Tribunal Rules Loans from Profitable Companies as Deemed Dividends; Orders Recalculation Based on Accumulated Profits.

The Tribunal upheld the application of Section 2(22)(e) of the IT Act, treating loans from companies with accumulated profits as deemed dividends. It rejected the arguments regarding the business of moneylending, repayment of loans, and the absence of evidence for deemed dividends in other shareholders' hands. The Tribunal directed the AO to recompute deemed dividends based on accumulated profits up to the date of each loan or advance, following the precedent set by the Ahmedabad Bench. The appeals were partly allowed for statistical purposes, with the matter restored to the AO for recalculation.

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Issues Involved:
1. Deemed Dividend under Section 2(22)(e) of the IT Act.
2. Accumulated Profits for the purpose of Deemed Dividend.
3. Business of Moneylending and its impact on Deemed Dividend.
4. Repayment of Loan and its consideration in Deemed Dividend.
5. Accumulated Profits Calculation Date.
6. Evidence of Deemed Dividend in other Shareholders' hands.

Issue-wise Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e) of the IT Act:
The primary issue revolves around whether loans taken by the assessee from companies in which they hold substantial shares should be treated as deemed dividends under Section 2(22)(e) of the IT Act. The AO observed that the assessee, holding 25% shares in M/s GDPL, took a loan from GDPL which had accumulated profits. The AO treated this loan as deemed dividend under Section 2(22)(e), which was upheld by the CIT(A) but with a reduction for an opening debit balance. The Tribunal supported the CIT(A)'s application of Section 2(22)(e), emphasizing that the law does not provide relief for loan repayments.

2. Accumulated Profits for the purpose of Deemed Dividend:
The Tribunal examined whether the profits deemed to be dividends were distributable and capitalizable. The assessee argued that the profits were provisional and not distributable. However, the Tribunal upheld that accumulated profits include all profits up to the date of loan payment, as per Explanation 2 to Section 2(22)(e).

3. Business of Moneylending and its impact on Deemed Dividend:
The assessee contended that since GDPL was involved in moneylending, the provisions of Section 2(22)(e) should not apply. The Tribunal found no substantial evidence that moneylending was a significant part of GDPL's business or income, thus rejecting this argument.

4. Repayment of Loan and its consideration in Deemed Dividend:
The assessee argued for the reduction of Rs. 8,000 repaid during the year from the deemed dividend. The Tribunal dismissed this plea, stating that the law does not provide for any relief for repayments of such loans.

5. Accumulated Profits Calculation Date:
The Tribunal emphasized that for determining deemed dividends, accumulated profits must be calculated up to the date of each loan or advance, following the precedent set by the Ahmedabad Bench in M.B. Stock Holding (P) Ltd. vs. Asstt. CIT. The AO was directed to recompute the deemed dividend based on accumulated profits up to the date of each loan/advance.

6. Evidence of Deemed Dividend in other Shareholders' hands:
The assessee argued that the addition in respect of all shareholders should not exceed the accumulated profit. The Tribunal found no evidence that deemed dividends were added in the hands of other shareholders and dismissed this argument.

Separate Judgments:
For ITA No. 1925/Mum/2006 (Asst. yr. 2002-03), the Tribunal followed the same reasoning as in ITA No. 1924/Mum/2006, restoring the matter to the AO to calculate deemed dividends based on accumulated profits up to the date of each loan/advance.

For ITA No. 1922/Mum/2006 (Asst. yr. 2001-02), the Tribunal reiterated its stance on accumulated profits and directed the AO to determine the accumulated profit on the date of loans/advances.

For ITA No. 1923/Mum/2006 (Asst. yr. 2001-02), the Tribunal followed the same directive as in ITA No. 1922/Mum/2006, restoring the matter to the AO to calculate deemed dividends based on accumulated profits on the date of each loan/advance.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the AO to recompute deemed dividends based on accumulated profits up to the date of each loan/advance, rejecting arguments related to moneylending business, loan repayments, and lack of evidence for deemed dividends in other shareholders' hands.

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