2019 (4) TMI 1226 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - assessee has taken an advance over and above the accumulated profit declared in the Balance sheet of the company - reduction of tax liability from accumulated profit - HELD THAT - As relying on GAUTAM SARABHAI TRUST NO. 23. 2001 (3) TMI 229 - ITAT AHMEDABAD-B the accumulated profit, which is freely available for distribution of dividend, it does means that the profit after deduction of all liabilities due from the company is still profit which is available for distribution of dividend. The profit which is completely free from liabilities are the profit available for distribution of dividend. In the given case, no doubt, it is showing accumulated profit, but, it has determined tax liabilities, after deducting the tax liabilities, the profit available in the business for the purpose of dividend is negative accumulated profit. Therefore, the accumulated profit for the purpose of section 2(22)(e) is nil, hence, we delete addition u/s 2(22)(e) even though in this case, all the ingredients available to invoke the provision but the company does not have enough accumulated profit for distribution of dividend after deduction of tax liabilities. Accordingly, ground raised by the assessee is allowed.

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act regarding deemed dividend and its applicability based on the company's reserves and tax liabilities.

Detailed Analysis:

1. Background and Assessment Proceedings:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals)-5, Hyderabad, concerning the assessment year 2012-13. The case involved the company advancing loans to the assessee, who held a position in the company. The provisions of Section 2(22)(e) of the Act were invoked due to the company's reserves and the loan advanced to the assessee. Assessment was reopened, and notices were issued under relevant sections.

2. Contentions and Assessing Officer's Decision:
The assessee contended that the reserves were affected by MAT liabilities and requested no deemed dividend charges. However, the Assessing Officer rejected these contentions, considering tax deductions but still adding an amount as deemed dividend under Section 2(22)(e) of the Act. The appeal was then filed before the CIT(A).

3. CIT(A) Decision and Subsequent Appeal:
The CIT(A) dismissed the appeal due to non-compliance and upheld the addition of deemed dividend based on the company's reserves and the loan advanced to the assessee. The assessee then appealed to the ITAT, challenging the CIT(A)'s decision.

4. Arguments Before ITAT and Decision:
Before the ITAT, the assessee argued that the company had tax liabilities not reflected in the balance sheet, affecting the reserves. The ITAT considered the company's accumulated reserves and tax liabilities, citing a relevant case law. It was observed that the tax liabilities should be considered while assessing accumulated profits for the purpose of deemed dividend under Section 2(22)(e). As the company's accumulated profit was affected by tax liabilities, the addition under Section 2(22)(e) was deleted, ruling in favor of the assessee.

5. Conclusion:
The ITAT allowed the appeal, emphasizing the impact of tax liabilities on accumulated profits for determining deemed dividend under Section 2(22)(e) of the Act. The decision highlighted the importance of considering all liabilities to ascertain available profits for dividend distribution. The judgment clarified the interpretation of the law in light of the company's financial position, ultimately leading to the deletion of the deemed dividend addition.

This detailed analysis provides a comprehensive overview of the legal judgment, addressing the issues, arguments, and decisions made throughout the appellate process.

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