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2016 (8) TMI 656 - AT - Income TaxDeemed dividend - whether the issue of bonus shares does not entail release of assets of the company to attract provisions of sec. 2(22)(a) of the Act requiring dividend distribution tax to be paid by the assessee? - Held that - The issue of bonus shares by the assessee company does not entail the release by the assessee company to its shareholders all or any part of the assets of the company. The Hon ble Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. (1964 (3) TMI 17 - SUPREME Court ) held that the conversion of reserves into capital does not involve the release of profit to the shareholders; the money remains where it was, that is to say, employed in the business. Furthermore, the Supreme Court in the case of Hansur Plywood Works Ltd. v. CIT (1997 (11) TMI 1 - SUPREME Court ) held that issuance of bonus shares does not amount to distribution of accumulated profit of a company. The Authority for Advance Rulings in the case of Briggs Burton (India) Pvt. Ltd (2005 (4) TMI 9 - AUTHORITY FOR ADVANCE RULINGS ) held that at the stage of issue of bonus shares there was no release of assets of the company and therefore, the Legislative intent in section 2(22)(a) and (b) is that the issue of bonus/preference shares to equity shareholders should not be treated as deemed dividend at the time of issue. Thus we do not find any infirmity in the order of CIT(A) for holding that issue of bonus shares does not amount to deemed dividend within the meaning of provisions of Section 2(22)(a) of the I.T.Act. - Decided in favour of assessee. Cessation of liability - Held that - The litigations commenced by the assessee company by filing a writ petition in respect of the unutilised MODVAT Credit of ₹ 98,19,113/was still pending in the Supreme Court and therefore, the liability to pay the sum of ₹ 60,47,226/by the assessee company to M/s. Colgate Palmolive India Ltd. was still subsisting. After applying the proposition of law laid down by the decision of Hon ble Supreme Court in the case of Sugauli Sugar Works Pvt. Ltd. (1999 (2) TMI 5 - SUPREME Court ) to the facts of the instant case, the CIT(A) has correctly came to the conclusion that the unilaterally right back of the amount by M/s. Colgate Palmolive India. Ltd. does not amount to cessation of liability in the hands of the assessee company. Detailed finding recorded by CIT(A) are as per material on record, therefore, do not require any interference on our part. - Decided in favour of assessee.
Issues Involved:
1. Appealability of the order charging dividend distribution tax under Section 115-O of the Income Tax Act. 2. Applicability of dividend distribution tax on the issue of bonus shares under Section 2(22)(a) of the Income Tax Act. 3. Addition on account of cessation of liability under Section 41(1) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Appealability of the Order Charging Dividend Distribution Tax: - The revenue raised the issue of whether the CIT(A) was justified in entertaining and adjudicating the charge of dividend distribution tax under Section 115-O of the Act when such an order is not appealable under Section 246A of the Act. - The ground was not pressed by the department representative and was dismissed in limine. 2. Applicability of Dividend Distribution Tax on Bonus Shares: - The assessee issued equity shares by way of bonus shares to its existing shareholders, capitalizing the amount from the general reserve account. - The Assessing Officer (AO) treated the bonus shares as liable to dividend distribution tax under Section 2(22)(a) of the Act. - The CIT(A) set aside the AO's order, observing that the issue of bonus shares does not constitute a distribution of profits or release of assets of the company. - CIT(A) referenced the case of Hansur Plywood Works Ltd. v. CIT, where it was held that the issue of bonus shares was merely a mechanism for capitalizing profits without distributing profits to shareholders. - CIT(A) emphasized that Section 2(22) is a deeming provision requiring strict interpretation and that there was no release of assets in issuing bonus shares. - The CIT(A) also noted that Section 115-O applies to distributed profits by way of dividends, which does not include deemed dividends under Section 2(22). - The Tribunal upheld the CIT(A)'s order, citing the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd. and Hansur Plywood Works Ltd. v. CIT, which held that the conversion of reserves into capital and issuance of bonus shares do not amount to distribution of accumulated profits. - The Tribunal also referenced the Authority for Advance Rulings in Briggs of Burton (India) Pvt. Ltd., which held that the issue of bonus shares does not require tax deduction at source and does not fall within the mischief of Section 2(22). 3. Addition on Account of Cessation of Liability: - The AO made an addition under Section 41(1) for cessation of liability towards M/s Colgate Palmolive India Ltd., based on a letter from Colgate stating no transactions with the assessee and no amount payable or receivable as of 31.03.2010. - The CIT(A) deleted the addition, noting that the amount was still reflected in the assessee's books and the issue was pending litigation in the Supreme Court. - The CIT(A) referenced the Supreme Court decision in CIT v. Sugauli Sugar Works Pvt. Ltd., which held that unilateral entries in accounts do not amount to cessation of liability. - The Tribunal upheld the CIT(A)'s order, finding that the liability was still subsisting due to pending litigation and the unilateral write-back by Colgate did not amount to cessation of liability in the assessee's books. - The Tribunal also noted that the assessee offered the amount in its income for the assessment year 2013-2014 after the court's verdict, affirming no infirmity in the CIT(A)'s order. Conclusion: - The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s findings that the issue of bonus shares does not attract dividend distribution tax under Section 2(22)(a) and that the addition for cessation of liability under Section 41(1) was not justified. The detailed findings were supported by relevant case laws and material on record.
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