2016 (7) TMI 934 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - amount under the head reserve and surplus representing share premium and credit balance of profit and loss account - Held that - Income Tax Appellate Tribunal was justified in allowing relief to the assessee by treating the amount under the head reserve and surplus representing share premium and credit balance of profit and loss account as not falling within the ambit of deemed dividend under section 2(22)(e). Revvenue has not advanced any submission to show that the aforesaid view of the learned Tribunal is wrong in law. We , as such, find no reason to interfere with the views taken by the learned Tribunal. - Decided against revenue

Summary

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend treatment for payments made by a company from its accumulated profits. Determination of whether payments made from share premium and accumulated profits constitute deemed dividend. Assessment of whether money lending formed a substantial part of the business of a company.

Interpretation of Section 2(22)(e) - Deemed Dividend Treatment:
The case involved a dispute regarding the applicability of deemed dividend treatment under Section 2(22)(e) of the Income Tax Act, 1961 to payments made by a company from its accumulated profits. The Court highlighted that for a payment to be classified as deemed dividend, it must be made from the company's accumulated profits. In this case, it was established that one company did not have accumulated profits, while the other had only a small amount. The Court emphasized that unless payments are made from accumulated profits, they do not qualify as deemed dividends under the Act.

Assessment of Share Premium and Accumulated Profits:
The Court examined the nature of the payments made by the companies involved. It was noted that the money lent by one company included a portion from accumulated profits and the rest from the share premium account. The Court emphasized that share premium does not constitute accumulated profits, and the portion paid from accumulated profits was insufficient to trigger deemed dividend treatment. The Court upheld the decision that the payment made by the company did not fall within the ambit of Section 2(22)(e) due to the source of funds and the nature of the payment.

Determining Substantial Business Activity - Money Lending:
The key issue revolved around whether money lending formed a substantial part of the business of one of the companies. The Tribunal found that 34.98% of the funds of the company were utilized in money lending activities, which was deemed substantial. The Court upheld the Tribunal's decision, emphasizing that the percentage of funds utilized in money lending activities was significant enough to qualify as a substantial part of the business. The Court rejected arguments challenging this determination, as no legal errors were identified in the Tribunal's analysis.

Conclusion:
The Court dismissed the appeal, ruling in favor of the assessee, as the payments in question did not meet the criteria for deemed dividend treatment under Section 2(22)(e). The Court upheld the Tribunal's findings regarding the source of funds and the substantial nature of money lending activities. Each party was ordered to bear their own costs in the matter.