2016 (7) TMI 756 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - assessee is a share holder holding more than 10% stake in some private limited companies - Held that - A careful perusal of the Ledger account copy of the assessee as available in the books of M/s KBJ Jewellery Pvt. Ltd shows that the same has been operated as a current account, i.e., there has been credit of Director s remuneration; Rent, rates & taxes etc., Besides that there has been repeated deposit and withdrawal of cash. When the credits in the nature of income payable to the assessee are credited to the account of the assessee, the same signifies that those credits constitute liability in the hands of the above said company and hence the above said company is liable to pay those amount to the assessee. Under these set of facts, we find merit in the contentions of the assessee. Accordingly, we are also of the view that the amount withdrawn by the assessee, either by way of advance or as subsequent payment, to the extent of the liability of the company towards Directors Remuneration, Rent, other income items etc. credited to the account, should be considered as payment made towards settlement of those liabilities. Accordingly, in our view, withdrawals to that extent cannot be considered as loan taken by the assessee, which would attract the provisions of sec. 2(22)(e) of the Act. Accordingly, we modify the orders passed by the Ld CIT(A) and direct the AO to compute the loan amount by excluding the withdrawals as stated above in the case of KBJ Jewellery (P) Ltd and also in other two companies referred above. With regard to the computation of accumulated profits, we hold that it shall not include current year s proportionate profit, since the current years profit shall be deemed to accrue only when the books of account are closed at the year end. Accordingly we direct the AO to compute the accumulated profit in the manner discussed above - Decided partly in favour of assessee

Summary

Issues:
Assessment of deemed dividend u/s 2(22)(e) of the Act for assessment years 2008-09 and 2009-10.

Analysis:

1. Assessment Year 2008-09:
- The assessee, a shareholder holding more than 10% stake in private limited companies, received loans from two companies.
- The AO assessed the loan amounts as deemed dividends u/s 2(22)(e) based on the accumulated profits of the companies.
- The assessee contended that accumulated profits should be distributed between the assessee and the mother in proportion to their shareholdings.
- The Ld CIT(A) accepted the contention and directed the AO accordingly.
- The assessee also argued that accumulated profits should be computed up to the date of loan receipt, including opening balance and profits till that date.
- The Ld CIT(A) accepted this argument as well and issued directions to the AO.
- The assessee challenged the decision before the ITAT.

2. Assessment Year 2009-10:
- Similar issues arose regarding loans received by the assessee from companies in this assessment year.
- The AO assessed deemed dividends based on accumulated profits, which the assessee challenged.
- The assessee argued that share premium amounts should not be considered part of accumulated profits.
- The Ld CIT(A) agreed with the assessee and directed the AO to exclude share premium amounts from accumulated profits for calculation purposes.
- The ITAT was approached by the assessee against the decision.

3. ITAT Decision:
- The ITAT considered the contentions of both parties regarding the computation of loan amounts and accumulated profits.
- The ITAT found merit in the assessee's argument that certain withdrawals should not be considered as loans attracting sec. 2(22)(e) provisions.
- The ITAT directed the AO to exclude specific withdrawals from the loan amount calculations.
- Regarding accumulated profits, the ITAT agreed with the assessee that current year's proportionate profits should not be included.
- Citing relevant legal precedents, the ITAT held that accumulated profits should be computed without including current year's profits until the books of accounts are closed.
- The orders of the Ld CIT(A) were modified accordingly by the ITAT.
- Ultimately, both appeals filed by the assessee were partly allowed by the ITAT.

In conclusion, the ITAT's judgment addressed the issues of deemed dividend assessment under sec. 2(22)(e) for the relevant assessment years, focusing on the proper computation of loan amounts and accumulated profits, and ruling in favor of the assessee on certain key contentions.