2013 (6) TMI 751 - AT - Income Tax

Revision u/s 263 - Deemed dividend under Section 2(22)(e) - whether the loans/advances given to the shareholders in the earlier years which are assessable as deemed dividend in the hands of the respective shareholders in the past years, should be reduced from the surplus while determining the accumulated profits in the hands of the company during the year under consideration? - Held that - The advances or loans made in earlier years to the shareholders need to be reduced from the accumulated profits , for computing the accumulated profits for current year, irrespective of whether the prior loans were assessed as deemed dividend under Section 2(22)(e) of the Act or not. Accordingly, the accumulated profits as on 31.03.2002 of the company was ₹ 1,94,62,774/- and the loans/advances on even date to the shareholders holding in excess of 10% voting power was ₹ 3,73,65,065/- and in this manner, it was submitted that there was no accumulated profits as on 31.03.2002. The aforesaid proposition has been accepted by the Assessing Officer in the assessment order dated 12.06.2007 inasmuch as the Assessing Officer considered only the profits that accrued during the period from 01.04.2002 to 31.03.2003 amounting to ₹ 2,61,19,957/- for the purposes of computing the amount assessable under Section 2(22)(e) of the Act. In our considered opinion, the Assessing Officer made no mistake in excluding the sum of ₹ 1,94,62,774/- while determining the accumulated profits for the purposes of computing the amount assessable under Section 2(22)(e) of the Act, Commissioner has differed with the legal position accepted by the Assessing Officer without any justifiable reason. In fact, it would be in fitness to things to observe that the view adopted by the Assessing Officer on the aforesaid aspect was a possible view which is supported by judicial pronouncements and the Commissioner has not found it erroneous on the basis of any contrary judgment or legal position. Notably, the invoking of Section 263 of the Act can be justified only where the Commissioner is able to establish that the order passed by the Assessing Officer is erroneous in the eye of law so as to cause prejudice to the interest of the Revenue. In the present case, where the Assessing Officer has adopted a possible view, based on legal precedents, and the Commissioner is denuded from exercising his power under Section 263 of the Act.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Determination of 'accumulated profits' for the purpose of 'deemed dividend' under Section 2(22)(e) of the Income-tax Act.
3. Validity of the Commissioner's order under Section 263 of the Income-tax Act.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal filed by the assessee was delayed by 20 months. The delay was attributed to a change in consultant and a misunderstanding of the law, where the assessee believed that the order under Section 263 could not be separately challenged and only the consequential order by the Assessing Officer could be appealed before the CIT(A). The Tribunal condoned the delay, noting that the assessee acted in a bona fide manner without any mala fide intent. The Tribunal referenced the Supreme Court's judgment in the case of Collector of Land Acquisition v. Mst. Katiji, which emphasized that substantial justice should be preferred over technical considerations.

2. Determination of 'Accumulated Profits':
The Commissioner held that the Assessing Officer's order was erroneous because it restricted the 'deemed dividend' to 14% of the 'accumulated profits' corresponding to the assessee's shareholding. The Tribunal, however, found that the Assessing Officer's method of determining 'accumulated profits' was correct, as it excluded loans and advances made in earlier years to shareholders, which is supported by the Supreme Court's decision in CIT v. G. Narasimhan. The Tribunal also noted that the Commissioner's method of including the entire 'accumulated profits' without considering earlier loans was incorrect.

3. Validity of the Commissioner's Order under Section 263:
The Tribunal found that the Commissioner's invocation of Section 263 was unjustified. The Assessing Officer had adopted a possible view supported by judicial precedents, and the Commissioner did not provide any contrary judgment to establish that the order was erroneous. The Tribunal emphasized that the Assessing Officer's approach was a legally tenable view, and therefore, the Commissioner could not exercise his power under Section 263. The Tribunal also referenced the judgments of the Hon'ble Gujarat High Court and the Hon'ble Calcutta High Court, which did not support the Commissioner's stance.

Conclusion:
The Tribunal set aside the Commissioner's order under Section 263 and allowed the appeals of the assessee. Consequently, the consequential assessments framed by the Assessing Officer were also quashed. The decision was applied mutatis mutandis to similar cases, and all captioned appeals were allowed.