2011 (2) TMI 1439 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of current year's profits in accumulated profits for the purpose of application of section 2(22)(e).
2. Exclusion of share premium from accumulated profits for computing deemed dividend u/s 2(22)(e).
3. Treatment of debit balances in trading transactions as loans and advances within the meaning of section 2(22)(e).

Summary:

Issue 1: Inclusion of current year's profits in accumulated profits for the purpose of application of section 2(22)(e)

The assessee contended that current year's profits should not be included in accumulated profits for the application of section 2(22)(e). However, the Tribunal upheld the CIT(A)'s decision, stating that the definition of "accumulated profits" in Explanation 2 to section 2(22)(e) includes current year's profits up to the date of payment of deemed dividend. The Tribunal relied on the decision in NCK Sons Exports (P) Ltd., which clarified that the legislature's definition must be followed, and dismissed the assessee's appeal.

Issue 2: Exclusion of share premium from accumulated profits for computing deemed dividend u/s 2(22)(e)

The revenue challenged the CIT(A)'s decision to exclude share premium from accumulated profits. The Tribunal upheld the CIT(A)'s decision, relying on the Delhi Bench's ruling in DCIT v. Maipo India Ltd., which stated that share premium, being capital reserve and not distributable as dividend, cannot be included in accumulated profits for section 2(22)(e). The Tribunal rejected the revenue's arguments, including the applicability of section 2(17) and clause (b) of section 2(22), and dismissed the revenue's appeal on this ground.

Issue 3: Treatment of debit balances in trading transactions as loans and advances within the meaning of section 2(22)(e)

The revenue argued that debit balances in the assessee's account with M/s. Ruchiraj Shares & Stock Brokers Pvt. Ltd. should be treated as loans and advances. The Tribunal upheld the CIT(A)'s decision that these were regular business transactions of purchase and sale of shares, not loans or advances. The CIT(A) verified the ledger accounts and found no cash or cheque receipts, and noted a consistent reduction in the balance payable by the assessee. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeals on this issue.

Conclusion:

All appeals by the revenue and the assessee were dismissed. The Tribunal upheld the CIT(A)'s decisions on all issues, confirming the inclusion of current year's profits in accumulated profits, exclusion of share premium from accumulated profits, and the treatment of trading transactions as not constituting loans or advances u/s 2(22)(e).