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2011 (9) TMI 95 - AT - Income TaxDeemed dividend under section 2(22)(e) - Accumulated profit - The assessees are directors in a closely held company named M/s. Vikas Educational Institutions Ltd. (VEIL) and each of them held 25 per cent shares in that company. - The Assessing Officer noticed from the assessment record of the VEIL for the assessment year 2004-05 that the said company has advanced money to the assessee - Held that - as per the provisions of section 2(22)(e) of the Act such payments can be treated as deemed dividend only to the extent to which the company possesses accumulated profits. - Supreme Court in the cases of CIT v. Urmila Rungta (1998 -TMI - 5635 - SUPREME Court) and P.K. Badiani v. CIT (1976 -TMI - 6489 - SUPREME Court) has held that the Profits mentioned in section 2(22)(e) is the actual profits calculated on commercial principles. - the question of determination of the quantum of accumulated profits that were available in the hands of the company on the date of entering into the impugned transactions requires to be examined afresh. - matter remanded back.
Issues Involved:
1. Deletion of addition made by the Assessing Officer as deemed dividend under section 2(22)(e) of the Income Tax Act. 2. Determination of whether the company, M/s. Vikas Educational Institutions Ltd. (VEIL), is a closely held company. 3. Examination of the transactions between the company and the assessees in the context of section 2(22)(e). 4. Determination of accumulated profits for the purposes of section 2(22)(e). Detailed Analysis: Issue 1: Deletion of Addition as Deemed Dividend The revenue challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] who deleted the addition made by the Assessing Officer (AO) under section 2(22)(e) of the Income Tax Act. The AO had assessed certain amounts as deemed dividends in the hands of the assessees, who were directors in VEIL, holding 25% shares each. The CIT(A) had allowed the appeals filed by the assessees, leading to the revenue's appeal before the tribunal. Issue 2: Whether VEIL is a Closely Held Company The Learned Departmental Representative (D.R.) argued that VEIL, having more than 10% voting power held by the assessees, and possessing accumulated profits, should be considered a closely held company under section 2(22)(e). The Assessee's Representative (A.R.) contended that VEIL had a maximum number of shareholders and should not be considered a closely held company. However, the tribunal noted that VEIL does not fall under the categories listed in section 2(18) of the Act, thus qualifying it as a company in which the public are not substantially interested, and thereby covered by section 2(22)(e). Issue 3: Examination of Transactions under Section 2(22)(e) The A.R. argued that the transactions between the assessees and VEIL were carried out in the ordinary course of business and should not be subjected to section 2(22)(e). The tribunal clarified that section 2(22)(e) applies unless the transactions are in the ordinary course of business or if lending money is a substantial part of the company's business. It was neither shown that the transactions were in the ordinary course of business nor that lending money was a substantial part of VEIL's business. The A.R. also contended that the payments were made directly by the bank to the creditors of the assessees, and not from VEIL's funds. The tribunal refuted this, explaining that the funds, represented by the loan obtained by VEIL, became the company's asset, and the direct disbursement to creditors was merely a different methodology of fund transfer. The tribunal cited ITAT Delhi's decision in Pramod Kumar Dang v. JCIT to support that payments made from any source, including loans, fall under section 2(22)(e). Issue 4: Determination of Accumulated Profits The tribunal noted that the AO had referenced assessed income to determine accumulated profits. The A.R. argued that the assessed income declared during a survey should not be considered for accumulated profits as it was quantified after 31-3-2004. The tribunal agreed that the determination of accumulated profits, as per Supreme Court rulings, should be based on actual profits calculated on commercial principles and available on the date of payment. The tribunal set aside the CIT(A)'s orders, stating that the issue of accumulated profits needs re-examination by the AO. The AO is directed to determine the quantum of deemed dividend based on the accumulated profits as per law, and the assessees should be given an opportunity to be heard. Conclusion The appeals by the revenue are allowed for statistical purposes, with directions for the AO to re-examine the accumulated profits and determine the deemed dividend accordingly, ensuring compliance with legal provisions and giving the assessees an opportunity for representation.
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