Revision u/s 263 quashed as AO in view of legal position made conscious decision on applicability of section 2(22)(e)

Revision u/s 263 quashed as AO in view the legal position made a conscious decision holding that section 2(22)(e) was not applicable to the case.

ABCAUS Case Law Citation:
ABCAUS 2987 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
Pradip Kumar Malhotra v CIT (2011) 338 ITR 538

The assessee had challenged the orders passed by the Principal Commissioner of Income Tax, under section 263 of the Income Tax Act, 1961 (the Act) on the issue of applicability of deemed dividend.

The assessee was a Company. The assessments was completed by the Assessing Officer (AO) under section 153A/143(3) of the Act for three years under consideration.

The record of the said assessments came to be examined by the Principal CIT. On such examination, he found that the assessee company had received unsecured loans from Group Companies.

The PCIT further noted that the assessee-company was shareholder in all these Group Companies and was having substantial shareholding and all these companies who were having substantial accumulated profit during the years under consideration.

According to the Principal CIT, the loan amounts received by the assessee-company during the years under consideration thus were liable to be assessed in the hands of the assessee-company as deemed dividend under section 2(22)(e) of the Act and there was an error in the orders of the Assessing Officer passed under section 153A/143(3) in not making any enquiries/verification in respect of the said loans so as to consider the applicability of section 2(22)(e).

He accordingly issued notices under section 263 requiring the assessee to show-cause as to why remedial action should not be taken by exercising the powers under section 263 to revise the orders passed by the Assessing Officer under section 153A/143(3).

In reply to the show-cause notices, the assessee submitted that those companies had advanced loan in their ordinary course of business and it was out of purview of section 2(22)(e) of the Act. Relying on the decision of the jurisdictional High Court, it was also submitted that those companies had duly charged interest on the loan given and thus such transaction should be treated as being entered during the normal course of business.

However, the submissions made by the assessee were not found acceptable by the Principal CIT. Instead, he held that the assessments made by the Assessing Officer was without making any enquiry or verification regarding the applicability of section 2(22)(e) to the loans in question and such lack of enquiry or verification made the said orders erroneous insofar as prejudicial to the interest of revenue.

He accordingly set aside the orders passed by the Assessing Officer vide orders passed under section 263 with a direction to the Assessing Officer to make the assessments afresh.

Aggrieved by the orders of the Principal CIT, the assessee had preferred the instant appeals before the Tribunal.  

The Tribunal observed that the details of unsecured loans taken during the years under consideration by the assessee-company from the other Group Companies were called for by the Assessing Officer during the course of assessment proceedings and the same were duly furnished by the assessee.

Also, in the Tax Audit Reports filed by the assessee-company along with its returns of income, the unsecured loans received by the assessee-company during the years under consideration from the other Group Companies and squared off in the same years were duly reflected and even interest paid thereon was duly shown in the said Tax Audit Reports in the details of payments made to related persons as specified in section 40A(2)(b).

The Tribunal opined that all the relevant details to ascertain the applicability of section 2(22)(e) to the loan amounts in question taken by the assessee-company were either available on the record before the Assessing Officer or the same were called for by him during the course of assessment proceedings by raising specific queries and after applying his mind to the said details, a conscious decision was taken by him as regards the non-applicability of section 2(22)(e) to the loan amounts in question while completing the assessment under section 153A/143(3) of the Act.

The Tribunal opined that therefore, it could not be said that there was an error in the orders of the Assessing Officer in not making any enquiry or verification on the issue of applicability of section 2(22)(e) to the loan amounts in question as alleged by the Principal CIT and the revision under section 263 by the ld. Principal was not called for.

The Tribunal also observed that the assessee company had paid interest on the loan amounts in question taken from the other Group Companies and as held by the Hon’ble jurisdictional High Court the said loans given to the assessee-company by the other Group Companies as a consequence of further consideration, which were beneficial to the said companies, could not be treated as deemed dividend under section 2(22)(e).

The Tribunal opined that the Assessing Officer had not only made the enquiry or verification as required in the facts of the case to ascertain the applicability of section 2(22)(e) to the loan amounts received by the assessee from the other group companies, but a conscious decision was also taken by him keeping in view the legal position that section 2(22)(e) was not applicable to the loan amounts in question received by the assessee during the years under consideration from the other Group Companies.

Accordingly, the Tribunal set aside the impugned orders passed by the Principal CIT under section 263 and restored that of the Assessing Officer passed under section 153A/143(3) of the Act.

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