2010 (5) TMI 64 - HC - Income Tax

Court rules loan from company not deemed dividend under Income-tax Act. Liability for house tax considered.

The court upheld the Tribunal's decision that the loan obtained by the assessee from a company cannot be treated as deemed dividend under Section 2(22)(e) ... Deemed Dividend – Accumulated profit - The assessee is a share-holder in Jyoti Theatres Pvt. Ltd. The assessee holds 35% of shareholding in that company. In the year in question, the assessee obtained a loan of Rs 15 lakhs from Jyoti Theatres Pvt. Ltd. The Assessing Officer treated the said amount as deemed dividend to the extent of accumulated profit of Rs 13,33,493.85 shown in the balance sheet of the said company as on 31.03.2001. – CIT(A) deleted the said addition after taking note of the fact that Jyoti Theatres Pvt. Ltd had a liability of Rs 57,81,997/- towards house tax payable by the said company to the Municipal Corporation of Delhi (MCD). Consequently, if the said sum of Rs 57,81,997/- is deducted from the accumulated profit of Rs 13,33,493.85 as shown in the balance sheet by the said Jyoti Theatres Pvt. Ltd, then the company would have accumulated losses rather than profit. As a result, the said loan of Rs 15 lakhs or any part thereof could not be treated as deemed dividend within the meaning of Section 2(22)(e) of the Income-tax Act, 1961 – ITAT confirmed the order of CIT(A).Held that: that the books of accounts as prepared by any assessee are not decisive. The provisions of the Income-tax Act, 1961 would have to be gone into and the liability has to be determined on the basis of the provisions of the said Act. Furthermore, the treatment given by Jyoti Theatres Pvt. Ltd would not bind the present assessee where the present assessee is able to show that he is not otherwise liable to pay any tax on a particular item as per the provisions of the said Act. In fact, the present assessee cannot be precluded from showing that the said amount of house tax payable was an ascertained liability irrespective of the fact that Jyoti Theatres Pvt. Ltd had treated the same as a contingent liability. – Decided in favor of assessee Issues:1. Whether the loan obtained by the assessee from a company can be treated as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961Rs.2. Whether the liability towards house tax of the company should be considered while determining the accumulated profit for the purpose of computing deemed dividendRs.3. Whether the findings of the Tribunal regarding the liability towards house tax as an ascertained liability are correctRs.Analysis:Issue 1: The appeal challenged the order of the Income-tax Appellate Tribunal regarding the treatment of a loan obtained by the assessee from a company as deemed dividend. The Assessing Officer treated the loan amount as deemed dividend based on the accumulated profit of the company. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the loan could not be treated as deemed dividend as the company had a liability towards house tax, which when deducted from the accumulated profit, resulted in accumulated losses. The Tribunal concluded that no deemed dividend arose in the hands of the assessee.Issue 2: The Tribunal confirmed that the liability towards house tax should be considered while determining the accumulated profit for computing deemed dividend. Even though the company had not accounted for this liability in its balance sheet, the Tribunal considered it as an ascertained liability that needed to be deducted from the profit shown in the balance sheet to ascertain the true financial position of the company. This approach led to the conclusion that no deemed dividend existed.Issue 3: The appellant/revenue argued that the company had not treated the liability towards house tax as an ascertained liability and had not made any provision for it in their accounts. However, the Court held that the treatment given by the company did not bind the assessee, and the liability had to be determined based on the provisions of the Income-tax Act, 1961. The Court emphasized that the assessee could show that the house tax payable was an ascertained liability, even if the company treated it as a contingent liability. The Court upheld the Tribunal's findings, stating that no substantial question of law arose for consideration, and dismissed the appeal.