2016 (3) TMI 741 - AT - Income Tax

Reopening of assessment - deemed dividend u/s 2(22) - Held that - Prima facie going by the ld. Counsel s contention on merits, we find that the Assessee had no accumulated profits up till 31.3.2005 which is evident from the balance-sheet. Only the current year s reserves and surplus is ₹ 65,36,884/- which is on account of net loss carried to the balance-sheet. The Hon ble Supreme Court in the case of CIT vs. V. Damodaran (1979 (10) TMI 5 - SUPREME Court) after considering the various decisions has interpreted that accumulated profit cannot be construed to include current profits and there is a distinction between accumulated profits and current profits . If the Assessee did not had any accumulated profits brought forward from the earlier years, then, the provision of deemed dividend cannot be invoked on the current year s profit. This is a settled position of law. Here, in this case, once there is no accumulated profits brought forward from the earlier years, then, the provision of deemed dividend u/s 2(22)(e) of the Act cannot be invoked for taxing the reserves and surplus or the profits of the current year. Accordingly, the addition made by the AO cannot be sustained at the threshold. - Decided in favour of assessee.

Summary

Issues:
1. Validity of reopening of assessment proceedings under section 147 r.w.s. 148 of the Income Tax Act.
2. Addition made by Income-tax Officer under section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.

Issue 1: Validity of Reopening of Assessment Proceedings
The appeal was filed against the impugned order passed by CIT(A)-5, Mumbai for the quantum of assessment under section 143(3) r.w.s. 147 of the Income Tax Act for the A.Y 2006-07. The grounds of appeal challenged the validity of the reopening of assessment proceedings under section 147 r.w.s. 148 of the Act. The Assessee argued that all relevant details were available with the assessing officer during the original assessment, thus reopening was unjustified. The AO issued a notice for reopening based on the loan advanced by a related company to the Assessee, deemed as a dividend under section 2(22)(e). The Assessee contended that the re-opening was a "change of opinion" and no new material was presented post-assessment. The AO and CIT(A) upheld the reopening and additions made.

Issue 2: Addition Made under Section 2(22)(e)
The Assessee challenged the addition made by the Income-tax Officer under section 2(22)(e) regarding deemed dividend. The AO noted the loan advanced by a related company to the Assessee, falling under the provisions of deemed dividend. The Assessee argued that no accumulated profits existed in previous years, and therefore, the current year's reserves and surplus should not be taxed as deemed dividend. The Assessee relied on the distinction between accumulated profits and current profits as per the decision in CIT vs. V. Damodaran. The Tribunal admitted additional grounds raised by the Assessee and held that without accumulated profits from earlier years, the provision of deemed dividend could not be applied to the current year's profits. Consequently, the addition made by the AO was deemed unsustainable on merits.

The Tribunal allowed the appeal, holding that the addition on merits was deleted, rendering the issue of the validity of reopening of assessment proceedings as academic and thus not adjudicated. The appeal was treated as allowed, and the order was pronounced on 15.1.2016.