2015 (12) TMI 1614 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - Held that - As decided in assess;s own case in AY 2005-06 if the share premium amount is taken out of Reserves and Surplus, the assessee is having negative balance under the head profit and loss account which means that it has accumulated losses for the year ending 31.3.2005, which lead to only logical conclusion that there cannot be any question of deemed dividend. The findings of the Ld. CIT(A) are accordingly reversed. The AC) is directed to delete the addition made on account of deemed dividend u/s. 2(22)(e) of the Act. - Decided in favour of assessee Assessment u/s 153A - whether an addition which is not on the basis of incriminating material as found during the search operation can be made where the assessment has attained finality? - Held that - Addition made is not based on the incriminating material during the search and the assessment which is already attained finality cannot be disturbed. The additional ground also decided in favour of assessee.

Issues Involved:
1. Addition on account of deemed dividend under Section 2(22)(e).
2. Treatment of share premium account as part of accumulated profit.
3. Applicability of Section 153A for additions not based on incriminating material found during the search.
4. Disallowance under Section 14A read with Rule 8D for expenses attributed to earning exempt income.

Detailed Analysis:

1. Addition on Account of Deemed Dividend under Section 2(22)(e):
The primary issue revolves around the addition of Rs. 46,67,500/- as deemed dividend under Section 2(22)(e) of the Income Tax Act. The Assessing Officer (A.O.) added this amount by treating the share premium account as part of the accumulated profit, despite the fact that the company had an accumulated loss. The CIT(A) upheld this addition, reasoning that the profits of the company accrue on a day-to-day basis and that the cumulative loss at the end of the year did not justify the claim that there were no profits when the loans were advanced. However, the Tribunal found that the share premium account cannot be considered as accumulated profit for the purpose of deemed dividend, as per the Companies Act, which prohibits the distribution of share premium as dividend. The Tribunal, following a similar case involving the assessee's son, reversed the CIT(A)'s decision and directed the A.O. to delete the addition.

2. Treatment of Share Premium Account as Part of Accumulated Profit:
The Tribunal emphasized that the share premium account cannot form part of accumulated profit. It cited Section 78 of the Companies Act, which bars the distribution of share premium as dividend. The Tribunal noted that if the share premium amount is excluded, the company had an accumulated loss, leading to the conclusion that there could be no deemed dividend. This interpretation aligns with the statutory provisions and previous judicial precedents.

3. Applicability of Section 153A for Additions Not Based on Incriminating Material Found During the Search:
The assessee raised an additional ground, arguing that the addition under Section 2(22)(e) was not based on any incriminating material found during the search. The Tribunal agreed, noting that the assessment had attained finality as it was completed under Section 143(1) before the search. The Tribunal referenced the Bombay High Court's decision in the case of Continental Warehousing Corporation and All Cargo Global Logistics, which held that Section 153A should not disturb completed assessments unless incriminating material is found during the search. Consequently, the Tribunal decided this ground in favor of the assessee.

4. Disallowance under Section 14A read with Rule 8D for Expenses Attributed to Earning Exempt Income:
For the assessment year 2008-09, the A.O. disallowed Rs. 13,97,843/- under Section 14A read with Rule 8D, attributing this amount to expenses related to earning exempt income. The CIT(A) upheld this disallowance. However, the Tribunal found that the investments were strategic in nature, primarily in group companies, and thus should not attract disallowance under Section 14A. The Tribunal cited previous decisions, including those involving the assessee's group companies, where similar disallowances were deleted. The Tribunal directed the A.O. to re-compute the disallowance by excluding strategic investments.

For the assessment years 2009-10 and 2010-11, the Tribunal applied the same reasoning and directed the A.O. to re-compute the disallowance under Section 14A read with Rule 8D, excluding strategic investments. These appeals were partly allowed for statistical purposes.

Conclusion:
The Tribunal allowed the appeal for the assessment year 2005-06, directing the deletion of the addition under Section 2(22)(e) and deciding in favor of the assessee on the additional ground related to Section 153A. For the assessment years 2008-09, 2009-10, and 2010-11, the Tribunal partly allowed the appeals, directing the A.O. to re-compute the disallowance under Section 14A read with Rule 8D, excluding strategic investments. The judgments adhered to legal precedents and statutory interpretations, providing relief to the assessee on multiple grounds.

← Previous Next →