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2012 (11) TMI 1127 - AT - Income TaxValidity of re-opening of assessment - assessment of deemed dividend u/s 2(22)(e) - Held that - We notice that the assessee has furnished a copy of the Loan account of the assessee as available in the books of the company in Page 8 of the paper book. On the perusal of the said account, we notice that the dividend amount of ₹ 31,25,100/- was adjusted by the company against the said loan amount. Thus, the observation made by Ld CIT(A) appears to be against the facts available on record. There cannot be any dispute that the dividend amount so set off shall have to be deducted from the deemed dividend amount computed above. However, the observations made by Ld CIT(A) show that the tax authorities have not examined this aspect properly. Hence, the factual aspect on this matter, in our view, requires verification preferably at the end of the assessing officer. The foregoing discussions show that the views entertained by the tax authorities on the matter of accumulated profits and deemed dividend are not in accordance with the settled position of the law. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the Assessing Officer with the direction to carry out due verification of the computations made with regard to the accumulated profits and also determine the amount of deemed dividend , if any, accordingly after verifying the record with regard to the amount to be deducted as per clause (iii) of sec. 2(22)(e) of the Act, which was discussed in the preceding paragraph. Appeal of the assessee is treated as partly allowed for statistical purposes.
Issues Involved:
1. Validity of re-opening of assessment. 2. Validity of assessment of deemed dividend u/s 2(22)(e) of the Act. Detailed Analysis: 1. Validity of re-opening of assessment: During the course of hearing, the counsel for the assessee did not press the grounds relating to the validity of re-opening of assessment. Consequently, these grounds were dismissed as withdrawn. 2. Validity of assessment of deemed dividend u/s 2(22)(e) of the Act: The primary issue revolves around the assessment of deemed dividend under section 2(22)(e) of the Income Tax Act. The assessee, a director in a company and a partner in a partnership firm, received advances from the company. The Assessing Officer (AO) noted that the company had accumulated profits of Rs. 87,48,366/- as on 31.3.2007 and advanced sums to the assessee and the partnership firm. The AO assessed the amount equivalent to the accumulated profit as deemed dividend in the hands of the assessee for the assessment year 2007-08. Arguments by the Assessee: - The provisions of section 2(22)(e) should not apply as the company declared dividends during the relevant year. - The AO incorrectly computed the accumulated profit. Findings and Observations: - The CIT(A) noted that clause (iii) of section 2(22)(e) excludes any dividend paid by a company which is set off by the company against any sum previously paid and treated as a dividend. Since the dividend paid was not set off against the loan account, the CIT(A) held that clause (iii) did not apply. - The CIT(A) rejected the assessee's contention that the dividend declared should be set off against the deemed dividend, citing the decision of the Hon'ble Bombay High Court in the case of Badiani (LP) 154 ITR 2004. Computation of Accumulated Profits: - The assessee argued that the accumulated profit should be reduced by the amount that should have been assessed as deemed dividend in the previous year (assessment year 2006-07). - The CIT(A) disagreed with the Cochin bench's decision in Gordhandas Khimji, stating that the statute and the Supreme Court's decision in P. Sarada do not provide for such a reduction. Tribunal's Analysis: - The tribunal examined the rival contentions and the relevant legal provisions. - It agreed with the assessee that the deemed dividend should be assessed based on the accumulated profits on the date of each loan or advance. - The tribunal noted that the accumulated profits do not include current year's business profit, consistent with the Ahmedabad bench's decision in M.B. Stock Holding (P) Ltd. - The tribunal also concurred with the Cochin bench's view that the deemed dividend assessable in earlier years should be reduced from the accumulated profits, even if it was not assessed in those years. Conclusion and Directions: - The tribunal set aside the CIT(A)'s order and directed the AO to verify the computations of accumulated profits and determine the amount of deemed dividend after considering the dividend set off as per clause (iii) of section 2(22)(e). - The appeal of the assessee was treated as partly allowed for statistical purposes. Pronouncement: The judgment was pronounced on 16.11.2012.
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