TaxTMI 
TaxTMI 
2004 (12) TMI 337
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....st such sums due to the assessee were being debited by Kothari Products Limited (hereinafter referred to as "KPL") to the current account as aforesaid. Such debits by and large, were covered by the credits, except that some times the debits (excluding the opening balance brought forward for earlier year) exceeded the credits for the reason that timely credits (for the sums due to the assessee) were not allowed in the Current Account, owing to the accounting delays. Such debits, without considering corresponding credits and/or in isolation thereof, were treated as "loans and advances" within the meaning of section 2(22)(e) of the Act and, on that basis, debits aggregating to Rs. 11,10,797 were added to his income as "deemed dividend" in the original assessment order made on 31st March, 1992. 3. Similar to the current account in the KPL as aforesaid, the assessee had been having an account with another company of the same group namely Ekta Flavours (P.) Limited. The debits appearing in the assessee's account in the said company were also treated as the assessee's income under the head "deemed dividend" under section 2(22)(e) of the Act as per the assessment order dated 31-3-1992 a....
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....------------------------- (ii) 17-8-1992 The assessment order mentioned above, was set aside by the ld. CIT(A) with the direction that the matter may be examined afresh after giving reasonable opportunity of being heard to the assessee on various points. ----------------------------------------------------------------------- (iii) 31-3-1995 Second assessment order passed by the Assessing Officer. However, the quantum of assessment on &nbs....
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....nbsp; complying with the directions contained in the appellate order dated 25-3-1996, listed at Serial No. iv) above. ----------------------------------------------------------------------- (vi) 25-1-1999 The assessment order mentioned at serial No. (v) above made for the third time was again set aside by the ld. CIT(A) with the directions that the assessment be made de novo, keeping in view &n....
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....--------------------------------------------------------------------- 6. Thus, it is the order of the ld. CIT(A) dated 7-1-2002 which is under challenge before us. 7. In his order dated 7-1-2002, the ld. CIT(A) has deleted the addition on account of debits appearing in the assessee's account with M/s. Ekta Flavours (P.) Ltd., amounting to Rs. 6,01,783, after holding that there was no "accumulated profit" in the said company owing to the liability of excise duty (which had not been provided for in the books of that company, nevertheless allowed in the assessment). His findings are contained in paras 11 and 12 of the appellate order. 8. However, similar claim in the case of KPL was rejected by the ld. CIT(A) after recording the following findings: "13. As far as the loans taken from M/s. Kothari Products Ltd. are concerned, the facts of the issue appear to be slightly different, although the arguments advanced by the appellant in his favour regarding the outstanding liability of Rs. 8,42,26,335 on account of sales-tax liability are similar in nature to the arguments advanced regarding the liability on account of Excise Duty in the case of M/s. Ekta Flavours (P.) Ltd. Howe....
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....ned earlier, he contended that in the assessment order dated 27th March, 2001, the Assessing Officer could not have entered into the controversy as to whether the liability of excise duty and the sales tax in the case of M/s. Ekta Flavours (P.) Ltd. and KPL respectively were liable to be adjusted from the "profits till date" as shown in the balance sheets of the two companies for the purposes of finding out whether there were "accumulated profits" or not. 11. He contended that the controversy about the admissibility of the said liabilities for the purposes of ascertainment of "accumulated profit", stood already decided in favour of the assessee, as per the order dated 25-3-1996 wherein it was categorically held by the ld. CIT(A) that the liabilities in question were subsisting and the computation of "accumulated profits" should be made after due adjustment of the same. The findings are appearing in para 4 of the said order which is reproduced hereunder: "4. On behalf of the appellant, a copy of my own order in his case in the wealth tax appears of assessment years 1988-89 and 1989-90 was furnished. It was shown therefrom that the liability had been held as allowable in view o....
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....ly circumscribed, to the directions contained in the appellate orders dated 25-3-1996 read with the order dated 25-1-1999. As both the additions (i) on account of debits in the assessee's account appearing in the books of M/s. Ekta Flavours (P.) Ltd.; and (ii) in the account of KPL, have been made in contravention of the directions contained in the appellate orders referred to above, the same are liable to be declared as illegal. In support of this contention, reliance was placed upon a large number of decisions which, are listed hereunder: (i) S.P. Kochhar v. ITO [1984] 145 ITR 255 (All.) (ii) CIT v. Mahindra & Co. [1995] 215 ITR 922 (Raj.) (iii) Cawnpore Chemical Works (P.) Ltd. (No. 1) v. CIT [1992] 197 ITR 296 (All.) (iv) Raja D.V. Seetharamayya Bahadur v. Sixth WTO [1995] 213 ITR 502 (Mad.). 15. On the strength of above mentioned case laws, the learned Counsel forcefully submitted that the issue of admissibility of sales tax liability in the case of KPL and excise duty in the case of M/s. Ekta Flavours (P.) Ltd. for the purposes of working out the quantum of "accumulated profit" was no longer res integra in the present case. In the assessment order dated 27th Ma....
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....already stood decided in favour of the assessee even from the stage of the Hon'ble ITAT. In terms of the consolidated order as has been passed by the Allahabad Bench of the ITAT in [WT Appeal No. 68 (All.) of 1994, dated 19-9-1994] in the case of Vikram Kothari v. Asstt. CWT for the assessment years 1987-88 it had been held that the liability in question was allowable as a deduction, while computing the value of shares under Rule 1D of the Wealth-tax Rules. On the same analogy, while computing the "accumulated profits" the liability in question should have been allowed as deduction and in view of the uncontroverted fact that on such a deduction being allowed, there shall remain no "accumulated profits", the very applicability of section 2(22)(e) fails. Accordingly, the addition that has been made in the assessment by invoking the provisions of section 2(22)(e) as a whole, was liable to be deleted also on the ground of non-applicability of the said provision itself. 17. Alternatively, the learned Counsel submitted that the "debits" in question were not in the nature of "loans and advances" as envisaged in the said section. With reference to the discussion appearing in paras 15 to....
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....sp; when the loan was advanced; (c) Thirdly - The debits in the account of the shareholder falling in the specified category should necessarily be in the nature of "loans & advances"; (d) Fourthly - The loan so advanced to such shareholder can be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan; (e) Fifthly - The loan must have not been advanced by the company in the ordinary course o....
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....as a "person" falling in the specified category of shareholders in both the companies. Therefore, any payment made to him out of "accumulated profit" was hit by the provisions contained in section 2(22)(e) of the Act. Further, the nature of debits did not require any analysis to be made by the Assessing Officer, so long as the fact remained that the debits were real and not entered in the assessee's account by any mistake. Such debits which are the results of any bona fide mistake, alone could have been excluded. This could, perhaps, be held to be true with reference to debit entry of Rs. 6,72,500, which had to be passed through the account of the assessee, owing to the pre-existing credit of the same amount. He further submitted that the case laws as have been referred to and relied upon by the learned Counsel, were not applicable on the facts of the present case. It has been categorically held by the successive appellate authorities vide their respective orders dated 25-3-1996 and 25-1-1999 that the assessments were to be made de novo, which meant that the assessment (made earlier) had been thrown wide open and Assessing Officer could have looked into each and every aspect of the....
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....mpany (making any payment to its shareholder) has got accumulated profits so as to cover such payments; and (b) the payments so made to a shareholder are in the nature of loan or advance; in other words, debits any kind which is devoid of the character of "loan or/and advance cannot be treated as "deemed dividend" in the hands of the recipient". It is seen that in the first assessment order dated 31-3-1992 (passed originally), the Assessing Officer found and held that there were debits aggregating- (a) Rs. 11,10,797 - in the assessee's current account with KPL. (b) Rs. 6,01,783 - in his account with Ekta Flavours (P.) Ltd.; and such debits were fully covered by the "accumulated profits" as revealed by their respective balance sheets. Accordingly, the two aggregations Rs. 11,10,797 and Rs. 6,01,783 were treated as his income by invoking the provisions of section 2(22)(e) of the Act. While arriving at such a conclusion, he specifically overruled the arguments put forth by the assessee that the said companies had been carrying substantial liabilities on account of sales tax and excise duty and, on a due adjustment of the said liabilities there remained no "accumulated p....
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....ther the liabilities were ascertained or contingent and/or are allowable or not. Such a review or reappraisal was not permissible at the end of the Assessing Officer, in view of the decision of the Hon'ble Jurisdictional High Court in the case of S.P. Kochhar and the later decision of the jurisdictional High Court in the case of Cawnpore Chemical Works (P.) Ltd. (No. 1). From the later decision again, we find that there is a striking unanimity of the decisions on this issue amongst different High Courts. Even later on, similar view was taken by the Hon'ble Rajasthan High Court in the case of Mahindra & Co. and Madras High Court in the case of Raja D. V. Seetharamayya Bahadur. Just for the sake of easy appreciation, relevant extracts of the said decisions are reproduced hereunder: S.P. Kochhar v. ITO 145 ITR 255 (All.) "The scope of ITO's powers to make a fresh assessment under an order of remand passed by the appellate authority has come up for consideration in numerous cases. This court in J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. CIT [1963] 47 ITR 906, laid down that where on an appeal from an assessment the AAC set aside the assessment and directed the ITO to make a....
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....on given by the Appellate Assistant Commissioner and his jurisdiction does not extend beyond recomputation of income from these two sources. The power which has been given to the Inspecting Assistant Commissioner under section 144A cannot be exercised so as to extend the jurisdiction of the Income-tax Officer." Cawnpore Chemical Works (P.) Ltd. (No. 1) v. CIT 197 ITR 296 (All.) "The last ruling, reported in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688/[1991] UPTC 125 (SC), cited by learned counsel for the assessee, does not throw any light upon the contention raised by learned counsel for the assessee. In our opinion, the contention raised on behalf of the assessee has no merit. In Surrendra Overseas Ltd v. CIT [1979] 120 ITR 872, a Division Bench of the Calcutta High Court has indicated that if the Appellate Assistant Commissioner set aside the assessment only partially and gave a specific direction to the Income-tax Officer, the Income-tax Officer had no jurisdiction to consider the admissibility or otherwise of development rebate. In this case, the principle of law laid down in Pulipati Subbarao and Co. v. AAC of L.T. [1959] 35 ITR 673 (AP), that where the o....
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.... High Courts as also other case laws, we hold that the issue as to whether there existed any sales tax liability or not in the case of KPL [and liability for excise duty in the case of Ekta Flavours (P.) Ltd.] and the issue as to whether such liabilities have to be adjusted from the figures of "profits till date" for the purposes of applicability of section 2(22)(e) were no longer open for discussion or decision by the Assessing Officer. The directions of the ld. CIT(A) in the order dated 25-3-1996 as followed subsequently by the ld. CIT(A) himself in his order dated 25-1-1999 being categorical, the role of the Assessing Officer (in the set aside proceedings) was limited, we emphasis to recompute the "accumulated profit" after allowing deduction for liabilities in question. The ld. CIT/Sr. DR has not disputed the factual position that in case such a liability is allowed, there shall remain no "accumulated profits". 28. In the background of the case as given above, we hold that the ld. CIT(A) in his subsequent order dated 7-1-2002 went wholly wrong in re-adjudicating the issue as to whether there existed any sales tax liability in the case of KPL, and then to eventually hold that....
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.... existence, (after allowing set off of sales tax liabilities) the provisions of section 2(22)(e) of the Act are not applicable. 30. Otherwise also, the term "accumulated profit" has to be understood in real and commercial sense and it is not the same, for the purposes of examining the applicability of section 2(22)(e) as is usually understood as "taxable income" or "assessable income". The said term came up for consideration before the Hon'ble Bombay High Court in the case of CIT v. P.K. Badiani [1970] 76 ITR 369. In the said case, which was rendered in the con text of corresponding section 2(6A)(e) of the old Act, it was held that the "accumulated profit" for the purposes of that section should be worked out after deducting therefrom all items which are legitimately deductible therefrom. The matter went to the Hon'ble Supreme Court which also affirmed the same vide case law P.K. Badiani v. CIT [1976] 105 ITR 642, wherein it has been held as under: "The expression "accumulated profits" occurring in clause (e) of section 2(6A), or for the matter of that in any of other clause, means profits in the commercial sense and not assessable or taxable profits liable to lax as income u....
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.... us above with reference to the principle laid down in the case of P.K. Badiani. Accordingly, in our considered opinion, there remains no "accumulated profit" of KPL so as to attract the applicability of section 2(22)(e) in relation to the debits in the account of the assessee with KPL. 32. Further, we have noted that the learned Counsel has vehemently argued that the ld. CIT(A) went wholly wrong in holding that the debits (aggregating Rs. 10,50,040, were in nature of "loans and advances". In support of his contention, reference was made to a large number of cases. There is no denial proposition that only such payments appearing on the debit side of an account, which are in the nature of loans and advances, are relevant for the applicability of section 2(22)(e). What the phrase "loans and advances" means, according to Black's Law Dictionary, 5th Edition page 844, is "the lending; delivery by one party to and received by another party of sum of money upon agreement, express or implied to repay it with or without interest". The said meaning has been advanced further by the Hon'ble Bombay High Court in the case of P.K. Badiani 76 ITR 369 wherein at page 381 their Lordships have obs....
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.... also against various other credits. None of the said sums can be said to be the sums in relation to which the KPL had become the creditor of the assessee. KPL had maintained a current account of the assessee in its books of account to keep a record of various sums falling due to the assessee. Payments against the same sums, even if the credit entries were passed at a later date would not be in the nature of "Loans and Advances". In any case, in keeping with the legal meaning of the term "loans and advances" as contained in Black's Dictionary (as been quoted by us above) as also the definition given by the Hon'ble Bombay High Court in the case of P.K. Badiani 105 ITR 642 it has to be held that KPL had not given any money to the assessee, by way of "loan or advance". For these reasons, we hold that the ld. CIT(A) has unjustly restricted the relief (out of debits aggregating Rs. 11,10,797 to Rs. 60,757 only (representing TDS). As none of the remaining debits also are in the nature of "debt" created in favour of the KPL, they do not fall within the meaning of "loan or advance" and accordingly, the same are not hit by the provisions of section 2(22)(e). 33. In view of the discussion....