TaxTMI 
TaxTMI 
2001 (3) TMI 229
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....s not amount to deemed dividend because the company does not possess accumulated profits. The Assessing Officer rejected the contention of the assessee and taxed the amount of distribution as deemed dividend. The CIT(A) has however held that in the absence of accumulated profits, no dividend on account of reduction of capital by the company is liable to be included under section 2(22)(a). 2. AIPL had reduced its share capital from Rs.100 per share to Rs.45 per share after obtaining necessary approval from its shareholders and High Court of Gujarat. Reduction of Rs.45 per share has been paid partly in cash and partly in kind to each shareholder as under: ---------------------------------------------------------------------- For Equity Entitlement Value of Amount Basis shares of entitle- per share Alkapuri ment -----------------------....
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....nbsp; tion as on 21-6-1988 58 1 15% (series-B) 75 01.29 Valuation report Red. Bonds of ASE of JM Financial Ltd. of Rs. 100 & Inv. Cons. Ser- ....
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....PL and KPPL owns some shares of BAPL. On amalgamation of all the companies, the shares owned by each other cases to exist, which are as under: --------------------------------------------------------------------- Shares of KPPL BAPL KOBA MED Shares held --------------------------------------------------------------------- eq.sh. eq.sh. eq.sh. eq.sh. --------------------------------------------------------------------- KPPL held 0 2375 0 0 BAPL held ....
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.... -------------------------------------------------------------------------- 700706 equity shares of SEPL X 1.2 shares of Alkapuri = 840847.2 eq. shares. 5900 pref. shares of SEPL X 0.5 shares of Alkapuri = 29555 eq. shares. Total equity shares = 843802.2 eq. shares. Less: Shares of Alkapuri held by SEPL cancelled as per order of Gujarat High Court = 299025 ------------ Total number of shares allotted to shareholders of SEPL = 544777 -------------------------------------------------------------------------- Thus, th....
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....cial year 1988-89 Rs. 1,21,455 (iv) Accumulated losses upto 31-3-1988 were deducted being Rs. 1,90,77,879 (v) Tax on capital gains calculated and deducted by the Assessing Officer Rs. 2,87,25,385 (vi) Total accumulated profit calculated by the Assessing Officer Rs. 14,68,35,788 --------------------------------------------------------------------- In the aforesaid computation of accumulated profits the Assessing Officer had considered the issue of bonus shares by amalgamating companies, viz. KPPL and BAPL as capitalised profits, thus, forming part of accumulated profits of the company. 6. In appeal, the CIT(A), after detailed consi....
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....; ------------------ Accumulated profit/loss (-) Rs. 48,61,000" -------------------------------------------------------------------------- The CIT(A) proceeded to hold that since the accumulated profit works out to a negative figure, the distribution made by the company to its shareholders on reduction of share capital will not attract provisions of section 2(22)(d) of the I.T. Act and deleted the additions made by the Assessing Officer under section 2(22)(a). The CIT(A) further held that since the assessee has not received any amount in excess of what was paid for acquiring the share, no capital gains tax would be leviable as a result of reduction of capital by AIPL. The revenue is aggrieved and has come up in appeal before us. 7. Shri Girish Dave, the ld. Sr. D.....
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.... certain amounts which are actually not distributed as dividend are brought within the net of dividend for the purpose of taxability by introducing a legal fiction and the provision must therefore receive a strict interpretation. Relying upon the decision of Supreme Court in Punjab Distilling Industries Ltd. v. CIT [1965] 57 ITR 1 and Calcutta High Court decision in CIT v. Martin Burn Ltd. 136 ITR 805 the ld. counsel urged that the legal fiction has been incorporated by the Legislature to prevent evasion of tax and must receive a strict interpretation. Repelling the contention of the ld. D.R. that amalgamation and mergers by the companies of the Sarabhai group have been engineered as tax planning measures, the ld. counsel argued that the scheme of amalgamation, has been duly approved and sanctioned by the High Court in accordance with the provisions of section 101 of the Companies Act. The ld. counsel referred to the Gujarat High Court decision in Wood Polymer Ltd., In re [1977] 109 ITR 177 wherein the Court has observed that a scheme of amalgamation made for the avowed object of defeating tax would not be in the 'public interest' as per the expression used in the second proviso to....
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....tions and deal with the same while considering the issue of their inclusion in the accumulated profits. 11. We have given our thoughtful consideration to the rival submissions made before us and perused the orders of the tax authorities below. An array of judicial pronouncements of Hon'ble Supreme Court and various High Courts cited at the Bar have also been carefully gone through by us. Before we embark upon the consideration of various items included by the Assessing Officer for computation of accumulated profits, we consider it necessary to analyse true scope and ambit of the expression "accumulated profits" as used in section 2(22). Section 2(22) deals with various types of cases and creates a fiction by which certain amounts, which are actually not distributed as dividends, are also brought within the net of dividend. It is a cardinal rule of interpretation that such a deeming section must receive a strict interpretation. The object and purpose of introducing the legal fiction in the statute is to frustrate any attempt by a company to avoid dividend tax by distributing the profits of the company to its shareholders under the guise of loan, reduction of capital etc. 12. T....
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...., he may include many items of notional basis. But the commercial or accounting profits are the actual profits earned by an assessee calculated on commercial principles." Again in P.K Dadiani v. CIT [1976] 105 ITR 642, a three-judge Bench of this court while considering the question of "deemed dividend" observed at page 647 as follows: "We think that the term "profits" occurring in section 2(6A)(e) of the 1922 Act means profits in the commercial sense, that is to say, the profits made by the company in the real and true sense of the term" 13. Insofar as profits of capital nature are concerned arisen from the sale of capital assets, such profits are to be excluded for the purpose of ascertaining the accumulated profits under section 2(22) unless such capital profits have been subjected to capital gains under section 45. In First ITO v. Short Bros. (P.) Ltd. [1966] 60 ITR 83 (SC) it has been held that capital appreciation in respect of the lands from which the income was derived was agricultural income and that was not taxable in the hands of the company as capital gains, would not, on distribution be liable to be so taxed as dividend under section 12 of the Indian Income-ta....
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....eated in the balance sheet of the amalgamated company in the context of section 2(22) of the I.T. Act. So far as the contention of the ld. D.R. that Alkapuri and various allied companies of the Sarabhai Group have carried on series of amalgamations as a tax planning device, we are unable to accept the contention. We see substantial merit in the contention of ld. counsel for the assessee that various amalgamations and mergers have been duly approved by the High Court and after such amalgamations have been sanctioned as made in conformity with the requirements under the Companies Act, no such allegation of tax planning or tax evasion can be levelled by the revenue against the assessee. While according sanction the High Court has duly considered that the scheme of amalgamation is in public interest which essentially implies that the amalgamation is not motivated by consideration of capital gains tax. The decision of Gujarat High Court in Wood Polymer Ltd's case relied upon by the ld. counsel renders direct support to the view taken by us. Their Lordships in the said decision observed at page 177 of the report, "this Court would not, by approving such a scheme of amalgamation, be a par....
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....nder section 45 would be includible as part of the accumulated profits. 4. If there is a provision in the constitution of the company against distribution of dividend out of capital profits, such profits would not form part of accumulated profits unless charged to capital gains tax. 5. Surplus arisen on the amalgamation of companies would not result in revenue gain since amalgamation even if treated as an activity of purchase would not result in profit to the amalgamated company. 6. Since amalgamating company is a separate entity, profits in its balance sheet, after amalgamation cannot be treated as accumulated profits of the amalgamated company. 19. We would proceed to discuss the specific items included by the Assessing Officer for computing accumulated profits for the purpose of section 2(22)(a) of the I.T. Act. The entire controversy whether any deemed dividend is liable to be included in the hands of the shareholder under section 2(22)(a) on reduction of capital by AIPL (Alkapuri) would be determined by the question whether AIPL possess accumulated profits as on the date of reduction being 22-6-1988. 20. Capitalised part of share capital of Alkapuri Investments ....
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..... It is worth noting here that Alkapuri has not issued any bonus shares to its shareholders. Bonus shares have been issued by the two amalgamating companies viz. KPPL and BAPL prior to 1-1-1974 i.e. much before their amalgamation with Alkapuri. 22. For the aforesaid reasons we would uphold the view of the CIT (A) that the amount of Rs.8,58,07,700 is not to be considered as part of accumulated profits. 23. Capital Reserve No. 1: Rs.3,45,70,443. This is the book surplus which has arisen on account of various amalgamations and mergers as per the facts indicated hereinbefore: "Sarabhai Chemicals is wholly owned subsidiary of Alkapuri. Elscope is wholly owned subsidiary of Sarabhai Chemicals. Fabriquip is wholly owned subsidiary of Elscope. SEPL owns 2,99,025 shares of Alkapuri. On amalgamation of these companies, the shares so held by each of them cease to exist, and hence, surplus had arisen in case of Alkapuri amounting to Rs.3,45,70,443. This amount is shown under the head Capital Reserve in balance sheet of Alkapuri." 24. The contention of the ld. counsel before us is that the surplus amount of Rs.3,41,43,264, being capital reserve No. 1 cannot be regarded as profits....
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....sp; Rs. 93.54 b. Excess of distribution received from liquidators of certain wholly owned subsidiaries during the year ended 31-3-1988, over the book value of the shares of those subsidiaries Rs. 25.16 c. Excess of distribution received from liquidators of certain wholly owned subsidiaries during the year ended 31-3-1988, over the book value of the shares of those subsidiaries. Rs. 622.73 ....
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....ceived on the liquidation of the subsidiary companies has been worked out at a negative figure of Rs.2,27,81,381. 28. The ld. D.R. during the course of hearing before us pointed out that the excess realised on the liquidation of the subsidiaries has been taxed by the Assessing Officer in the case of Alkapuri Investments (AIPL) for assessment year 1988-89 and once the amount has been brought to tax as capital gains, such excess, the ld. D.R. contended, would be liable top be treated as part of accumulated profits for the purpose of section 2(22)(a). 29. Shri K.C. Patel, the ld. counsel strongly refuted the contentions of the ld. D.R. and argued that full facts have not been stated by the ld. D.R. and further that the capital gains have been deleted by the CIT(A) vide order dated 27-11-1994 following the Tribunal's order in the case of Brahmi Investments (P.) Ltd. passed in [ITA No. 5936/Ahd./91 on 21-7-1993]. This decision is reported in Brahmi Investments (P.) Ltd. v. Asstt. CIT [1993] 47 ITD 387 (Ahd.) is one of the subsidiary companies included in the list of 18 subsidiaries appearing in the aforementioned annexure to the impugned order of the CIT(A). 30. Respectfully fo....
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....lanation 2 which enacts that the expression "accumulated profits" in sub-clauses (a), (b), (a) and (e) shall include all profits of the company upto the date of distribution or payment. Therefore current profits of Rs.1,21,455 have been rightly included by the Assessing Officer and we hold accordingly. 33. Shri K.C. Patel, the ld. counsel for the assessee sought to support the finding of the CIT(A) regarding the company not possessing accumulated profits during the year by arguing the grounds decided against the assessee by the CIT(A). These grounds decided against the assessee are: 1. Out of capital reserve account No. 2 Rs.118.70 crores held as rightly included in the accumulated profits. 2. Provision for taxation included in debit balance of P & L account Rs.23,47,000. 3. Existing tax liability raised by the I.T. authorities but disputed by the assessee and not provided in the books Rs.17,38,04,000. The ld. counsel referred to section 253(4) of the I.T. Act and argued that since the CIT(A) had deleted the deemed dividend holding that AIPL did not possess accumulated profits, the assessee was not entitled to file cross objection against the impugned order. However ....
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....on for taxation Rs.23,47,000 the ld. counsel pointed out that the amount forms part of debit balance of profit and loss account being Rs.190.78 lakhs. Referring to page 105 of the paper book filed by the ld. counsel it is pointed out that the amount comprises the following items: 1. Rs.18,09,000 pertaining to the year ended 30-9-1986. 2. Rs.5,38,000 for the year ended 31-3-1988 debited to P & L account. Thus the total amount of Rs.23,47,000 has been debited to the P & L account. Relying upon the decision of Supreme Court in the case of Tea Estate India (P.) Ltd it is urged that the tax liabilities debited to the P & L account as well as tax liabilities created by the I.T. department and not debited in the books cannot be treated as part of accumulated profits since these liabilities cannot be treated as excess provision for taxation. 39. With regard to the tax liabilities of Rs.17,38,04,000 the ld. counsel referred to the written submissions made before the Assessing Officer placed at page 31 of the paper book whereby deduction of Rs.17,38,04,000 on account of disputed tax liabilities has been claimed on the basis of note appearing in Schedule H form part of annual acco....
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.... I.T. authorities and assessment orders as well as demand notices in support of the said liabilities have been produced during the assessment proceedings, such liabilities are to be taken note of, even if not provided in the books for ascertaining the accumulated profits. In the absence of specific reserves for taxation created by the company those liabilities may have to be met from the general reserves. In such circumstances to take the figure of general reserve from the balance sheet for ascertaining the accumulated profits would not be correct procedure for the quantum of the general reserves would not represent the accumulated profits. 42. It has been observed by the Madras High Court in CIT v. G. Narasimhan [1979] 118 ITR 60:-- "If the liabilities that accrued from year to year has been taken into account year by year and the accumulated profits had been depleted year by year by writing down the accumulated profits and only the balance carried over, the total of the accumulated profits in any given year will be less than in cases where there has been no deduction made for accrued liabilities." 43.In CIT v. V. Damodaran [1972] 85 ITR 590 (Ker.) cited by the ld. counse....
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....; ------------- -4739,545 Deduct: Tax provision debited to P & L account. - 23,47,000 - 70,86,545 Deduct: Tax liabilities created by the I.T.....
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....oses of levy of capital gains is whether reduction of share capital by a company results in extinguishment of rights in shares held by shareholders covered by the expression 'transfer' as defined in section 2(47). When a company reduces its share capital by paying of a part of the capital thereby reducing the face value of the shares, the share remains but right of the shareholder to dividends of his share capital and the right to share is extinguished proportionately to the extent of reduction in capital. It has been held by the Supreme Court in Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163 that reduction of the share capital would amount to a transfer as per the provisions of section 2(47) and the assessee was liable to pay capital gains tax. The Supreme Court applied the ratio of its earlier decision in Anarkali Sarabhai v. CIT [1997] 224 ITR 422. 48. Referenre may further be made to the decision of Supreme Court in G. Narasimhan's case wherein the Supreme Court held that if the distribution made by the company under any of the clauses contained under section 2(22) exceeded the accumulated profits, the excess of distribution would liable to be considered for the levy of cap....