1978 (3) TMI 32 - HC - Income Tax

Court rules in favor of assessee on deemed dividends & capital gains assessment. Revenue to pay costs.

The court ruled in favor of the assessee in a case involving the deduction of deemed dividends from accumulated profits and the assessment of capital ... Accumulated Profits, Capital Gains, Deemed Dividend Issues Involved1. Whether the deemed dividends assessed in the hands of various shareholders in past assessment years should be deducted from the surplus while determining the 'accumulated profits' in the hands of the company.2. Whether no capital gain was assessable in the hands of the assessee due to no extinguishment of any right of the assessee and consequently no transfer within the meaning of section 2(47) of the Income-tax Act, 1961.Issue-Wise Detailed AnalysisIssue 1: Deemed Dividends and Accumulated ProfitsThe first issue revolves around whether the deemed dividends assessed in the hands of various shareholders in past assessment years should be deducted from the accumulated profits of the company. The court examined Section 2(22)(d) and (e) of the Income-tax Act, 1961, which define 'dividend' and its implications on accumulated profits. The court emphasized that 'accumulated profits' include profits from past years, excluding those before April 1, 1933. The court noted that the term 'accumulated profits' refers to undistributed profits accumulated over the years.The relevant facts include four sums advanced to shareholders in previous years, which were considered dividends under Section 2(22)(e). The Tribunal had determined the accumulated profits to be Rs. 3,01,331, and the court had to decide if Rs. 64,517 (the total of the four sums) should be deducted from this amount. The court concluded that deemed dividends under Section 2(22)(e) should indeed be considered as coming from accumulated profits, supported by the statutory provisions in Section 194 of the Income-tax Act and Section 205 of the Companies Act, 1956. Therefore, the sum of Rs. 64,517 should be deducted from the accumulated profits of Rs. 3,01,331, and the first question was answered in favor of the assessee.Issue 2: Capital Gains and Extinguishment of RightsThe second issue concerns whether there was any capital gain assessable in the hands of the assessee due to the reduction of capital and whether this constitutes a transfer under Section 2(47) of the Income-tax Act, 1961. The court examined the definitions of 'transfer' and 'capital gains' under Sections 2(47), 45, and 48. The court noted that there had been no sale, exchange, or relinquishment of assets, and the reduction of capital did not involve an exchange as the company did not receive anything in return.The court also considered whether there was any extinguishment of the shareholder's rights. It concluded that the shareholder's rights remained intact, as they continued to hold the same number of shares, and there was no real extinguishment of rights. The court emphasized that capital gains tax could only be imposed based on a strict interpretation of the provisions, and in this case, there was no transfer of capital assets by the assessee. Therefore, the second question was also answered in favor of the assessee.ConclusionIn conclusion, the court answered both questions in favor of the assessee and against the revenue. The deemed dividends should be deducted from the accumulated profits, and there was no assessable capital gain as there was no transfer of capital assets. The revenue was directed to pay the costs of the assessee, including counsel's fee of Rs. 500.