1994 (12) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Application of Section 2(22)(e) of the Income-tax Act, 1961.
2. Nature of advances made prior to 22-4-1989 and between 22-4-1989 and 31-3-1990.
3. Validity and evidentiary value of the affidavit submitted by the appellant.
4. Computation of accumulated profits and its impact on deemed dividend.
5. Consideration of peak debit for the purpose of deemed dividend.
6. Relevance of contingent liabilities and current liabilities in computing accumulated profits.

Detailed Analysis:

1. Application of Section 2(22)(e) of the Income-tax Act, 1961:
The primary issue was whether the advances made by M/s. Victory Press (P.) Ltd. to the appellant, who is a shareholder, fall under the purview of deemed dividend as per Section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer determined that the appellant had taken advances amounting to Rs. 6,70,000, which were repaid during the year, but still invoked Section 2(22)(e) for taxation. This was upheld by the CIT (Appeals), and the Tribunal agreed, citing the Supreme Court's decision in Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345, which established that the statutory fiction of deemed dividend applies at the time of payment of the advance or loan, regardless of its repayment within the same year.

2. Nature of Advances Made Prior to 22-4-1989 and Between 22-4-1989 and 31-3-1990:
The appellant argued that the advances made prior to 22-4-1989 were commercial advances and should not be considered for deemed dividend computation. However, the CIT (Appeals) and the Tribunal rejected this argument, noting that the affidavit provided lacked specifics and supporting evidence. The Tribunal emphasized that the ledger account did not distinguish between different types of advances, and thus, all advances were considered under Section 2(22)(e).

3. Validity and Evidentiary Value of the Affidavit Submitted by the Appellant:
The affidavit from the managing director of the company attempted to differentiate the nature of the advances. However, the Tribunal found the affidavit vague and unsupported by material evidence. It stated that an affidavit with bare assertions, without details or supporting records, is not credible. Consequently, the Tribunal rejected the affidavit and proceeded based on available material.

4. Computation of Accumulated Profits and Its Impact on Deemed Dividend:
The appellant contended that the accumulated profits should be adjusted for sundry creditors, sales tax payable, and contingent liabilities. The Tribunal rejected this argument, clarifying that current liabilities should be matched against current assets and not against reserves. The Tribunal upheld the Assessing Officer's computation of accumulated profits, emphasizing that the general reserves at the beginning of the year were sufficient to cover the advances made.

5. Consideration of Peak Debit for the Purpose of Deemed Dividend:
The appellant suggested that only the peak debit amount should be considered for deemed dividend. The Tribunal dismissed this contention, reaffirming the Supreme Court's stance that the statutory fiction applies at the time of each advance or loan, irrespective of subsequent repayments.

6. Relevance of Contingent Liabilities and Current Liabilities in Computing Accumulated Profits:
The Tribunal addressed the appellant's argument regarding the set-off of contingent liabilities and current liabilities against accumulated profits. It held that such liabilities should not be deducted from reserves when computing accumulated profits for the purpose of Section 2(22)(e). The Tribunal maintained that the general reserves at the beginning of the year remained intact and were sufficient to cover the advances.

Conclusion:
The Tribunal upheld the CIT (Appeals) decision, affirming that the advances made to the appellant were taxable as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The appeal of the assessee was dismissed.