A company in which my client holds shares lent money to two other companies in which he also holds shares. He received nothing. Can the reassessment stand?
No, on these reasons. The Gujarat High Court quashed a s.148 notice issued more than four years after the assessment year, holding that where the reasons recorded show only that the lender advanced unsecured loans to sister concerns, and contain no information that the payment was made for the benefit of the petitioner, no obligation lay on him to disclose those transactions. Without a finding that income had accrued to him, the first proviso to s.147 was not satisfied.
Decided by the High Court (Harsha Devani J and G.R. Udhwani J) on 2020-03-26, reported as R/Special Civil Application No. 15992 of 2015 (Gujarat High Court). It bears on section 2(22)(e), section 147, section 148, section 148(2), section 143(3), section 142(1), section 143(2) of the Income Tax Act 1961, in Reassessment & Reopening matters.
This is the reassessment side of the Ankitech problem. The Assessing Officer's reasons treated every loan by a company to a sister concern as deemed dividend 'in the hands of the shareholder' merely because the shareholder held more than 10 per cent in each; the Court held that reasoning does not, by itself, disclose income escaping assessment in the individual's hands, because s.2(22)(e) requires the payment to be to the shareholder, or to a concern in which he has a substantial interest, or on his behalf or for his individual benefit, and here there was nothing to show benefit to him. The point has real value for a live notice: the failure that unlocks the extended period under the first proviso to s.147 has to be a failure to disclose material facts, and there is no duty to disclose a transaction from which the assessee derived nothing. Read it with care on the substantive law, though — the question whether a payment to a concern can be taxed in the shareholder's hands where he never received the money is exactly the point on which the Delhi High Court in Ankitech and the Supreme Court in National Travel Services pull in different directions, and this judgment resolves the reassessment question, not that one.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioner, an individual, filed his return for assessment year 2008-09 showing total income of Rs 1,48,89,810 together with audit reports in Forms 3CB and 3CD. After notices under s.142(1) dated 16 September 2010 and 19 October 2010 and a notice under s.143(2), and after the petitioner had furnished details by replies dated 14 October 2010, 18 and 26 November 2010, 2 December 2010 and a further letter, the Assessing Officer passed an assessment order under s.143(3) on 28 December 2010 determining income at Rs 2,02,55,060 and making six additions. The petitioner appealed and the Commissioner (Appeals) decided on 26 September 2011. On 27 March 2015, more than four years after the end of the assessment year, a notice under s.148 was issued. The reasons recorded stated that on information from the DCIT, TDS Circle, Ahmedabad, unsecured loans had been extended by M/s J. P. Infrastructure Ltd, now J. P. Iscon Ltd, to various sister concerns during financial year 2007-08; that no disclosure of those related-party transactions had been made; and that under s.2(22)(e) the unsecured loans extended to its related concerns should be treated as deemed dividend in the hands of the shareholder, income of Rs 14,68,76,145 having escaped assessment. The concerns were Gujarat Mall Management Co. Pvt Ltd and Aryan Arcade Pvt Ltd, in which, with the lender, the petitioner held 27.49 per cent, 50.00 per cent and 29.00 per cent. Objections were rejected by orders at Annexures T and V, and the petitioner moved the High Court under Article 226.
The petition succeeded and was allowed. The notice dated 27 March 2015 under s.148 reopening the assessment for assessment year 2008-09, and all proceedings pursuant to it, were quashed and set aside. Where the reasons recorded show only that the lender company advanced unsecured loans to its sister concerns and contain no information that the payment was made for the benefit of the petitioner, and where no finding has been recorded that any income accrued in his favour, no obligation lay on the petitioner to disclose those transactions.
The Court read s.2(22)(e) as envisaging payment by way of loan or advance in any of the three modes provided in it to be deemed dividend in the hands of the concerned shareholder to the extent of the accumulated profits of the loan-giver company (para 7.10). On the reasons recorded, while the Assessing Officer had information that the lender had advanced unsecured loans to sister concerns, there was no information that such payment was made for the benefit of the petitioner (para 7.11), and in the absence of any benefit having been received by him there was no obligation to disclose such transactions (para 7.11). The assessment year being 2008-09 and the notice having issued on 27 March 2015, it was clearly beyond four years from the end of the relevant assessment year (para 7.14). It was not the Assessing Officer's case that the petitioner had received any loan from the loan-giver company or that the loans were for his benefit, and in the absence of any finding that income had accrued in his favour, it could not be said that any obligation to disclose lay upon him (para 7.17).
Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions.
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Handle my notice → Ask a CA on WhatsAppNo, on these reasons. The Gujarat High Court quashed a s.148 notice issued more than four years after the assessment year, holding that where the reasons recorded show only that the lender advanced unsecured loans to sister concerns, and contain no information that the payment was made for the benefit of the petitioner, no obligation lay on him to disclose those transactions. Without a finding that income had accrued to him, the first proviso to s.147 was not satisfied. This was decided by the High Court (Harsha Devani J and G.R. Udhwani J) and bears on section 2(22)(e), section 147, section 148, section 148(2), section 143(3), section 142(1), section 143(2) of the Income Tax Act 1961. It is reported as R/Special Civil Application No. 15992 of 2015 (Gujarat High Court). This is the reassessment side of the Ankitech problem. The Assessing Officer's reasons treated every loan by a company to a sister concern as deemed dividend 'in the hands of the shareholder' merely because the shareholder held more than 10 per cent in each; the Court held that reasoning does not, by itself, disclose income escaping assessment in the individual's hands, because s.2(22)(e) requires the payment to be to the shareholder, or to a concern in which he has a substantial interest, or on his behalf or for his individual benefit, and here there was nothing to show benefit to him. The point has real value for a live notice: the failure that unlocks the extended period under the first proviso to s.147 has to be a failure to disclose material facts, and there is no duty to disclose a transaction from which the assessee derived nothing. Read it with care on the substantive law, though — the question whether a payment to a concern can be taxed in the shareholder's hands where he never received the money is exactly the point on which the Delhi High Court in Ankitech and the Supreme Court in National Travel Services pull in different directions, and this judgment resolves the reassessment question, not that one. If it applies to you, the first step is this: Ask for the reasons recorded and test them on their own terms: do they say the assessee received anything, or that the payment was for his individual benefit?
The petitioner, an individual, filed his return for assessment year 2008-09 showing total income of Rs 1,48,89,810 together with audit reports in Forms 3CB and 3CD. After notices under s.142(1) dated 16 September 2010 and 19 October 2010 and a notice under s.143(2), and after the petitioner had furnished details by replies dated 14 October 2010, 18 and 26 November 2010, 2 December 2010 and a further letter, the Assessing Officer passed an assessment order under s.143(3) on 28 December 2010 determining income at Rs 2,02,55,060 and making six additions. The petitioner appealed and the Commissioner (Appeals) decided on 26 September 2011. On 27 March 2015, more than four years after the end of the assessment year, a notice under s.148 was issued. The reasons recorded stated that on information from the DCIT, TDS Circle, Ahmedabad, unsecured loans had been extended by M/s J. P. Infrastructure Ltd, now J. P. Iscon Ltd, to various sister concerns during financial year 2007-08; that no disclosure of those related-party transactions had been made; and that under s.2(22)(e) the unsecured loans extended to its related concerns should be treated as deemed dividend in the hands of the shareholder, income of Rs 14,68,76,145 having escaped assessment. The concerns were Gujarat Mall Management Co. Pvt Ltd and Aryan Arcade Pvt Ltd, in which, with the lender, the petitioner held 27.49 per cent, 50.00 per cent and 29.00 per cent. Objections were rejected by orders at Annexures T and V, and the petitioner moved the High Court under Article 226. The matter was decided on 2020-03-26 by the High Court (Harsha Devani J and G.R. Udhwani J). On those facts the High Court held as follows. The petition succeeded and was allowed. The notice dated 27 March 2015 under s.148 reopening the assessment for assessment year 2008-09, and all proceedings pursuant to it, were quashed and set aside. Where the reasons recorded show only that the lender company advanced unsecured loans to its sister concerns and contain no information that the payment was made for the benefit of the petitioner, and where no finding has been recorded that any income accrued in his favour, no obligation lay on the petitioner to disclose those transactions.
The Court read s.2(22)(e) as envisaging payment by way of loan or advance in any of the three modes provided in it to be deemed dividend in the hands of the concerned shareholder to the extent of the accumulated profits of the loan-giver company (para 7.10). On the reasons recorded, while the Assessing Officer had information that the lender had advanced unsecured loans to sister concerns, there was no information that such payment was made for the benefit of the petitioner (para 7.11), and in the absence of any benefit having been received by him there was no obligation to disclose such transactions (para 7.11). The assessment year being 2008-09 and the notice having issued on 27 March 2015, it was clearly beyond four years from the end of the relevant assessment year (para 7.14). It was not the Assessing Officer's case that the petitioner had received any loan from the loan-giver company or that the loans were for his benefit, and in the absence of any finding that income had accrued in his favour, it could not be said that any obligation to disclose lay upon him (para 7.17). In the words reproduced by the source cited on this page: "Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions."
It was decided by the High Court on 2020-03-26 and is reported as R/Special Civil Application No. 15992 of 2015 (Gujarat High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 2(22)(e), section 147, section 148, section 148(2), section 143(3), section 142(1), section 143(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The petition succeeded and was allowed. The notice dated 27 March 2015 under s.148 reopening the assessment for assessment year 2008-09, and all proceedings pursuant to it, were quashed and set aside. Where the reasons recorded show only that the lender company advanced unsecured loans to its sister concerns and contain no information that the payment was made for the benefit of the petitioner, and where no finding has been recorded that any income accrued in his favour, no obligation lay on the petitioner to disclose those transactions. It arises in Reassessment & Reopening matters, on section 2(22)(e), section 147, section 148, section 148(2), section 143(3), section 142(1), section 143(2) of the Income Tax Act 1961, and was decided by Harsha Devani J and G.R. Udhwani J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the notice is beyond four years, plead the first proviso to s.147 and show there was no failure to disclose, because there was nothing the assessee was obliged to disclose. If the Assessing Officer relies on related-party disclosure norms, check whether Accounting Standard 18 applied to the assessee at all — the petitioner here showed it did not, being an individual below the turnover threshold. Where s.2(22)(e) was examined in the original scrutiny, take the change-of-opinion point as well; that was pressed here on the basis of specific s.2(22)(e) questions asked in the s.143(3) proceedings. Keep the substantive defence separate and in reserve — that the amount, if taxable at all, is taxable in the hands of the registered shareholder who received it, and not by attribution.
Validity check could not be completed. Validity check could not be completed — no search for any appeal against this judgment or for later treatment was run on this pass. The decision quashes a reassessment notice and does not decide the substantive question of whose hands a payment to a concern is taxable in; that question is contested, the Delhi High Court in Ankitech having held the concern is not taxable and the Supreme Court in National Travel Services having doubted the registered-shareholder line and referred it for reconsideration. The reassessment machinery itself has since been replaced by the s.148A regime from 1 April 2021, so the procedural route in a current case is different even though the first-proviso reasoning on failure to disclose remains relevant to reopening beyond three years. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A first pass over the print view returned a facts-and-question section written as narrative prose rather than as the Court's own sentences; the facts stated here have been taken from a second pass that returned paragraphs 2 to 5 and the reasons recorded verbatim. The key quote as first returned read 'In the absence of any benefit having been received by the petitioner, there was no obligation...' but a phrase re-fetch showed the sentence in fact begins 'Therefore, in the absence...'; the re-fetched version has been used, and it is the closing sentence of paragraph 7.11. The reasons recorded contain a table of loan details and shareholding percentages that was not reproduced in the text available on this pass, and the reasons quantify the escaped income at Rs 14,68,76,145. The judgment's reasoning runs continuously from 7.1 to 7.17: paragraph 7.13 holds that deciding the benefit question at the re-assessment stage would be to permit a fishing inquiry, and paragraph 7.15 holds that neither of the two factors under clause (e) — a loan to the petitioner, and accumulated profits — appears in the reasons recorded, so the reopening was without due application of mind. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The petition succeeded and was allowed. The notice dated 27 March 2015 under s.148 reopening the assessment for assessment year 2008-09, and all proceedings pursuant to it, were quashed and set aside. Where the reasons recorded show only that the lender company advanced unsecured loans to its sister concerns and contain no information that the payment was made for the benefit of the petitioner, and where no finding has been recorded that any income accrued in his favour, no obligation lay on the petitioner to disclose those transactions.
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