2013 (1) TMI 42 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - CIT(A) deleted the addition - Held that - There is no doubt that M/s Radhe Sham Jain Diamond Jewellers (P) Ltd is a company the assessee i.e. Shri Radhe Sham Jain is holding more than 10% shares was incorporated by way of conversion of proprietorship business of Jain Diamond Jewellers on 9.2.2008. Perusal of the balance sheet of the proprietorship concern on 9.2.2008 clearly shows that there was a capital balance of 12, 34, 430/-. There was also a liability on account of cheque issued - OBC to the extent of 1.50 crores. Perusal of the capital account of the assessee in the proprietary concern also shows that there was opening capital balance of 1, 64, 34, 402/-. There are various transactions done in the capital account till 8.2.2008 and there was a credit balance of 1, 59, 39, 810/- on that date. Against which payment of 1.50 crores was made by the proprietorship concern to the assessee i.e. Shri Radhe Sham Jain on 8.2.2008. This cheque was not encashed and shown as liability in the balance sheet. Because of the conversion of proprietary concern into a Private Limited company the cheque could not be encashed later on and the same was returned to the Private Limited Company which has been credited by the company to the assessee s account on 15.3.2008. Thus it is clear that this amount belonged to the assessee on account of capital in the proprietorship concern and because the cheque could not be encashed therefore the money belonged to the assessee which has credited by the company. The so called cheque on account of loan or advance which have been issued by the Company have been issued only after 15.3.2008. The AO has failed to appreciate that because of the conversion of the proprietorship concern the cheque could only be encashed by the assessee. Since all the assets have been taken over by the Private Limited company the said company owned assessee this amount of 1.50 crores which was credited to his account on 15.3.2008. Because of non-encashment of the cheque the same is not reflected in the bank statement. This fact has been correctly appreciated by the ld. CIT(A). CIT(A) has also correctly noted that there was definitely a debit balance amounting to 11, 75, 569/- on 29.3.2008 in the name of the assessee in the books of the Private Limited company. However he has correctly restricted the addition to 34, 858/- i.e. to the extent of accumulated profits. As decided in P.K. Badiani v. CIT 1976 (9) TMI 3 - SUPREME COURT that accumulated profits would mean profit in the commercial sense and not assessable taxable profits - share premium account would not partake the nature of commercial profits and therefore by no stretch of imagination this can be called accumulated profits - appeal of the Revenue dismissed.

Summary

Issues:
1. Deletion of addition of deemed dividend
2. Interpretation of accumulated profits for deemed dividend calculation

Issue 1: Deletion of addition of deemed dividend
The case involved an appeal against the order passed by the CIT(A)-II, Ludhiana, where the Revenue raised two grounds related to the addition of Rs. 1,81,10,000 as deemed dividend. The appellant, a substantial shareholder in a Private Limited Company, had withdrawn a significant sum from the company, leading to a dispute with the Assessing Officer (AO). The AO contended that the amount should be treated as deemed dividend under section 2(22)(e) of the Act. However, the CIT(A) found that a portion of the withdrawn amount was not a loan but a capital adjustment, reducing the deemed dividend addition to Rs. 34,858 only.

Issue 2: Interpretation of accumulated profits for deemed dividend calculation
The main contention revolved around the interpretation of accumulated profits for calculating deemed dividend. The appellant's counsel argued that the amount withdrawn was not a loan but a capital adjustment, and the accumulated profits of the company were insufficient to justify the full addition. The balance sheet details and transactions were scrutinized to determine the nature of the withdrawn amount. The Tribunal analyzed the provisions of section 2(22)(e) which specify that deemed dividend can only be to the extent of accumulated profits. The Tribunal noted that the accumulated profits were limited to Rs. 34,858 as per the balance sheet, excluding the share premium account. Citing precedents and the commercial sense of accumulated profits, the Tribunal upheld the CIT(A)'s decision to restrict the deemed dividend addition to Rs. 34,858, dismissing the Revenue's appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to reduce the deemed dividend addition based on the correct interpretation of accumulated profits and the nature of the withdrawn amount. The judgment clarified the application of section 2(22)(e) and emphasized the distinction between loan transactions and capital adjustments in determining deemed dividends.