2016 (12) TMI 945 - AT - Income Tax

Deemed dividend addition workout u/s 2(22) - Held that - Assessee has neither placed on record the dates of receipt nor the accumulated profit of the company on the date of receipt of money. In fact no details - except the accumulated profit as on 31-03- 2002- were furnished to the AO. AO seems to have made a mistake of arriving at the accumulated profit at 9, 72, 990/- as the same amount could not be verified either from the Balance Sheet or from any other details placed on record. We are unable to determine how this amount of 9, 72, 990/- has been arrived at by the AO. As seen from the Balance Sheet the amount of accumulated profit as on 31-03-2002 was only 3, 26, 333/-. The depreciation claimed in the P 7, 77, 416/-. Since there are already judicial pronouncements that the accumulated profits are to be arrived at on the basis of IT computation the depreciation allowable under IT Act at 9, 31, 388/- has to be reduced. Thus the accumulated profit for the year works out to 1, 72, 362/-. The Co-ordinate Bench in the case of Bagamane Leasing and Finance Pvt. Ltd., (2010 (11) TMI 662 - ITAT Bangalore) has held that Explanation-2 to Section 2(22)(e) does not have the effect of inclusion of current year s business profits. It followed the principles laid down in the case of M.V. Murugappan 1965 (11) TMI 144 - MADRAS HIGH COURT which these assessees have relied on and submitted before the AO. In view of that in the absence of any working given by assessee and due to non-co-operation by assessee before the CIT(A) also we have no option than to determine the accumulated profits as per the Balance Sheet of M/s. Eye Ads Pvt. Ltd. as stated above. AO is directed to re-workout the deemed dividend in each of assessees hands at the same ratio i.e. 73 27 considering the accumulated profit on 1, 72, 362/- only

Summary

Issues:
Appeal against addition made under section 2(22)(e) of the Income Tax Act.

Analysis:
The appeals were filed by the assessees against the orders of the Commissioner of Income Tax (Appeals) confirming the addition made under section 2(22)(e) of the Income Tax Act. The assessees, who are Directors in a company, received amounts considered as deemed dividends by the Assessing Officer. The issue revolved around the computation of accumulated profits on the date of payment of the deemed dividends. The ITAT directed the AO to re-examine the issue and compute the accumulated profit on the date of payment. However, in the subsequent orders, the AO repeated the addition without properly examining the accumulated profits. The assessees contested the addition, citing the company's Balance Sheet and relevant case laws, but the CIT(A) dismissed the appeal on merits.

The main contention in the appeals was the quantum of deemed dividend determined by the AO. The assessees argued that the accumulated profit should be calculated based on the Balance Sheet of the company and certain adjustments, resulting in a lower amount than originally determined by the AO. The assessees relied on various case laws to support their contentions. On the other hand, the Department argued that the assessees did not cooperate with the authorities, justifying the addition made by the AO.

Upon considering the rival contentions and the documents, the ITAT acknowledged the application of section 2(22)(e) but highlighted the lack of cooperation from the assessees in providing necessary details. The ITAT observed discrepancies in the AO's calculation of accumulated profits and directed a re-calculation based on the Balance Sheet information and relevant adjustments. Relying on precedents and legal principles, the ITAT determined the accumulated profits and directed the AO to rework the deemed dividend accordingly. As a result, the appeals were partly allowed, emphasizing the importance of accurate computation of accumulated profits for determining deemed dividends.

In conclusion, the ITAT's judgment addressed the issues raised by the assessees regarding the addition made under section 2(22)(e). The decision emphasized the need for proper computation of accumulated profits and adherence to legal principles in determining deemed dividends, ultimately partially allowing the appeals based on the revised calculation of accumulated profits.