2005 (11) TMI 193 - AT - Income Tax

Tribunal reduces additions under IT Act, clarifies accumulated profits criteria

Parmod Kumar Dang. Versus Joint Commissioner Of Income-tax.

The Tribunal partially allowed the appeal, directing the Assessing Officer to reduce the addition to Rs. 30,000 under Section 2(22)(e) of the IT Act, ... Accumulated Profits Issues Involved:1. Treatment of advances/loans as deemed dividend under Section 2(22)(e) of the IT Act, 1961.2. Determination of 'accumulated profits' for the purpose of Section 2(22)(e).3. Addition of unexplained credits under Section 68 of the IT Act, 1961.Detailed Analysis:Issue 1: Treatment of Advances/Loans as Deemed Dividend under Section 2(22)(e) of the IT Act, 1961The primary issue raised by the assessee was against the CIT(A)'s decision to sustain the addition made by the AO, treating advances/loans totaling Rs. 79,07,500 as deemed dividend under Section 2(22)(e) of the IT Act, 1961. The AO found that the assessee had substantial borrowings from a company in which he had substantial interest, and thus, these borrowings were treated as deemed dividend. The assessee argued that the company did not possess accumulated profits at the time of receiving the advances/loans. The AO, however, concluded that the company had substantial accumulated profits due to undisclosed income assessed during a search and seizure operation. The CIT(A) upheld the AO's decision, noting that the company's accumulated profits were sufficient to cover the advances/loans.Issue 2: Determination of 'Accumulated Profits' for the Purpose of Section 2(22)(e)The assessee contended that the company did not have accumulated profits on the dates of payment of advances, as the profits were only determined at the end of the financial year. The AO included undisclosed income assessed under Section 158BC as part of accumulated profits. The Tribunal examined whether such undisclosed income could be considered accumulated profits. Referring to Supreme Court judgments, the Tribunal held that 'accumulated profits' should mean commercial profits earned from business activities, not merely assessed profits. Therefore, the undisclosed income assessed under Section 158BC could not be considered accumulated profits. The Tribunal also determined that accumulated profits must be ascertained on the date of payment of advances. The Tribunal found that the company did not possess accumulated profits up to 29th February 1996, and thus, payments made up to that date could not be treated as deemed dividend. However, an advance of Rs. 30,000 made on 13th March 1996 was liable to be treated as deemed dividend.Issue 3: Addition of Unexplained Credits under Section 68 of the IT Act, 1961The assessee challenged the addition of Rs. 5,47,886 representing unexplained credits under Section 68. The AO found that the assessee received cash credits from two individuals and required verification. The assessee provided affidavits and income-tax particulars of the creditors, but the AO's enquiries revealed that the creditors were not assessed in the claimed circle, and notices issued under Section 131 were unserved. The AO concluded that the assessee failed to prove the genuineness of the credits. The Tribunal noted that the opening balances in the creditors' accounts were brought forward from the previous year and that the AO had not doubted the amounts repaid by the assessee. Thus, the Tribunal set aside the addition, directing the AO to delete it.Conclusion:The Tribunal partly allowed the appeal, directing the AO to scale down the addition to Rs. 30,000 under Section 2(22)(e) and to delete the addition of Rs. 5,47,886 under Section 68.