2018 (9) TMI 218 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - as argued on behalf of the assessee that computation of accumulated profit of the two companies was not done in a proper manner - Held that - We find from the order of the assessing officer that he had arrived at the figures upon going through the assessment records of these two companies. We are of opinion that the assessee may be given chance once more for determination of this limited issue. AO ought to undertake a fresh exercise and verify if the said sum exceeds the accumulated profits of the respective companies or not. We accordingly confirm the finding of the assessing officer, subsequently sustained by the two appellate fora that the sums representing loan in the books of the assessee received from the two corporate entities ought to be added as deemed dividend to the assessee s income but this shall be subject to computation of accumulated profit of the two companies - remand the matter to the assessing officer for the limited purpose of determining as to whether the sums directed to be added as deemed dividend in his order exceeds the accumulated profit of the respective companies or not

Summary

Issues:
1. Whether the Tribunal's decision confirming the amount assessed under Section 2(22)(e) of the Income-Tax Act, 1961 as deemed dividend in the case of the assessee was perverse or not having regard to the provisions of the said Section.

Analysis:

The case involved the appellant, a partner in a firm with a substantial stake in two corporate entities, facing re-assessment proceedings for four assessment years. The assessing officer considered loans given by the two companies to the partnership firm as deemed dividends in the hands of the appellant, leading to an addition of a specific sum to the appellant's income. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision, prompting the appellant to appeal to the High Court.

Upon review, the High Court found no basis to treat the transactions between the appellant and the two companies as running accounts with mutual obligations. The appellant's argument that the sums were advanced for the benefit of the companies was rejected by all three authorities. The Court declined to re-evaluate this factual finding based on the evidence presented.

However, the appellant contended that the computation of accumulated profits of the two companies was not done correctly. The Court noted that the assessing officer determined the figures based on the assessment records of the companies. To address this concern, the Court decided to grant the appellant another opportunity to resolve this specific issue.

The Court directed the assessing officer to conduct a fresh examination to verify if the sum in question exceeded the accumulated profits of the respective companies. While confirming that the sums should be added as deemed dividends to the appellant's income, subject to the correct computation of accumulated profits, the Court remanded the matter for this limited purpose. The assessing officer was instructed to complete this exercise within eight weeks from communication of the order to ensure compliance with the law.

Before initiating this reassessment, the appellant would be notified for representation before the assessing officer. The appeal and stay petition were disposed of accordingly, with no costs imposed on either party.