe for the revenue to reopen the assessment would indicate that the reasons to believe were based on “scrutiny of the case records, balance-sheet, Profit & Loss Account and computation of income.” In other words, there was no fresh or new tangible material available with the revenue to reopen the assessment.
6.1 What is evident from the records too is that it was clearly pointed out that the assessee company is not a shareholder of GSEC Aviation Limited from whom the loan of Rs.16,55,41,554/- has been received. As pointed out by the learned counsel for the petitioner, it is a settled position of law that where loan has been given by the Company to concern, wherein, the shareholder of the payer Company holds at least 20% of share carrying voting power, the said loan can be considered as dividend under section 2(22)(e) of the Act and not the concern to whom the loan has been given. From the annual accounts annexed to the petition, it is evident that a notice was given under Sec.142 of the Act, to which the petitioner had responded showing that the shareholder of the companies were original owners and the shares holding not less than 10% of the voting power.
6.2 Even in the case of Daisy Packers (supra), the Court had considered the question of deemed dividend under Sec.2(22)(e) of the Act and relying on the decision in the case of Commissioner of Incometax v. Ankitech (P) Ltd., reported in [2011] 11 taxmann.com 100 (Delhi), held as under:-
“2.0 The brief facts are that the assessee filed return of income for the Assessment Year 200001 declaring a loss of Rs.4,22,792/. The return was processed under Section 143(1)(a) of the Income Tax Act, 1961 (for short ‘the Act’) and income of the assessee was declared under Section 115JA of the Act. Thereafter the case was reopened under Section 147 of the Act which was served on the assessee. The case of the department was that the Amigo Brushes Pvt. Ltd. had a total surplus of Rs.70 lacs as on 31st March 1999 and it has advanced a loan to the assessee to the tune of Rs.25 lacs. Whereas the assessee contended that he received deposit from Amigo Brushes Pvt. Ltd. and Daisy Packers Pvt. Ltd. was not a shareholder in Amigo Brushes Pvt. Ltd. The Assessing Officer by his order dated 30th September 2004 rejected the claim of the assessee and treated the deposits as loan and consequently deemed to be a deemed dividend under Section 2(22)(e) of the Act and accordingly computed the tax. The assessee filed appeal which was dismissed by CIT(A) on 11th May 2006. The assessee filed Second Appeal which has been allowed by the Tribunal on 5th June 2009 and the Tribunal has hold that it was not the case of the deemed dividend and it was the case of the deposits. The Tribunal further recorded finding that it was not a loan given by Amigo Brushes Pvt Ltd. to the assessee company and it was intercorporate deposits. However, we need not go into various questions raised by learned counsel for the parties as admittedly the assessee was not shareholder in the Amigo Brushes Pvt. Ltd. The Division Bench of this Court in Commissioner of Income Tax vs. Ankitach(P) Ltd. [(2012) 340 ITR 14]. The Delhi High Court has held that if the assessee company does not hold a share in other company from which it had received deposit then it cannot be treated tobe a deemed dividend under Section 2(22)(e)of the Act. In view of this admitted position that assessee is not a shareholder in Amigo Brushes Pvt. Ltd. and therefore, the deposit received by the assessee of Rs.25 lacs from Amigo Brushes Pvt Ltd. was an intercorporate deposit and not a deemed dividend and, therefore, though this aspect has not been considered by the Tribunal but since the order of the Tribunal can be supported by another legal reason on the admitted facts, we need not send the matter back.”
6.3 The Delhi High Court in the case of Ankitech (supra), had held that where loans and advances are given in the normal course of business and transaction in question benefits both, i.e. the payer and the payee companies, the provisions of Sec.2(22)(e) cannot be invoked. The Hon’ble Supreme Court in the case of Commissioner of Incometax vs. Madhur Housing & Development Co., reported in [2018] 93 taxmann.com 502 (SC)., held as under:-
“Section 2(22) of the Incometax Act, 1961-Deemed dividend – (Applicability of)- High Court relied upon judgment of Delhi High Court in Commissioner of Incometax v. Aankitech (P) Ltd. [2011] 11 taxmann.com 100 (Delhi) in which it was held that (I) legal fiction created under section 2(22)(e) enlarges definition of dividend only and it cannot be extended further for broadening concept of shareholders, (ii) a concern in which shareholder of payer company has at least 20 per cent of voting power and loan or advance under this category is given admittedly not to a shareholder / member of payer company, under no circumstances, said concern can be treated as shareholder / member receiving dividend, (iii) in a case where conditions stipulated in section 2(22)(e) treating loan and advance as deemed dividend are established, revenue can treat dividend income at hands of shareholders and tax them accordingly, and (iv) where loans and advances are given in normal course of business and transaction in question benefits both payer and payee companies, provisions of section 2(22)(e) cannot be invoked.”
6.4 It is well settled in the case of Kelvinator of India (supra), that reason must have a link with the formation of the belief.
7. In view of the aforesaid, the notice dated 27.03.2021 issued under section 148 of the Income Tax Act, 1961, and the order disposing of the objections are hereby quashed and set aside. The petition is allowed, accordingly. Rule is made absolute to the aforesaid extent.
