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2008 (6) TMI 226 - AT - Income TaxDeemed dividend u/s. 2(22)(e) - AO held that more than 10 per cent. share in M/s GDPL which is a closely-held company in which the public was not substantially interested - Further moneylending was not substantial part of the GDPL - made an addition - CIT(A) upheld the action of the AO for the application of provisions u/s. 2 (22)(e) and sustained the addition - HELD THAT - No dispute to the fact that the assessee is holding 25 per cent share in the said M/s GDPL meaning thereby the assessee is having substantial interest in the said company. We find that Expln. 2 of s. 2(22)(e) is very clear according to which accumulated profits in s. 2(22)(e) shall include all profits of the company upto the date of payment of such loans/advances. Therefore the action of the learned CIT(A) in upholding the AO s action regarding applicability of provisions of s. 2(22)(e) is justified. However we find since the assessee had an opening debit balance the learned CIT(A) was justified in deleting that amount from the loan taken by the assessee. The submission of the learned counsel for the assessee that an amount to be reduced from such deeming provisions does not carry much force since the law does not give any relief for any repayment of such loan. The submission of the learned counsel for the assessee that the assessee was in the business of lending of money and provisions of s. 2 (22)(e) are not attracted also does not have any force in it since the learned counsel for the assessee could not prove that the assessee was in fact engaged in the business of moneylending and a part of the income of the assessee consists of income from such moneylending. However for the purpose of quantifying such deemed dividend we find in the case of M.B. Stock Holding (P) Ltd. vs. Asstt. CIT 2001 (12) TMI 190 - ITAT AHMEDABAD-B has taken the view that for determining the deemed dividend u/s. 2(22)(e) accumulated profits are to be worked out upto the date of payment of such loan or advance in the nature of loan. We therefore are of the opinion that the deemed dividend has to be calculated on the basis of accumulated profits upto the date of each loan/advance. Thus we set aside the order of the learned CIT(A) and direct the AO to recompute the deemed dividend on the basis of our observations made above. The AO shall give adequate opportunity of being heard to the assessee as per law. We hold and direct accordingly. In the result the appeal filed by the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Deemed Dividend under Section 2(22)(e) of the IT Act. 2. Accumulated Profits for the purpose of Deemed Dividend. 3. Business of Moneylending and its impact on Deemed Dividend. 4. Repayment of Loan and its consideration in Deemed Dividend. 5. Accumulated Profits Calculation Date. 6. Evidence of Deemed Dividend in other Shareholders' hands. Issue-wise Detailed Analysis: 1. Deemed Dividend under Section 2(22)(e) of the IT Act: The primary issue revolves around whether loans taken by the assessee from companies in which they hold substantial shares should be treated as deemed dividends under Section 2(22)(e) of the IT Act. The AO observed that the assessee, holding 25% shares in M/s GDPL, took a loan from GDPL which had accumulated profits. The AO treated this loan as deemed dividend under Section 2(22)(e), which was upheld by the CIT(A) but with a reduction for an opening debit balance. The Tribunal supported the CIT(A)'s application of Section 2(22)(e), emphasizing that the law does not provide relief for loan repayments. 2. Accumulated Profits for the purpose of Deemed Dividend: The Tribunal examined whether the profits deemed to be dividends were distributable and capitalizable. The assessee argued that the profits were provisional and not distributable. However, the Tribunal upheld that accumulated profits include all profits up to the date of loan payment, as per Explanation 2 to Section 2(22)(e). 3. Business of Moneylending and its impact on Deemed Dividend: The assessee contended that since GDPL was involved in moneylending, the provisions of Section 2(22)(e) should not apply. The Tribunal found no substantial evidence that moneylending was a significant part of GDPL's business or income, thus rejecting this argument. 4. Repayment of Loan and its consideration in Deemed Dividend: The assessee argued for the reduction of Rs. 8,000 repaid during the year from the deemed dividend. The Tribunal dismissed this plea, stating that the law does not provide for any relief for repayments of such loans. 5. Accumulated Profits Calculation Date: The Tribunal emphasized that for determining deemed dividends, accumulated profits must be calculated up to the date of each loan or advance, following the precedent set by the Ahmedabad Bench in M.B. Stock Holding (P) Ltd. vs. Asstt. CIT. The AO was directed to recompute the deemed dividend based on accumulated profits up to the date of each loan/advance. 6. Evidence of Deemed Dividend in other Shareholders' hands: The assessee argued that the addition in respect of all shareholders should not exceed the accumulated profit. The Tribunal found no evidence that deemed dividends were added in the hands of other shareholders and dismissed this argument. Separate Judgments: For ITA No. 1925/Mum/2006 (Asst. yr. 2002-03), the Tribunal followed the same reasoning as in ITA No. 1924/Mum/2006, restoring the matter to the AO to calculate deemed dividends based on accumulated profits up to the date of each loan/advance. For ITA No. 1922/Mum/2006 (Asst. yr. 2001-02), the Tribunal reiterated its stance on accumulated profits and directed the AO to determine the accumulated profit on the date of loans/advances. For ITA No. 1923/Mum/2006 (Asst. yr. 2001-02), the Tribunal followed the same directive as in ITA No. 1922/Mum/2006, restoring the matter to the AO to calculate deemed dividends based on accumulated profits on the date of each loan/advance. Conclusion: The Tribunal partly allowed the appeals for statistical purposes, directing the AO to recompute deemed dividends based on accumulated profits up to the date of each loan/advance, rejecting arguments related to moneylending business, loan repayments, and lack of evidence for deemed dividends in other shareholders' hands.
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