2024 (11) TMI 963 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - AO calculated proportionate profit upto the date of advances and added the same to the total income of the assessee u/s 2(22)(e) - as argued accumulated profit must exclude the proration of current year s business profit - HELD THAT - We direct the AO to restrict the addition on account of deemed dividend only to the extent of accumulated profits and delete the balance addition made.

Summary

Issues Involved:

1. Validity of reopening of assessment under section 148 of the IT Act.
2. Justification of addition made under section 2(22)(e) of the IT Act as deemed dividend.
3. Treatment of Inter Corporate Deposit (ICD) concerning section 2(22)(e) of the IT Act.
4. Calculation of accumulated profits for deemed dividend under section 2(22)(e).

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:
- The assessee challenged the reopening of the assessment under section 148 of the IT Act, arguing that the notice and subsequent assessment order under section 143(3) read with section 147 were erroneous. However, the assessee's counsel did not press this ground during the hearing, and thus, it was not adjudicated further.

2. Justification of Addition under Section 2(22)(e):
- The core issue contested was the addition of Rs. 2,69,30,925 as deemed dividend under section 2(22)(e) of the IT Act. The assessee argued that the addition was unjustified, arbitrary, and illegal. The assessee contended that the amount advanced by SSIL was an Inter Corporate Deposit (ICD) and should not be treated as a deemed dividend. However, the CIT(A) upheld the Assessing Officer's decision, asserting that the conditions for deemed dividend were met, and the accumulated profits included current year's profits up to the date of the loan.

3. Treatment of Inter Corporate Deposit (ICD):
- The assessee claimed that the ICD received from SMS Shivnath Infrastructure Pvt. Ltd. (SSIL) was not covered under section 2(22)(e) as it was not a loan or advance in the traditional sense. The assessee argued that only accumulated profits should be considered without including current year's profits. The CIT(A) dismissed this argument, relying on the explanation that accumulated profits include all profits up to the date of distribution or payment.

4. Calculation of Accumulated Profits:
- The assessee argued that the accumulated profits should only include profits up to the date of the loan and not the current year's business profits. The CIT(A) and the Assessing Officer included current year's profits in the accumulated profits, leading to a higher deemed dividend addition. The Tribunal, however, found merit in the assessee's argument, citing judicial precedents that support excluding current year's profits from accumulated profits for deemed dividend calculations. The Tribunal directed the Assessing Officer to restrict the addition to the extent of accumulated profits as of the date of the loan, which was Rs. 4,79,825, and delete the remaining addition.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of the excess addition made under section 2(22)(e), thereby restricting the deemed dividend to the extent of Rs. 4,79,825, aligning with the judicial precedents that exclude current year's profits from accumulated profits for such calculations.