2023 (1) TMI 1319 - AT - Income Tax

Addition u/s 2(22)(e) - accumulative profits as on 31.03.2011 was minus/loss - HELD THAT - Ahmedabad bench of Tribunal in the case of M/s M.B. Stock Holdings (P) Ltd Vs ACIT 2001 (12) TMI 190 - ITAT AHMEDABAD-B took note of the Hon ble Supreme Court decision in the case of CIT Vs. Asokbhai Chimanbhai 1964 (10) TMI 11 - SUPREME COURT wherein it was held that the profits do not accrue from day to day or even from month to month and have to be ascertained by a comparison of assets at two stated points. Also unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. AO not to include the current year profit to be part of accumulated profit while determining the amount of deemed dividend u/s 2(22)(e) after considering Explanation-2 to Section (2(22)(e) (which defines the accumulated profit). And the Hon ble High Court specifically observed that while determining the amount of deemed dividend under Explanation 2 to Section 2(22)(e) of the Act, the current profit was not required to be included to be part of accumulated profit. And their Lordship also took note that the issue was already settled by the Hon ble Supreme Court against the revenue in the case of Associated Banking Corporation of India Ltd. 1964 (10) TMI 7 - SUPREME COURT wherein the view was taken that the profit accrues when the books of account are closed. In the light of the judicial precedent laid by Hon ble Gujarat High Court in CIT Vs. M. B. Stockholding (P) Ltd 2015 (5) TMI 232 - GUJARAT HIGH COURT and since no decision of jurisdictional High Court was cited in support of impugned action of Ld CIT(A), we are of the considered opinion that in the present case, while determining the deemed dividend, the AO/Ld. CIT(A) ought to have taken into consideration the accumulated profit as on 31.03.2011 i.e loss/(-) of Rs. 74,80,633/- and not accumulated profit adopted as on 31.03.2012 ( Rs. 3.46 crores). Therefore, no addition was possible u/s 2(22)(e) of the Act in the facts of the case and thus the assessee succeeds. And consequently, we direct the deletion of Rs. 3,41,96,270/. It is noted that the Revenue s reliance on the judgment of P.K. Badiani Vs. CIT 1976 (9) TMI 3 - SUPREME COURT was misplaced because the Hon ble Apex Court was answering the question as to whether the development rebate reserve created by the company by duly charging the amount in profit loss account, although liable as a deduction under the Income Tax Act, 1922, constituted accumulated profit of the company within the meaning of Section 2(6A)(e) of the Act, 1922. In this judgment, we couldn t even find an obiter-dicta which could support the contention of the revenue. So the same cannot be of any help to the revenue. Therefore, by applying the ratio in CIT Vs. Damodran as well as CIT Vs. Ashokbhai Chamanbhai 1964 (10) TMI 11 - SUPREME COURT and Associated Banking Corporation 1964 (10) TMI 7 - SUPREME COURT and as held by the Hon ble Gujarat High Court in CIT Vs. M. B. Stockholding 2015 (5) TMI 232 - GUJARAT HIGH COURT we uphold the contention of the Ld AR of the assessee as discussed supra and allow the appeal.

Summary

Issues Involved:
1. Legality of the reassessment order under Section 143(3) read with Section 147 of the Income Tax Act.
2. Validity of the addition of Rs. 3,41,96,270/- under Section 2(22)(e) of the Income Tax Act.
3. Consideration of accumulated profits for deemed dividend.
4. Set-off of business loss.
5. Initiation of penalty proceedings under Section 271(1)(c).
6. Charging of interest under Sections 234A and 234B.

Detailed Analysis:

1. Legality of the Reassessment Order:
The assessee contended that the reassessment order passed by the Assessing Officer (AO) was illegal and bad in law as no reassessment can be made for making additions under Section 2(22)(e) of the Income Tax Act, especially when all details were available on record. The main condition for reopening the case beyond four years, which is the failure on the part of the appellant to disclose fully and truly all material facts, was not established by the AO. The ITAT was requested to reverse the order of the CIT(A)/NFAC on this account.

2. Validity of the Addition under Section 2(22)(e):
The AO added Rs. 3,41,96,270/- to the total income of the assessee as deemed dividend under Section 2(22)(e) of the Act. The AO noted that the assessee had received Rs. 16.19 crores from M/s. Sony Mony Developers Pvt. Ltd., in which the assessee was a director and 50% shareholder. The AO treated the transaction as a deemed dividend based on the accumulated profits as on 31.03.2012.

3. Consideration of Accumulated Profits:
The main issue was whether the accumulated profits should be considered as on 31.03.2011 or 31.03.2012. The assessee argued that the accumulated profit as on 31.03.2011 was a loss of Rs. 74,80,633/-, and therefore, no deemed dividend could be declared. The ITAT cited the decision in CIT vs. M. B. Stockholding Pvt. Ltd., where it was held that current year profits should not be included in accumulated profits for the purpose of Section 2(22)(e). The ITAT concluded that the AO and CIT(A) erred in adopting the accumulated profit as on 31.03.2012. The ITAT directed the deletion of the addition of Rs. 3,41,96,270/-.

4. Set-off of Business Loss:
The assessee argued that the CIT(A) NFAC erred in not allowing the set-off of business loss of Rs. 3,11,913/- during the year within inter-head of incomes, stating that unabsorbed depreciation can be set off against any income during the year. However, this ground was not pressed by the assessee and was dismissed.

5. Initiation of Penalty Proceedings:
The CIT(A) NFAC upheld the initiation of penalty proceedings under Section 271(1)(c) of the IT Act. The assessee contended that the requisite facts for concealment of income were not existing in this case. However, this ground was also dismissed as it was consequential in nature.

6. Charging of Interest:
The assessee argued that the AO wrongly charged interest under Sections 234A and 234B of the IT Act and that the CIT(A)/NFAC did not adjudicate on this issue. This ground was also dismissed as it was consequential in nature.

Conclusion:
The ITAT allowed the appeal partly, primarily on the issue of the addition under Section 2(22)(e), directing the deletion of Rs. 3,41,96,270/- on the basis that current year profits should not be included in accumulated profits for the purpose of deemed dividend. The other grounds raised by the assessee were dismissed either as not pressed or consequential.