Reopening Of Income Tax Assessment Can't Be Allowed On Grounds Of Future Contingencies: Bombay High Court

The division bench of Justice N.J.Jamadar and Justice K.R.Shriram has noted that the entire exercise of reassessment is only contingent on a future event and a consequence that may endure upon the decision of the Tribunal, that again if the Tribunal were to hold against the Revenue. A reopening of an assessment under Section 148 cannot be justified on such a basis. There has to be a reason to believe that income has escaped assessment. 'Has escaped assessment' indicates an event which has taken place.

The court relied on the decision in the case of DHFL Venture Capital Fund V/s. Income Tax Officer wherein it was held that tax legislation cannot be rewritten by the Revenue or the Court by substituting the words 'may escape assessment' in future. Writing legislation is a constitutional function entrusted to the legislature.

The Petitioner/assessee held 50% of the equity share capital of Shivum Holdings Pvt. Ltd. (Shivum) and 25% of the equity share capital of P & A Estate Pvt. Ltd. (P&A). Petitioner's wife, Rachana Murarka held 50% of the equity share capital of Shivum and 25% of the equity share capital of P&A. Balance 50% of the equity share capital of P&A was held by Mr. Akshat Prasad. Shivum held 85% interest in a partnership firm named Laxmi Trading Company (LTC) and petitioner held the balance 15% interest in LTC. During the previous year relevant to the assessment year 2006-2007, LTC gave an advance to P&A on behalf of Shivum. The accumulated profits of Shivum a.

The Commissioner of Income Tax (Appeals) decided P&A's appeal against the Revenue holding that addition under Section 2(22)(e) cannot be made in the hands of P&A since P&A was not a shareholder of Shivum. The other contentions of P&A challenging the correctness of the treatment of the amounts advanced as dividend were not adjudicated. The view of CIT(A) was not accepted by the Department and an appeal was filed by them before the Income Tax Appellate Tribunal (ITAT) contending that an addition under Section 2(22)(e) was required to be made in the hands of P&A.

The ITAT dismissed Revenue's appeal and held that the addition under Section 2(22)(e) can only be made in the hands of the shareholder and since P&A was not the shareholder, addition in its hands could not be sustained, thus deciding the issue against Revenue.

Unhappy with the view of the ITAT, an appeal was filed by Revenue before the High Court at Delhi maintaining their contention that the addition was required to be made in the hands of P&A. The High Court was pleased to dismiss Revenue's appeal by an order and judgement pronounced on 11th May 2011 holding that the loan or advance cannot be treated as deemed dividend in the hands of the concern which is not a shareholder.

The counsel for the assessee submitted that the notice impugned in the petition is barred by limitation since it is issued beyond a period of six years from the end of the relevant assessment year, which is the time limit within which the impugned notice was required to be issued as per Section 149(1)(b) of the said Act. Therefore, the impugned notice is invalid and deserves to be quashed.

It was further contended that for Section 150 of the said Act to apply, the notice must be issued in consequence of or to give effect to any finding or direction and the order in question must be passed by any authority in any proceeding under this Act or by a Court in any proceeding under any other law. Since none of these statutory requirements are fulfilled in the present case, Section 150 has no application and does not save the impugned notice from being barred by limitation.

On the other hand, the counsel for the department has contended that reassessment proceedings can be initiated without being affected by the limitation period stated in Section 149 because Section 150(1) of the said Act clearly mentions that notice under Section 148 may be issued at any time to give effect to any "finding" or "direction" contained in an order passed by any authority in any proceedings under the Act by way of appeal, reference or revision or by a Court in any proceeding under any other law. Hence, reassessment proceedings can be initiated by the department even after March 2013.

The court quashed the notice issued by the department under Section 148 of the Income Tax Act. Consequently, the orders rejecting petitioner's objections are also quashed and set aside.

Case Title: Pavan Morarka Versus The Assistant Commissioner of Income Tax – 2(3), Mumbai

Citation: 2022 LiveLaw (Bom) 58

Case No.: Writ Petition No. 602 Of 2014

Counsel For The Petitioner: Senior Advocate P.J. Pardiwalla, along with Advocate Niraj Sheth

Counsel For The Respondent: Advocate Suresh Kumar

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