2014 (11) TMI 526 - AT - Income Tax

Revision u/s 263 - Deemed dividend u/s 2(22)(e) - Loan amount received from company to be treated as deemed dividend u/s 2(22)(e) or not - Whether the loans/advances given to the shareholders in the earlier years which are assessable as deemed dividend in the hands of the respective shareholders in the past years, should be reduced from the surplus while determining the accumulated profits in the hands of the company during the year - Held that - Assessee is a shareholder in M/s. Apoorva Properties and Estates Pvt. Ltd., a company incorporated under the provisions of the Companies Act, 1956 in which the public are not substantially interested the AO made no mistake in excluding the sum while determining the accumulated profits for the purposes of computing the amount assessable u/s 2(22)(e) - the invoking of Section 263 of the Act can be justified only where the Commissioner is able to establish that the order passed by the Assessing Officer is erroneous in the eye of law so as to cause prejudice to the interest of the Revenue - In the present case, where the Assessing Officer has adopted a possible view, based on legal precedents, and the Commissioner is denuded from exercising his power under Section 263 of the Act. Amount assessable u/s 2(22)(e) Held that - The total accumulated profit available is ₹ 2,61,19,957/- whereas four shareholders (including the assessee) having voting power more than 10% in the company, have received loans and advances of ₹ 3,81,69,640/-. The entire available accumulated profits amounting to ₹ 2,61,19,957/- has been brought to tax as deemed dividend u/s 2(22)(e) of the Act in the hands of the respective shareholders but as the addition was liable to be restricted to the total amount of accumulated profits , the same has been assessed in proportion to their shareholding in the company - the accumulated profits only to the extent of shareholding was brought to tax, leaving an amount of accumulated profit which was available to cover the untaxed amount of loan advanced to the shareholder - there is no justifiable grounds for invoking the jurisdiction u/s 263 the order of the Commissioner is set aside Decided in favour of assessee. Condonation of delay delay of 20 months - Chartered Account filed an affidavit stating the reasons for delay - assessee submitted that the delay be condoned as same was unintentional and on account of misunderstanding of law - Held that - The facts do not suggest that the assessee acted in a negligent or in a mala fide manner qua the delay in filing of appeal before the Tribunal in Collector, Land Acquisition Versus Mst. Katiji And Others 1987 (2) TMI 61 - SUPREME Court it has been held that the expression sufficient cause is refers to enabling the Courts to apply the law in a meaningful manner which serves the ends of justice - in the absence of any mala fide or ulterior purpose, the assessee can be said to have sufficient cause for not presenting its appeal before the Tribunal in time against the order of the Commissioner passed u/s 263 - the delay in filing of appeal before the Tribunal is condoned.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Validity of the order passed under Section 263 of the Income-tax Act, 1961.
3. Determination of 'accumulated profits' for the purpose of Section 2(22)(e) of the Income-tax Act, 1961.
4. Proportional assessment of 'deemed dividend' under Section 2(22)(e) of the Income-tax Act, 1961.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appellant's appeal was delayed by 20 months. The delay was attributed to a change in consultant and a misunderstanding of the law. The appellant believed that the order under Section 263 could only be challenged through the consequential order of the Assessing Officer before the CIT(A). The Tribunal noted that the appellant acted under a bona fide belief and was not negligent or mala fide. Citing the Supreme Court's decision in Mst. Katiji, which emphasizes substantial justice over technical considerations, the Tribunal condoned the delay, finding 'sufficient cause' for it.

2. Validity of the Order Passed Under Section 263 of the Income-tax Act, 1961:
The Commissioner of Income-tax set aside the assessment order, directing the Assessing Officer to verify the 'accumulated profits' for determining the 'deemed dividend' assessable under Section 2(22)(e). The appellant misunderstood this and did not initially appeal the order. The Tribunal found that the appellant's misconstruction was not mala fide. It was concluded that the appellant intended to challenge the assessment of 'deemed dividend' and thus had 'sufficient cause' for the delay in appeal.

3. Determination of 'Accumulated Profits' for the Purpose of Section 2(22)(e) of the Income-tax Act, 1961:
The Commissioner disagreed with the Assessing Officer's determination of 'accumulated profits,' which excluded loans and advances made in earlier years. The Tribunal noted that the Supreme Court in CIT v. G. Narasimhan supported the reduction of earlier loans from 'accumulated profits' for the current year. The Tribunal upheld the Assessing Officer's view, which was supported by judicial precedents, and found no error in excluding the sum of Rs. 1,94,62,774 while determining 'accumulated profits.'

4. Proportional Assessment of 'Deemed Dividend' Under Section 2(22)(e) of the Income-tax Act, 1961:
The Commissioner contested the Assessing Officer's restriction of the 'deemed dividend' to the appellant's share of 'accumulated profits.' The Tribunal found this restriction aligned with Section 2(22)(e) and judicial precedents. The Tribunal noted that the entire available 'accumulated profits' were taxed proportionately among shareholders, including the appellant, based on their shareholding. The Tribunal held that the Commissioner's interpretation was incorrect and unsupported by the cited judgments of the Gujarat and Calcutta High Courts, which were based on different facts.

Conclusion:
The Tribunal set aside the Commissioner's order under Section 263, finding no error in the Assessing Officer's determination of 'accumulated profits' and proportional assessment of 'deemed dividend.' Consequently, the appeals of the appellant and related cases were allowed, and the consequential assessments framed by the Assessing Officer were quashed.

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