1996 (12) TMI 116 - AT - Income Tax

Accumulated Loss, Accumulated Profits, Assessing Officer, Assessment Year, Commercial Profit, Deemed Dividend

Summary

Issues:
- Dispute over computation of deemed dividends under section 2(22)(e) of the Income Tax Act.
- Interpretation of the term "accumulated profits" for the purpose of assessing deemed dividends.
- Whether loans taken by shareholders from closely-held companies are liable to be treated as deemed dividends.

Analysis:
1. The appeals before the ITAT Madras-B involved two assessees who were shareholders of closely-held companies. The Commissioner of Income-tax set aside the assessments for the year 1983-84 under section 263 of the Income Tax Act, directing a re-assessment. The dispute centered around the computation of deemed dividends under section 2(22)(e) of the Act, based on loans taken by the assessees from the companies with accumulated profits.

2. The assessees argued that the loans taken were not linked to accumulated profits as the companies had accumulated losses in previous years. They contended that the revenue authorities erred in computing accumulated profits based on assessed profits rather than commercial profits. The assessees emphasized that profits accrue at the end of the accounting year and disputed the department's method of calculation.

3. On the other hand, the departmental representative supported the assessment, asserting that loans to shareholders with substantial interest should be treated as deemed dividends based on the company's accumulated profits. The representative relied on the Explanation 2 to section 2(22) to justify the assessment methodology.

4. The ITAT analyzed the definition of "dividend" under section 2(22) and the term "accumulated profits." It emphasized that accumulated profits refer to commercial profits accumulated by a company, not merely assessed income. The Explanation 2 broadened the scope to include current profits, necessitating the inclusion of all profits up to the date of distribution for calculating deemed dividends.

5. The ITAT rejected the assessees' argument that accumulated profits exclude current profits awaiting finalization. It emphasized giving full effect to legal fictions like Explanation 2 and upheld the department's right to consider day-to-day profits for calculating deemed dividends. The ITAT directed the Assessing Officer to re-calculate the deemed dividends based on commercial profits up to the date of distribution.

6. Consequently, the ITAT allowed the appeals for statistical purposes, indicating a favorable decision for the assessees without altering the tax liability. The judgment clarified the interpretation of "accumulated profits" and the methodology for computing deemed dividends under section 2(22)(e) of the Income Tax Act.