2014 (1) TMI 1734 - AT - Income Tax

Deemed dividend u/s 2(22)(d) - Held that - It is an admitted fact that the assessee did not make payments as such to the firm / company to the extent of 25, 75, 116/-. It includes the sum of 19.7 lakhs which is obviously the goodwill appearing on the credit side for the first time on 31.3.2001. Effectively 20, 74, 170/- was paid by the company to the assessee is obviously against the non-payment by the assessee to the firm / company through the mode of allotment of redeemable preferential shares. These aspects were not examined deeply considering the relevant legal provisions under the Companies Act 1956. Further it is an admitted fact that the assessee has not raised the arguments relevant to the provisions of section 80(3) and section 100 of the Companies Act 1956. It is also relevant to mention here that there is no categorical finding on the essential aspect of reduction of its capital by the lower authorities qua the redemption of the preferential share capital. It is an admitted fact that the capital is a wider connotation and it is a generic term. In all fairness we are of the opinion that the above issues must be remanded to the files of the CIT (A) for a comprehensive remand report. Therefore we remand these issues to the files of the CIT (A) to adjudicate the matter afresh after providing a reasonable opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Addition of deemed dividend u/s 2(22)(d) of the Act
2. Interpretation of provisions of section 2(22)(d) of the Act
3. Applicability of provisions of Companies Act, 1956 on redemption of preferential shares
4. Examination of capital base and distribution of profits

Issue 1: Addition of deemed dividend u/s 2(22)(d) of the Act:
The appeal was filed against the order of CIT (A) for adding a sum on account of deemed dividend u/s 2(22)(d) of the Act. The AO added the amount as the assessee received redeemable preference shares against valuable consideration which were subsequently redeemed, resulting in a reduction of capital base. The AO invoked the provisions of section 2(22)(d) of the Act, leading to the addition of the said amount.

Issue 2: Interpretation of provisions of section 2(22)(d) of the Act:
During the first appellate proceedings, the assessee relied on exceptions provided in subclause (i) of section 2(22)(d) of the Act and argued that the transaction falls within those exceptions. The CIT (A) analyzed the capital account structure of the partners and concluded that the redemption of preferential shares constituted a distribution of profits by the company to the assessee, falling under section 2(22)(d) of the Act. The CIT (A) distinguished a previous case and upheld the addition made by the AO.

Issue 3: Applicability of provisions of Companies Act, 1956 on redemption of preferential shares:
The assessee argued before the Tribunal that the provisions of section 2(22)(d) were not applicable as the redemption of preferential shares did not amount to a reduction in capital or distribution of profits. The Counsel highlighted provisions of the Companies Act, 1956 related to the redemption of shares and reduction of share capital, which were not raised before the lower authorities. The Counsel contended that the redemption did not reduce the authorized share capital as per the Companies Act.

Issue 4: Examination of capital base and distribution of profits:
Both parties presented their arguments regarding the capital base manipulation by the firm and the distribution of profits through the redemption of preferential shares. The Ld DR emphasized that the redemption resulted in a reduction of the company's capital base, qualifying as a deemed dividend under section 2(22)(d) of the Act. The Tribunal observed that essential aspects concerning reduction of capital were not deeply examined, and remanded the issues to the CIT (A) for a comprehensive review, allowing the appeal for statistical purposes.

In conclusion, the Tribunal remanded the issues to the CIT (A) for a detailed examination, considering the arguments presented regarding the interpretation of legal provisions and the applicability of the Companies Act, 1956 on the redemption of preferential shares.