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2013 (4) TMI 398 - HC - Income TaxDeemed dividend u/s 2(22)(e) - Whether ITAT was justified in holding that the liability of the Sales Tax and Excise Duty in the case of M/s. Kothari Products Ltd. and M/s. Ekta Flavours (P) Ltd. were allowable as deduction from the accumulated profits for the purposes of examining the applicability of Sec. 2(22)(e) - Held that - In the instant case, it appears that the deemed dividend taken together in the hands of all the persons cannot exceed the accumulated profit because the concept is that if there is accumulated profit and if the advances of loan has been made out of that then it is deemed dividend . In the case of M/s. Ekta Flavours (P) Ltd., it appears from the order of the First appellate Authority that there was a liability of Rs. 3,44,57,866/- on account of excise duty payable, which is not contingent because the said liability cannot be denied. So, loan taken by the assessee from M/s. Ekta Flavours (P) Ltd., cannot be treated as deemed dividend within the meaning of Section 22(2)(e). When it is so then the said addition was rightly deleted by the First Appellate Authority as well as the ITAT and the same appears reasonable. Regarding M/s. Kothari Products Ltd., it appears that there was also a sales-tax liability to the tune of Rs. 8,42,26,335/-, as mentioned by the Tribunal in its impugned order. Needless to mention that the Tribunal is the final fact finding authority as per the ratio laid down in the case of Kamla Ganpati vs. Controller of State Duty 2001 (2) TMI 132 - SUPREME COURT . 2001 (2) TMI 132 - SUPREME COURT In the instant case, it is clear that both the companies in question were having tax or excise liability during the assessment year under consideration.It may also be mentioned that the Hon ble Supreme Court in the case of CIT vs. P.K. Badiani, 1976 (9) TMI 3 - SUPREME Court observed that the expression, accumulated profits occurring in clause (e) of section 2(6A), or for the matter of that in any of other clause, means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the Income Tax Act. Thus no reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with the reasons mentioned therein.
Issues:
Appeal under Section 260-A of the Income Tax Act, 1961 against deemed dividend additions for assessment year 1989-90. Detailed Analysis: 1. Deemed Dividend Additions: The case involved the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The AO added sums from two companies, M/s. Ekta Flavours (P) Ltd. and M/s. Kothari Products Ltd., totaling Rs. 17,12,580. The litigation history included multiple assessment orders and appeals. The CIT(A) provided partial relief, but the Tribunal ultimately granted full relief to the assessee, leading to the Department's appeal. 2. Liability of Sales Tax and Excise Duty: The substantial questions of law raised by the Department questioned the treatment of sales tax and excise duty liabilities as deductions from accumulated profits. The Tribunal's decision was challenged regarding the allowability of these liabilities as deductions for the applicability of Section 2(22)(e) of the Act, despite being contingent and not provided for in the companies' books of accounts. 3. Nature of Debits in Respondent's Account: The issue of whether certain debits in the respondent's account with M/s. Kothari Products Ltd. constituted "loans and advances" or "deemed dividend" was also contested. The Department argued that all payments made by the company for the individual benefit of the shareholder fell under the purview of deemed dividend, while the assessee contended otherwise. 4. Taxability of Sale-Tax Liability: The Department questioned the Tribunal's decision on the taxability of sales tax liability for computing accumulated profits. The appellate orders of the CIT(A) were cited, which were not accepted by the Department, leading to the ongoing appeal under Section 260A before the High Court. In the judgment, the Court examined the provisions of Section 2(22)(e) and emphasized the significance of accumulated profits in determining deemed dividend. The Court referred to precedents to interpret the inclusive nature of the definition of deemed dividend. It was established that if advances or loans were made out of accumulated profits, they could be deemed dividends. The Court analyzed the liabilities of the companies, noting the non-contingent nature of certain dues like excise duty. The Tribunal's decision to allow deductions for these liabilities was upheld. Additionally, the Court cited the finality of the Tribunal as a fact-finding authority, following a Supreme Court ruling. Based on the facts and legal principles, the Court found no grounds to interfere with the Tribunal's decision. The appeal by the Department was dismissed, and the Tribunal's order was sustained. The judgment aligned with the commercial sense of accumulated profits and upheld the Tribunal's reasoning. In conclusion, the judgment favored the assessee, dismissing the Department's appeal and upholding the Tribunal's decision.
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