2018 (1) TMI 654 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - relevant assessment year - whether loans given by M/s. Classic Linens International Pvt Ltd is on account of commercial expediency - Held that - the loan given by the company only in the immediate preceding year, i.e., assessment year 2007-08, should be assessed as deemed dividend in accordance with the provisions of sec. 2(22)(e) in that year. The deemed dividend so assessable in that earlier assessment year is liable to be deducted from the amount of accumulated profits for the purpose of computing the deemed dividend during the year under consideration Deemed dividend does not include any dividend paid by the company in the assessment year under consideration and it is to be set off against the amount of deemed dividend. Hence, the factual aspect on this matter requires verification from the end of the ld. Assessing Officer. Accordingly on the matter of accumulated profits and deemed dividend computed by the lower authorities, which are not in accordance with the provisions of Sec. 2(22) (e) of the Act. The issue is remanded to the file of the ld. Assessing Officer with the direction to carry out necessary verification with regard to the computation of accumulated profits and thereafter determine the quantum of deemed dividend as discussed above specifically with reference to Sec. 2(22)(e)(iii) of the Act and to consider the accumulated profit which do not include current year s business profit which accrues only at the end of the years. It is needless to say that an opportunity of hearing is to be given to the assessee by the Assessing Officer. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Treatment of an amount as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Whether repayments, dividend distribution tax, and commercial transactions affect the applicability of Section 2(22)(e).
3. Determination of accumulated profits for the purpose of deemed dividend.

Detailed Analysis:

Issue 1: Treatment of an Amount as Deemed Dividend under Section 2(22)(e)
The primary issue in the appeal was whether the amount of ?1,59,04,178/- received by the assessee from M/s. Classic Linens International Pvt. Ltd. should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) determined that the conditions for treating the loan as deemed dividend were satisfied, as the company was one in which the public were not substantially interested, the loan was given to a registered shareholder holding more than 10% of equity shares, and the company possessed accumulated profits at the time of the loan. The AO, therefore, added the amount as deemed dividend in the hands of the assessee.

Issue 2: Repayments, Dividend Distribution Tax, and Commercial Transactions
The assessee contended that repayments made during the year, the dividend distribution tax paid, and the commercial nature of the transactions should be considered. The Commissioner of Income Tax (Appeals) [CIT(A)] observed that repayments do not affect the deeming provisions of Section 2(22)(e), citing the Supreme Court decision in Tarulata Shyam vs. CIT. The argument regarding the dividend distribution tax was also rejected, as the tax was introduced only from 01.05.1997 and does not affect the applicability of Section 2(22)(e). The CIT(A) also rejected the claim that the transactions were for commercial purposes, noting that the assessee failed to prove any commercial expediency for the advances.

Issue 3: Determination of Accumulated Profits
The assessee argued that the accumulated profits should be calculated up to 31.03.2006 and not include current year's profits. The Tribunal held that accumulated profits for the purpose of Section 2(22)(e) do not include current year's business profits, as they accrue only at the end of the year. The Tribunal directed the AO to verify each debit entry and compute the deemed dividend based on the day-to-day debit balance and accumulated profits. The Tribunal also noted that any dividend declared and paid by the company should be set off against the deemed dividend.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to verify the computation of accumulated profits and determine the quantum of deemed dividend in accordance with the provisions of Section 2(22)(e), considering the exclusion of current year's profits and the set-off of declared dividends. The AO was instructed to provide the assessee with an opportunity of hearing during this process.