TaxTMI 
TaxTMI 
2016 (1) TMI 931
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....purpose of section 2(22)(e) of the Act. 3.1 The only issue to be decided in the appeal of the revenue is that whether the provisions of section 2(22)(e) of the Act could be invoked on the family members of the assessee who are not shareholders in the lending company and accordingly whether clubbing provision would be applicable for deemed income. 4. The brief facts of this appeal is that the assessee is an individual having investment in shares of M/s Bathilivala and Karani Financial Consultants Pvt. Ltd (in short 'BKFCPL'). The assessee is a substantial shareholder in the said company holding 41.84% of shares. The following monies were advanced by the said company BKFCPL to the assessee and his family members :- Manoj Murarka (Assessee) - 73,05,169 Nishita Murarka (Daughter) - 25,90,000 Saahil Murarka (Son) - 70,07,000 Swapana Murarka (Wife) - 17,60,000 1,86,62,169 4.1. The said company BKFCPL is not engaged in the business of money lending and is actually engaged in the business of dealing in shares, securities and other investments. The original assessment was completed u/s 143(3) of the Act on 10.11.2009. Later this assessment....
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.... material on record and provisions of law. 2. Because that the ld. Commissioner of Income Tax (Appeal) was erred in law as well as in facts in not accepting that, as there was a negative accumulated profit of Batlivala and Karnani Financial Consultants Pvt. Ltd from whom the appellant had taken loan, the addition under the provision of section 2(22)(e) of the I.T Act 1961 could not be sustained. 3. Because that the ld. Commissioner of Income Tax (Appeal) was erred in law as well as in facts in not accepting that the exempt capital gains income would not form part of accumulated profit in the hands of Batlivala and Karnani Financial Consultants Pvt. Ltd from whom the appellant had taken loan, and as such there would be negative accumulated profit and the provision of section 2(22)(e) of the I.T Act 1961 could not be invoked. 4. Because that the ld. Commissioner of Income Tax (Appeal) was erred in law as well as in facts in not accepting that the deeming provision should be construed strictly, and in the given facts and circumstances of the case, as there was negative accumulated profits after excluding exempt capital gains income in the hands of Batlivala and Karnani Financ....
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....nut Oil Mill reported in (2002) 255 ITR 428 (Cal) * CIT vs Howrah Flour Mills Ltd reported in (1999) 236 ITR 156 (Cal) 5.2.1. The Learned AR further stated that both the son and daughter are not shareholders in the lending company and in any case, the provisions of section 2(22)(e) of the Act could not be invoked in the facts and circumstances of the case. 5.2.2. The Learned AR further argued that the provisions of section 2(22)(e) of the Act creates a deeming fiction and hence has to be construed strictly. In this regard, he placed reliance on the decision of the Hon'ble Apex Court in the case of CIT vs C.P.Sarathy Mudaliar reported in (1972) 83 ITR 170 (SC). 6. We have heard the rival submissions and perused the materials available on record. We find that the Learned AO had travelled beyond the jurisdiction vested on him by the order of the Learned CIT u/s 263 of the Act by treating the amounts overdrawn by the son and daughter of the assessee thereby bringing the same to tax as deemed dividend. The relevant operative portion of the section 263 order of the Learned CIT is reproduced herein below:- "It has been noticed that the following issues are involved in this case- ....
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.... a reasonable opportunity of being heard. " In this regard, the following decisions relied upon by the Learned AR are well placed :- CIT vs Hindustan Coconut Oil Mill reported in (2002) 255 ITR 428 (Cal) "Broadly speaking, the Tribunal has opined that in the order passed in the revision there being no specific mention of the sales tax matter, it could form no part of the directions which were to be followed by the Income-tax Officer for the purpose of making alterations. Thus, the alterations sought to be made by the Income-tax Officer in the fresh assessment of February 26, 1988, in regard to sales tax addition was without jurisdiction. It should be mentioned here that in the fresh assessment the Income-tax Officer practically verbatim repeated the order which had been passed by him in the rectification order dated January 7, 1986. The addition of Rs. 32,00,000 and odd was maintained in the fresh assessment order and upon the same reasoning as was adopted in the order passed under Section 154. We have received excellent assistance from both sides in this matter where the facts are slightly unusual ; but the sustained efforts and expertise of Mr. Poddar certainly deserve ....
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....expressly there in Section 251. But so far as Section 263 is concerned, the power of cancellation of assessments made to the prejudice of the Revenue and of directions for fresh assessment were all along there and those are still there. Thus, the ratio given in the two above reference decisions of the Calcutta High Court would have to be followed by us, there being no material differences between the appellate provisions and the provisions for revision, at the relevant time. We respectfully opine that we are in full agreement with the reasoning of the two above cases, and we follow those cases here. On this basis, we would no doubt have to opine that the Tribunal was quite right in forming the view that the Income-tax Officer had no authority to say anything new about the sales tax addition ; this is so, simply because the Commissioner in revision did not permit, in the reasoning portion of his order, any change to be made in the Section 43B matter of addition of the sales tax amount received". CIT vs Howrah Flour Mills Ltd reported in (1999) 236 ITR 156 (Cal) " .... ..... It is all the more so, because the revenue has not been given any right of appeal under the Act agains....
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....n relied upon by the Learned DR in the case of L. Alagusundaram Chettiar vs CIT reported in (2001) 252 ITR 893 (SC), we would like to state that the facts in the said case are totally different and distinguishable to the facts of the instant case. In the case before the Supreme Court, the monies were advanced by the company to one employee K who in turn transferred the monies to the shareholder of the company and this fact was proved by the fact by shareholder admitting that he has been obtaining loan through K in this manner. Hence in these circumstances, the Hon'ble Supreme Court held that the monies were advanced by the company for the benefit of the managing director / shareholder and hence the same has to be treated as deemed dividend. Whereas in the instant case, the monies were advanced directly by the company to the son and daughter of the assessee and it is not the case of the revenue that the monies were subsequently transferred by son and daughter to the assessee and the children merely acted as a conduit to draw monies from the company for onward transmission to the assessee. We hold that the provisions of section 2(22)(e) of the Act creates a deeming fiction and hence ....
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....ered independently irrespective of the decision taken on the dispute as to whether there is accumulated profits in the instant case or not and whether exempted capital gains is to be included or excluded for reckoning the accumulated profits or not. 7. With regard to the appeal of the assessee, the Learned AR argued that the accumulated profits figure as on 31.3.2007 of Rs. 128.21 lacs admittedly includes exempted long term capital gains to the tune of Rs. 197.20 lacs and hence if the same is reduced then there will be only negative accumulated profits and accordingly the provisions of section 2(22)(e) of the Act could not be invoked. He further argued that the exempted capital gains does not get into the stream of accumulated profits and even as per Explanation 1 to section 2(22)(e) of the Act. He argued that the expression accumulated profits would include capital gains only if it is chargeable to tax u/s 45 of the Act and not otherwise. He placed reliance on the following decisions in support of his contentions:- * CIT vs Mangesh J Sanzgiri reported in 119 ITR 962 (Bom) * ACIT vs Gautam Sarabhai Trust No. 23 reported in (2202) 81 ITD 677 (AHD ITAT) The Learned AR also st....
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....lder of a company out of non-taxable accumulated capital gains of a company would not be dividend". In the case before the Bombay High Court, the dividend was distributed in the month of May 1961 and assessment year involved therein was Asst Year 1962-63 and the decision was rendered by duly considering the Explanation 1 to section 2(22) of the Act. * Smt.Chechamma Thomas vs CIT reported in (1986) 161 ITR 718 (Ker) * It was held that : "The question of law common to both the references referred to this court for decision is as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the distribution to the assessees of the amount attributable to compensation and sale price received by the Periyar and Pareekanni Rubbers Ltd., on the acquisition and sale, respectively, of agricultural lands, was, in the hands of the assessees, receipt of dividend assessable to income-tax under the Income-tax Act, 1961?" It is an admitted fact that the company itself is not liable to pay any tax by way of capital gains on the said receipts of compensation/sale price. In First ITO v. Short Brothers P. Ltd. [1966] 60 ITR 83, a Bench of ....
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.... gains under Section 12B ate chargeable in respect of any profits arising from transfer of 'capital assets', and 'capital assets' do not include lands from which the income derived is agricultural income. Profits derived by transfer of lands from which the income derived is agricultural income would not, therefore, be chargeable on a combined reading of Section 12B with Section 2(4A) of the Income-tax Act under the head 'Capital gains'. The expression 'accumulated profits' does not include capital gains arising within the excepted periods: vide Explanation to Section 2(6A). ' Accumulated profits' are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the Income-tax Act. Realisation of appreciated value of assets in commercial practice is regarded as realisation of capital rise, and not profits of the business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act. Counsel for the Department contended, relying upon Mrs. Bach....
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....ed as dividend under section 12 of the Indian Income Tax Act 1922. In a nutshell, it may be said that no part of any capital profits, except capital gains as assessable u/s 12(b) of the 1922 Act as well as under section 45 of the 1961 Act, of a company can ordinarily be included in "accumulated profits" for the purpose of determination of dividend u/s 2(22). In view of specific provision in the constitution of Alkapuri Investment Pvt Ltd (AIPL) capital profits of the company could not be distributed and, therefore, such profit, unless charged to capital gains tax, would not form part of "accumulated profits". We hold that the legal fiction created in the Explanation 2 to section 2(22) of the Act that 'accumulated profits' shall include all profits of the company upto the date of distribution or payment should be understood to include the current year profits of the company and not otherwise. In other words, for reckoning the accumulated profits, apart from the opening balance of accumulated profits, the profits earned in the current year also are to be added and then the total accumulated profits should be considered for the purpose of calculation of dividend out of accumulate....