Tribunal deletes deemed dividend addition under Income-tax Act, appeal allowed

The Tribunal allowed the appeal, deleting the addition made under section 2(22)(e) of the Income-tax Act regarding deemed dividend. The Tribunal held that without accumulated profits from earlier years, the provision of deemed dividend could not be applied to the current year's profits. Consequently, the addition made by the AO was deemed unsustainable on merits. The issue of the validity of reopening of assessment proceedings was not adjudicated as the addition on merits was deleted, and the appeal was treated as allowed.

---

---

Issues:
1. Validity of reopening of assessment proceedings under section 147 r.w.s. 148 of the Income Tax Act.
2. Addition made by Income-tax Officer under section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.

Issue 1: Validity of Reopening of Assessment Proceedings
The appeal was filed against the impugned order passed by CIT(A)-5, Mumbai for the quantum of assessment under section 143(3) r.w.s. 147 of the Income Tax Act for the A.Y 2006-07. The grounds of appeal challenged the validity of the reopening of assessment proceedings under section 147 r.w.s. 148 of the Act. The Assessee argued that all relevant details were available with the assessing officer during the original assessment, thus reopening was unjustified. The AO issued a notice for reopening based on the loan advanced by a related company to the Assessee, deemed as a dividend under section 2(22)(e). The Assessee contended that the re-opening was a "change of opinion" and no new material was presented post-assessment. The AO and CIT(A) upheld the reopening and additions made.

Issue 2: Addition Made under Section 2(22)(e)
The Assessee challenged the addition made by the Income-tax Officer under section 2(22)(e) regarding deemed dividend. The AO noted the loan advanced by a related company to the Assessee, falling under the provisions of deemed dividend. The Assessee argued that no accumulated profits existed in previous years, and therefore, the current year's reserves and surplus should not be taxed as deemed dividend. The Assessee relied on the distinction between accumulated profits and current profits as per the decision in CIT vs. V. Damodaran. The Tribunal admitted additional grounds raised by the Assessee and held that without accumulated profits from earlier years, the provision of deemed dividend could not be applied to the current year's profits. Consequently, the addition made by the AO was deemed unsustainable on merits.

The Tribunal allowed the appeal, holding that the addition on merits was deleted, rendering the issue of the validity of reopening of assessment proceedings as academic and thus not adjudicated. The appeal was treated as allowed, and the order was pronounced on 15.1.2016.

---