2014 (8) TMI 1139 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - dividend distribution tax and prior period expenses - Held that - If the AO himself had admitted in the remand report that capital subsidy was not be considered a part of the accumulate profit, then why has he filed an appeal especially when the FAA has endorsed his view. The stand taken by the AO in the ground of appeal is beyond our comprehension. Initially he held that necessary documents were not produced by the assessee. In our opinion his stand at that point of time could be held to be justifiable. But, after admitting a particular position in the remand report about the non-inclusion of capital subsidy out of accumulated profit for the purpose of calculating deemed dividend, he should not accepted the decision of the FAA and should not have filed the appeal. FAA had directed the AO to recomputed the accumulated profit after lying down certain principles. In our opinion direction given by him are as per the provisions of law. He has rightly held that Income tax paid, propose dividend distribution tax and prior period expenses cannot be considered for determining accumulated profits. - Decided against revenue.

Summary

Issues:
1. Recomputation of accumulated profits for the purpose of section 2 (22) (e) and reduction of capital subsidy.
2. Determination of whether capital subsidy should be considered as part of accumulated profits for the purpose of section 2 (22) (e) of the Income-tax Act.

Analysis:
Issue 1:
The Assessing Officer (AO) challenged the order of the Commissioner of Income Tax (Appeals) directing the recomputation of accumulated profits and reducing capital subsidy. The AO finalized the assessment, determining the total income of the individual assessee. The AO reopened the case under section 147 after receiving information regarding loans from M/s Universal Hotels Pvt. Ltd. to the assessee. The AO contended that the loans were in the nature of deemed dividend under section 2 (22) (e) of the Act. The assessee argued that certain amounts like capital subsidy and investment allowance should be excluded from the computation of deemed dividend. The First Appeal Authority (FAA) considered new evidence submitted by the assessee, including a capital subsidy of Rs. 30 lakhs. The FAA directed the AO to recompute the accumulated profits considering various factors like income tax paid, proposed dividend, and prior period expenses. The FAA held that for the purpose of section 2 (22) (e), accumulated profits should be determined based on commercial sense profits. The FAA's decision was based on legal principles and upheld.

Issue 2:
The key issue was whether the capital subsidy should be included in the accumulated profits for the purpose of section 2 (22) (e) of the Act. The AO initially contested the inclusion of capital subsidy but later admitted in the remand report that it should not be considered as part of accumulated profits. Despite this admission, the AO filed an appeal against the FAA's decision endorsing this view. The Tribunal found the AO's appeal unjustified, as the FAA's direction to recompute accumulated profits based on specific principles was in line with the law. The Tribunal dismissed the AO's appeal, confirming the FAA's decision on the treatment of capital subsidy and other factors in determining accumulated profits for the deemed dividend under section 2 (22) (e) of the Act. The Tribunal's decision was based on the legal soundness of the FAA's order and upheld the dismissal of the AO's appeal.

In conclusion, the Tribunal upheld the FAA's decision, emphasizing the correct computation of accumulated profits for the purpose of section 2 (22) (e) and the exclusion of capital subsidy from such profits. The judgment highlighted the importance of considering commercial sense profits and adhering to legal principles in determining deemed dividends under the Income-tax Act.