TaxTMI 
TaxTMI 
2018 (1) TMI 654
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee filed the return of income for the A.Y. 2007-08 on 26.10.2007 showing an income of Rs. 13,08,3201-. The return was processed u/s.143(1) and the case was selected for scrutiny. Notice u/s.143(2) of the Act was issued on 21.8.2008 and notice u/s.142(1) was issued on 29.9.2009. The AO, after hearing the assessee, completed assessment u/s. 143(3) on 09.12.2009 determining total income at Rs. 1,72,44,604/- by making addition of Rs. 1,59,04,178/- as deemed dividend u/s. 2(22)(e). The AO found that the assessee had received substantial amount from the said concern on various dates during the year. . The AO gave the details of amounts received on various dates in a tabular form and quantified the amount qualifying as deemed dividend at Rs. 1,71,57,874/-. The AO further noted that M/s. Classic International Pvt. Ltd is a company in which the public are not substantially interested and possess accumulated profit of Rs. 1,27,08,173/- as on 1.4.2006 and Rs. 1,59,04,178/- as on 31.3.2007. The assessee holds more than 83.71 % shares of M/s. Classic International Pvt. Ltd during the financial year 2006-07. The AO enumerated four conditions and held that as per Sec.2(22)(e) of the IT Act, 1961,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by; way of loan or advance. The second requirement is that the company making the payment should not be a company in which the public are substantially interested. Thirdly, the payment of advance or loan to the extent of accumulated profits (excluding capitalized profits) should be to (i) an equity shareholder, who is beneficial owner of shares holding not less than 10 per cent of voting power; or (ii) any concern in which such shareholder (holding not less than 10 per cent of voting power) is a member or a partner and in which he has a substantial interest; or (iii) any person, on behalf, or for the individual benefit, of any such shareholder (holding not less than 10 per cent voting power). Ld. Commissioner of Income Tax (Appeals) found that all the above requirements are satisfied in the case of the assessee and therefore Assessing Officer has rightly applied the deeming provisions of sec.2(22)(e). It is seen that during the course of assessment proceedings, that assessee agreed to the application of Sec.2(22)(e), but contended that the declared dividend sum of ? 80 lakhs on which dividend distribution tax has been paid the company should be reduced from the total advance taken ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itely not a "business transaction" and it does not result in any benefit to the company making payment, therefore this case does not support the case of the assessee in any way. The facts of the case In PRADIP KUMAR MALHOTRA vs. CIT in 338 ITR 538 (Cal) relied on by the Id.AR are entirely different from that of the assessee's case. The provisions of sec 2(22)(e) create a fiction bringing in amount paid otherwise than as dividend into the net of dividends. Therefore, according to CIT(A), this clause must be given a strict interpretation as held by the Hon'ble Supreme Court in the case of CIT v. C.P. Sarathy Mudaliar in 83 ITR 170(SC). The historical perspective of sec 2(22)(e) was also discussed by the Hon'ble Mumbai ITAT Special Bench in the case of ACIT v. Bhaumik Colour P Ltd (118 ITO 1) .ld. Commissioner of Income Tax (Appeals) observed that In the case of the assessee, all the conditions stipulated in sec 2(22)(e) are satisfied. In view of the facts and circumstances of the case and authoritative judicial precedents, the loan received by the assessee from M/s. Classic Linen lnternational Pvt. Ltd to the extent of accumulated profit of Rs. 1,59,04,178/- as on 31.03.07 wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... during the financial year 2006-07. Further, he relied on the order of the Chennai Bench of the Tribunal in the case of ACIT vs. C.Rajini and ACIT Vs. Subba Reddy (HUF) (140 TTJ 216) had held as "19. After carefully considering the rival submissions as put forth before us, we are of the considered opinion that section 2(22)(e) of the Act is a deeming provision which assumes existence of certain facts if the conditions specified in a particular section are fulfilled. We agree that these provisions are to be strictly construed. This legal fiction has to be carried to such logical ends and not to illogical lengths. Only a loan, which would include the payments mentioned in section 2(22)(e) can be deemed to be dividend and to that extent of the company has accumulated profits on the date of payment. We have gone through the Tribunal order dated March 9, 2007 passed in this assessee's case for the assessment year 2002-03 on which the learned authorised representative has heavily relied. In that year from the copy of account of CHPL in the books of CPDPL for the period April 1, 2001 to March 31, 2002 the Assessing Officer found that as on April 1, 2001 the account of CHPL st....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany. Therefore, we are also in agreement with Commissioner of Income-tax (Appeals) that this section can be invoked to curtail the misuse of the funds belonging to a private limited company by its shareholder but not when there is a business transaction between the two entities ; and funds of the director were also lying with the company. In this case, the assessee's money ranging between Rs. 313.72 lakhs and Rs. 490.67 lakhs with Ceebros Property Development P. Ltd., the payment by the same company to Ceebros Hotels P. Ltd. of Rs. 20,00,000 cannot be treated as intended deemed dividend under section 2(22)(e) of the Act. These facts have not been denied by the Assessing Officer. Consequently, we do not find any infirmity in the appellate order. So, there is no legality in making impugned addition''. 5.1 According to ld. A.R, the provisions of s. 2(22)(e) could not be invoked when there is a genuine business transaction between two assessees and funds of the assessee were also lying with the company and prayed that the appeal of the assessee to be allowed. 6. On the other hand, ld. Departmental Representative vehemently opposed to the submissions of the ld. Authorised R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ument of the A.R is rejected. 8. Another argument made by the ld. Authorised Representative is that the amount of payment of deemed dividend cannot exceed accumulated profits of the company as on date of the payment. In other words when payment is made, the accumulated profit to be notionally reduced by the amount of all loans and last payment will be deemed to be dividend only to the extent of balance accumulated profit. If some amount is repaid by the shareholder or by the company to which it was advanced, the amount so repaid cannot go to the part of the accumulated profit. This argument of the assessee was examined by Supreme Court in the case of P. Sarada vs. CIT 229 ITR 444, and observed hereunder:- "In the instant case, excess withdrawals were made by the assessee on various dates between July 3, 1972, and March 22, 1973, when the account of Mahesh had not been debited. The assessee's account was consequently overdrawn. On the very last day of the accounting year some adjustment was made but that will not alter the position that the assessee had drawn a total amount of Rs. 93,027 between July 3, 1972, to March 22, 1973, from the company when her account with the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on the aforesaid loan and treat only the excess amount of debit in the books of accounts of the company as a deemed dividend u/s.2(22)(e) of the Act. In other words, only those net amounts which reflected the debit side of the books of accounts of the assessee falling under the definition of the loans and advances in the relevant assessment years will be entitled to be taken as a deemed dividend. In other words, the AO has to compute the day to day debit balance of this assessee in the books of accounts of the company and compare with it, accumulated profit in respect of company and lower of these to be considered as deemed dividend in the hands of present assessee. 8.2 Further, ld. Authorised Representative made an argument that accumulated profit shall not include current year profit. For this purpose, he placed reliance on the decision of Vizag Bench and Mumbai Bench cited (supa). It was held by the Hon'ble Supreme Court in the case of CIT vs. V. Damodaran, 121 ITR 572 that accumulated profit shall not include current year's profit. So as pointed out by the ld. Authorised Representative, this was considered by the Vizag Bench of the Tribunal in the case of P. Satya Prasad vs.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earlier years has to be reduced from the accumulated profits, even if it was not assessed in that year. The relevant observations made by the Cochin Bench are extracted below: "11. In Smt. Tarulata Shyam s case (supra), it was held by the Supreme Court that the statutory fiction created by s. 2(6A)(e) would come into operation at the time of payment of advance or loan to a shareholder and tax is attracted to the loan or advance to the extent to which the company possesses accumulated profits the moment the loan or advance is received, and even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed to be 'dividend' if the conditions of the section are satisfied. It was also observed that the language of the section is clear and unambiguous and that there is no scope of importing into the statute words which are not there and that once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. ... 13. None of the discussions referred to above are directly on the point. But the line of discussion in those deci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rge advances taken in the last assessment year are converted into deemed dividends. As rightly pointed out by the CIT(A), the advances or loans in the earlier assessment years should be treated as dividend which the Department omitted to assess. If so, it follows that the accumulated profits should be reduced by the earlier loans or advances in spite of the fact that they were not assessed to tax as deemed dividends by the Department." 8.3 It is a well settled proposition of law that an income pertaining to a particular assessment year can be assessed in that year only. For example, the income pertaining to the assessment year 2006-07 can be assessed only in that year, i.e., the said income cannot be assessed in any other assessment year, even if the tax authorities wish to do so. Hence, the assessee cannot be compelled to pay tax on the income which was omitted to be assessed in an earlier year, by assessing the said income in any other assessment year. Accordingly, we are inclined to follow the decision rendered by the Cochin Bench in the case referred supra. Accordingly, the loan given by the company only in the immediate preceding year, i.e., assessment year 2007-08, should ....