2018 (8) TMI 51 - AT - Income Tax

Tribunal rules on deemed dividend inclusion criteria under Income Tax Act

The Tribunal upheld the CIT(A)'s decision to delete the addition under Section 2(22)(e) of the Income Tax Act, 1961, as there were no accumulated profits ... Deemed dividend addition u/s 2(22)(e) - proof of accumulated profits for the purpose of section 2(22)(e) - Held that:- CIT(A) has rightly observed that AO has wrongly made the addition u/s. 2(22)(e) by holding that there are accumulated profits in the hands of M/s Robin Software Pvt. Ltd. Ld. CIT(A) has also noticed that the AO has completed the assessment of M/s Robin Software Pvt. Ltd. for assessment year 2012-13 and no addition has been made in the hands of that company and return of loss has been accepted. CIT(A) has rightly cancelled the order of the AO by holding that if the AO has accepted the income returned by the said company and not made any changes in the return of income and assessed the income as declared by the said company, he cannot hold that there was accumulated profits for the purpose of section 2(22)(e) of the Act. when AO assesses the income of M/s Robin Software Pvt. Ltd. as loss for the same financial year, there could be no ground available to hold that the said company had accumulated profits at the time of making loans/advances. Therefore, the addition made as deemed dividend u/s. 2(22)(e) of ₹ 13,88,23,000/- was rightly deleted by the Ld. CIT(A) for want of fulfillment of the required conditions stipulated under the said section, which does not need any interference - decided against revenue Issues Involved:1. Legality of the order of the CIT(A).2. Deletion of addition of Rs. 13,88,23,000/- made by the AO under Section 2(22)(e) of the Income Tax Act, 1961.3. Assessment of accumulated profits and their inclusion in the deemed dividend calculation.4. Validity of the agreement between the assessee and M/s Robin Software (P) Ltd. and its subsequent cancellation.5. Treatment of current year’s profit in determining accumulated profits.Issue-Wise Detailed Analysis:1. Legality of the order of the CIT(A):The Revenue contended that the order of the CIT(A) was incorrect both in law and on facts. The CIT(A) had deleted the addition made by the AO under Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal upheld the CIT(A)’s decision, noting that the AO had accepted the loss return filed by M/s Robin Software Pvt. Ltd. for the same financial year, thereby negating the existence of accumulated profits necessary for the application of Section 2(22)(e).2. Deletion of addition of Rs. 13,88,23,000/- made by the AO under Section 2(22)(e) of the Income Tax Act, 1961:The AO had added Rs. 13,88,23,000/- to the assessee’s income as deemed dividend under Section 2(22)(e). The CIT(A) deleted this addition, reasoning that M/s Robin Software Pvt. Ltd. had reported a loss for the same financial year, and thus, there were no accumulated profits to justify the addition. The Tribunal agreed with the CIT(A), emphasizing that the AO could not claim accumulated profits for the purpose of Section 2(22)(e) while simultaneously accepting the company's loss return.3. Assessment of accumulated profits and their inclusion in the deemed dividend calculation:The AO argued that the company should have recognized revenue on a day-to-day basis, which would have resulted in accumulated profits by the time the loans/advances were made. The CIT(A) and Tribunal rejected this view, citing that profits are determined at the end of the financial year, not on a day-to-day basis. The Tribunal referenced the Supreme Court’s ruling in CIT vs. Ashokbhai Chimanbhai, which established that profits accrue at the end of the accounting period.4. Validity of the agreement between the assessee and M/s Robin Software (P) Ltd. and its subsequent cancellation:The Revenue questioned the genuineness of the agreement for the sale of house property, suggesting it was a tax evasion scheme. The Tribunal found no evidence to support this claim. The agreement was executed on stamp paper and witnessed, and its cancellation was due to the conversion of the company into an LLP. The Tribunal upheld the CIT(A)’s finding that the agreement was genuine and the amount received was not a loan or advance but part of a sale transaction, thus not falling under Section 2(22)(e).5. Treatment of current year’s profit in determining accumulated profits:The AO included the current year’s profits in the accumulated profits for the purpose of Section 2(22)(e). The Tribunal, referencing judicial precedents, held that current year’s profits do not form part of accumulated profits as they accrue at the end of the financial year. The Tribunal cited CIT vs. M. B. Stockholding Pvt. Ltd., which confirmed that current profits are not included in accumulated profits for deemed dividend calculations.Conclusion:The Tribunal dismissed the Revenue’s appeal, supporting the CIT(A)’s deletion of the addition under Section 2(22)(e) due to the lack of accumulated profits. The Tribunal also dismissed the assessee’s cross-objections as infructuous, given the primary appeal’s outcome. The judgment reaffirmed that current year’s profits are not included in accumulated profits and validated the genuineness of the property sale agreement. The Tribunal’s decision was pronounced on 11-07-2018.