2008 (4) TMI 349 - AT - Income Tax

Determination of Accumulated Profits - share premium should be excluded from the accumulated profits ? - Addition on account of deemed dividend under s. 2(22)(e) - contention of the Revenue is that accumulated profits includes all profits, including capital profits and is not restricted to commercial or revenue profits - no exclusion was provided for capital profits expressly - HELD THAT - Sec. 78(1) of the Companies Act deals with the application of premium received on issue of shares. It says that the premium received shall be transferred to a separate account styled the share premium account and further says that the provisions of the Companies Act relating to the reduction of the share capital of the company shall apply as if the share premium account were paid up share capital of the company. Sub-s. (2) mentions five purposes for which alone the share premium account may be applied without attracting the provisions of the Companies Act relating to the reduction of the share capital. Except in the five cases, any other application of proceeds of the share premium account will be treated as a reduction of the company's share capital and the provisions of the Companies Act dealing with this subject stand attracted. The share premium account cannot be used otherwise than for the specific purposes mentioned above and this position has been recognised by the Supreme Court in CIT vs. Allahabad Bank Ltd. 1969 (2) TMI 5 - SUPREME COURT . In P.K. Badiani vs. CIT 1976 (9) TMI 3 - SUPREME COURT , it was held by the Supreme Court that the term profits occurring in s. 2(6A)(e) of the 1922 Act means profits in the commercial sense, that is to say, the profits made by the company in the real and true sense of the term. The share premium account cannot be stated to be commercial profits in the true sense of the term, having regard to the provisions of the Companies Act referred. Applying the judgment in Badiani's case, it was held in Urmila Ramesh 1998 (1) TMI 2 - SUPREME COURT that where assets of the company were sold at a price less than the purchase price, the amount so received, apart from being in the nature of return of capital, cannot represent profits of the company. Therefore, we are in agreement with the decision of the CIT(A) that the amount of Rs. 1,85,821 alone out of the amount of Rs. 25,42,772 can be assessed as deemed dividend under s. 2(22)(e) of the IT Act. We affirm his order on this point and dismiss the appeal filed by the Revenue with no order as to costs.

Summary

Issues:
Reduction of addition on account of deemed dividend under s. 2(22)(e) from Rs. 25,42,772 to Rs. 1,85,821 based on exclusion of reserve on account of share premium.

Analysis:
The appeal involved a dispute regarding the reduction of addition on account of deemed dividend under s. 2(22)(e) from Rs. 25,42,772 to Rs. 1,85,821 by excluding the reserve on account of share premium. The assessee, a consultancy business, received an amount from another company, which was treated as deemed dividend by the assessing officer. The contention was that the entire reserves and surplus of the paying company consisted of share premium, which was a capital receipt and not distributable as dividend. The AO rejected this argument, stating that the absence of specific words in the relevant clause made it immaterial whether the reserves consisted only of capital receipts.

The CIT(A) accepted the assessee's contention, recognizing that a significant portion of the reserves and surplus represented share premium. The appeal by the Revenue challenged this decision, arguing that accumulated profits should include all profits, including capital profits, without any express exclusion provided for capital profits. The Revenue emphasized the need to give full effect to the provision of deemed dividend under s. 2(22)(e) and distinguished a previous judgment relied on by the CIT(A).

The assessee contended that the deeming provisions should be strictly interpreted, and where profits were not distributable as dividend, the deeming provisions should not apply. Reference was made to a statutory bar in the Companies Act prohibiting the distribution of dividend from the share premium account. The assessee argued that profits accumulated by the company should be capable of being distributed as dividend, citing relevant case law to support this position.

The Tribunal upheld the decision of the CIT(A), emphasizing the statutory provisions of the Companies Act regarding the treatment of share premium. The Tribunal noted that the share premium account could not be used for dividend distribution except for specific purposes outlined in the Act. The Tribunal highlighted the Supreme Court's interpretation of the term "accumulated profits" and "profits" in the context of the Companies Act provisions, supporting the view that the share premium account could not be considered commercial profits for the purpose of deeming dividend under s. 2(22)(e) of the IT Act.

In conclusion, the Tribunal affirmed the CIT(A)'s decision to assess only Rs. 1,85,821 as deemed dividend under s. 2(22)(e) and dismissed the Revenue's appeal, with no order as to costs.