2011 (6) TMI 263 - AT - Income Tax

Addition - Deemed dividend - assessee was holding more than 10 per cent shares of M/s. Western Agencies (Madras) (P.) Ltd. M/s. Western Agencies (Madras) (P.) Ltd. was a closely held company. - The expression accumulated profits appearing in the Explanations 1 and 2 of section 2(22)(e) of the Act is not linked to Schedule VI of the Companies Act or profit and loss account and balance sheet prepared under the Companies Act - it would not be possible to come to a conclusion that accumulated profits mentioned in section 2(22)(e) of the Act would be always equal to reserve and surplus mentioned in a balance sheet prepared under the Companies Act - Resultantly, the accumulated profits would effectively be a negative figure only - Decided in favor of the assessee

Summary

Issues:
Appeal against deletion of deemed dividend addition under section 2(22)(e) of the Income-tax Act, 1961 by CIT (Appeals).

Detailed Analysis:

1. Background and Initial Appeal:
The revenue appealed against the deletion of a deemed dividend addition made by the Assessing Officer under section 2(22)(e) of the Income-tax Act, 1961 by the CIT (Appeals). The grievance was based on the advance in the name of the assessee being treated as deemed dividend, citing a decision by the Bombay High Court.

2. Adjournment Petition Rejection:
The learned A.R. filed an adjournment petition which was rejected due to insufficient reasons provided for seeking adjournment.

3. Assessment and Arguments:
The assessee, a Director in a closely held company, received a loan exceeding accumulated profits. The Assessing Officer applied section 2(22)(e) of the Act, considering the loan as deemed dividend. The assessee argued that the company did not possess accumulated profits due to unadjusted tax payments in its balance sheet.

4. CIT (Appeals) Decision:
The CIT (Appeals) ruled in favor of the assessee, stating that accumulated profits were absent in the company due to unadjusted income-tax payments, thus deleting the addition made by the Assessing Officer.

5. Arguments Before ITAT:
The revenue strongly contested the CIT (Appeals) decision, emphasizing that income-tax payments should have been reflected in the profit and loss account. The appellant relied on a Supreme Court decision to support their argument.

6. Counter-Arguments and Analysis:
The appellant argued that the company's substantial income-tax payments reduced the effective surplus, challenging the assumption of accumulated profits based on reserves. The ITAT analyzed the definition of "accumulated profits" and clarified that reserves in a balance sheet do not necessarily indicate accumulated profits.

7. ITAT's Decision:
The ITAT examined the legislative intent behind the deeming provision of deemed dividends, emphasizing the need for actual accumulated profits for section 2(22)(e) to apply. The ITAT rejected the revenue's reliance on a Bombay High Court decision and upheld the CIT (Appeals) decision to delete the addition under section 2(22)(e).

8. Final Verdict:
The ITAT dismissed the revenue's appeal, affirming the deletion of the deemed dividend addition by the CIT (Appeals) based on the absence of accumulated profits in the company.

This detailed analysis covers the issues, arguments, decisions, and legal interpretations involved in the judgment regarding the deletion of a deemed dividend addition under section 2(22)(e) of the Income-tax Act, 1961.