AI Drafter 
TaxTMI 
TaxTMI 
2012 (11) TMI 1127
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....e Directors in a company named M/s P.S.V. Engineering & Contractors (P) Ltd (herein after called "the Company") and he is also a partner in a partnership firm named M/s P.S.V. Enterprises. The AO noticed that the company has advanced money to the assessee and also to the partnership firm, cited above and hence the AO examined about the applicability of the provisions of sec.2(22)(e) relating to "Deemed Dividend" with respect to the amounts so advanced by the company. According to the AO, the Company had accumulated profit of Rs. 87,48,366/- as on 31.3.2007. The details of the amounts advanced by the Company to the assessee and also to the partnership firm as available in the books of the company for the year under consideration has been extracted by Learned CIT(A) as under:- Advance to P. Satya Prasad (assessee): Opening balance as on 01.04.2006 77,50,000 Advance given on 01.07.2006 5,46,500 ---------------- 82,96,500 ======== Advance to P.S.V. Enterprises (Partnership firm): Advances given on:- 09.04.2006 20,00,000 13.05.2006 16,50,000 03.05.2006 26,00,000 28.09.2006 4,25,000 31.03.2007 94,00,000 --....
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....s:- " 5.7 From the provisions of section it is clear that any dividend paid which is set off against any sum previously paid should not be included as deemed dividend. However when the assessee was asked as to whether the dividend paid at the end of the year is set off against the loans given to the assessee, it was stated that no such set off was made in the books of account by the assessee. It is undisputed that grant of loan/advance was earlier to the payment of dividend. Even the dividend declared later is not set off against the loan outstanding and hence no set off of the loan taken can give against the subsequent dividend declared. Reliance in this regard is placed on the decision of Hon'ble Bombay High Court in the case of Badiani (LP) 154 ITR 2004 wherein it is held by the Hon'ble Court that where the amounts are assessed in the hands of share holder as deemed dividend, section 2(22)(e) requires a set off to be made by company against actual distribution of dividends. If the company fails to give such set off there might be double taxation of the assessee, but this by itself would not be sufficient to permit a strained construction on the phraseology employed by the leg....
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....years as on 31.3.2006 Rs.55,87,174/- Less:- Loans given upto 31.3.2006 (to be considered as Deemed dividend) Rs.77,50,000/- Accumulated profit as on 1.4.2006 Nil Loan given during the year (asst. year 2007-08) - Rs. 1.60 crores. Current year's profit for the year ending 31.3.2007 - Rs. 31,61,192/- Dividend declared during the year ending 31.3.2007 - Rs. 82,50,000/- By placing reliance on the decision of Hon'ble Bombay High Court in the case of CIT Vs. P.K. Badani (76 ITR 369), it was also submitted that the repayment of the loan, which was treated as deemed dividend earlier, could not be added to the amount of "accumulated profit". 9. The Ld CIT(A) was unable to accept the proposition laid down by the Cochin bench of the Tribunal in the case of Gordhandas Khimji,((Supra)), on the reasoning that the department is going to gain anything by postponing the taxability to a subsequent year. He further held that the Cochin bench did not consider the Explanation 2 to sec. 2(22)(e), which defines the term "accumulated Profit". Accordingly, the Ld CIT(A) held that the statute as well as the decision of Hon'ble Supreme Court in the case of P.sarada ((Sup....
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....sed to follow the decision of Cochin bench referred supra, since he was of the view that the Tribunal did not consider the definition of "accumulated Profits", as given in Explanation 2 to sec. 2(22)(e) of the Act. However, the Ahmedabad bench of Tribunal in the case of M.B.Stock Holding (P) Ltd Vs. ACIT (2003)(84 ITD 542) has held that the accumulated profits are to be worked out up to the date of each payment/advancement of loan and further the profits of business accrue only at the end of the previous year. (d) The tax authorities have failed to take into consideration the amount of dividend actually declared by the assessee during the year relevant to the assessment year 2007-08. The assessee has declared dividend more than the current year's profit. 12. The contentions of the Ld D.R can be summarized as under:- (a) The decision rendered by the Cochin bench in the case of Gordhandas Khimji, supra is not in accordance with the scheme of the Act. (b) In the case of P.K.Badani Vs. CIT (1976)(105 ITR 642), the Hon'ble Supreme Court has held that the "Accumulated Profits" means profits in the commercial sense and not assessable or taxable profits liable to tax as ....
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....ence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. Then the Tribunal went on to explain the purpose of Explanation 2 to sec. 2(22)(e) as under in para 24 of the order:- "Keeping in view the above interpretation of law, it cannot be said that Expln.2 to sec. 2(22)(e) is redundant. It is bound to be for a specific purpose. The question for determination is as to what is the purpose for which this Explanation has been incorporated when the Hon'ble Supreme Court in the case of CIT Vs. Ashokbhai Chimanbhai (supra) have held that the profits of business do not accrue from day to day or even from month to month. In our considered view, the legislature has taken into account the fact that where as the profits from business for the current year may not be determinable in the middle of the year, there are certain sources of income, the income from which is capable of determination which, according to the legislative intent, should also be taken into account while determining the accumulated profits on the day of advancing the loan. The company is a person. It may carry on business and may also derive i....
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....not assessed as deemed dividend in that year. For this proposition, the Ld A.R has placed reliance on the decision rendered by the Cochin bench of Tribunal in the case of Gordhandas Khimji (supra) and also the decision rendered by the Delhi bench of Tribunal in the case of A.R.Chadha & Co India (P) Ltd (Supra). The Ld CIT(A), as stated earlier, refused to follow the said decisions on the ground that the department is going to gain anything by postponing the taxability of deemed dividend. Further, the Learned CIT(A) has observed that the Cochin bench did not consider Explanation 2 to sec. 2(22)(e) of the Act. We have already noticed that the Ahmedabad bench of the Tribunal has explained about the area of operation of Explanation 2 to sec. 2(22)(e) of the Act and we have also concurred with the view that the accumulated profit does not include current years profit from business. Accordingly, in our view, the Explanation 2 to sec. 2(22)(e) shall not alter the taxability of the dividend in the right year of assessment. 15. The Hon'ble Supreme Court has held in the case of P.Sarada (Supra), that the legal fiction embodied in sec. 2(22)(e) comes into play as soon as monies were....
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....emed dividend has to be worked out on the basis of the conditions obtaining at the time when the loans or advances are made. In the case of Smt. Tarulata Shyam (supra), the Supreme Court observed that the statutory fiction created by the section would come into operation at the time of the payment of advance or loan. Similarly, the observations in the case of P.K.Badani (supra)(76 ITR 369)(Bom) would indicate that the accumulated profits should be reduced by the amount of loan or advance, immediately on making such loan or advance. Only if this is done, the subsequent loans or advances can be tested by verifying the accumulated profits on the dates on which they are made. As pointed out in the decision referred above, the repayments of the advances or loans will have no effect either on the advances or loan treated as dividend or on the accumulated profits as reduced by such advance or loan. As such, it does not seem to be neither practicable nor proper to postpone the whole process of ascertaining the accumulated profits till the Department chooses to treat a particular advance as deemed dividend. If the contention of the Department is accepted, then if the ITO ignores the advance....
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.... of the instant case. The assessee has furnished copies of financial statements of the company pertaining to the year ending 31.3.2007 in the paper book and in page No. 15, the details of Reserves and Surplus are given. Based on the principles discussed above, the "accumulated profits", which is required to be considered for the purpose of assessment year 2007-08 shall work out as given below:- Reserves and surplus as on 31.3.2007 before dividends - 87,48,366 Less:- Current year's business profits relating to F.Y 2006-07 - 31,61,192 ---------------- 55,87,174 Less:- Income assessable as deemed dividend in asst. year 2006-07:- (Loan given or accumulated profit whichever is less) (a) Loan given in a.y. 2006-07 (Pg. 7 of Paper book) 80,50,000 ======= (b) Accumulated Profit:- (Pg. 15 of Paper book) Reserves and Surplus as on 31.3.06 - 55,87,174 Less:- Current year's business profit (relating to F.Y 2005-06) 29,15,546 Asst. year : 2006-07 --------------- 26,71,628 ======= Lower of (a) or (b) 26,71,628 --------------- Accumulated profit for the purpose of as....