2021 (4) TMI 909 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - HELD THAT - As per the ledger account, it is clear that the amount was transferred from HDFC Bank through DD to Ch.N.K.D. Prasad, who was director of the company in which the appellant holds substantial shares of the company. The shares owned by Ch.N.K.D. Prasad was transferred in the name of the appellant i.e. the amount was transferred for the purchase of shares in the name of the appellant. The company has also debited to the current account as maintained by the company of the director. The assessee has also alleged that the AO has not calculated the reserves and surplus on the date of advance to the directors and he has taken closing balance of reserves and surplus as at the end of the year i.e. 31/03/2006, which is not correct and while calculating the reserves and surplus, depreciation as per the IT Act has also not been calculated by the AO. It was the duty of the assessee to prove that on the date of advance the assessee must calculate the reserves and surplus, which has not done by the assessee. In regard to Reserves Surplus , it should be read in general terms as used in the IT Act. The payer is a company and the financial statements are prepared as per the Companies Act. Therefore, both the contentions raised by the ld. AR is rejected. We also find that the current account maintained in the name of the appellants in the company s ledger, there are debit balances on different occasions, but, no interest has been charged. The ld. AR of the assessee could not prove any business exigency in the present case. Since the assessee is having substantial interest in M/s Kalanikethan Textiles and Jewels Pvt. Ltd., i.e. more than 10% shareholding, the amount withdrawn from the above company over and above his credit balance, is treated as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee to the extent of ₹ 20,00,000/- Accordingly, the grounds raised by the assessee on this issue are partly allowed.

Issues:
1. Interpretation of provisions of section 2(22)(e) of the Income Tax Act, 1961.
2. Treatment of excess amount withdrawn by the assessee from the company.
3. Determination of deemed dividend in the hands of the assessee.
4. Calculation of reserves and surplus on the date of advance to the directors.
5. Business exigency for the withdrawals made by the assessee.
6. Application of judgments and case laws in determining the tax liability.

Issue 1: Interpretation of provisions of section 2(22)(e) of the Income Tax Act, 1961

The case involved appeals against the CIT(A)'s orders concerning proceedings under section 143(3) read with 147 of the Income Tax Act, 1961. The appeals were clubbed due to identical facts and grounds. The main contention was the interpretation of section 2(22)(e) regarding deemed dividend and the real beneficiaries of the transactions. The AO treated the excess amount withdrawn by the assessee from the company as deemed dividend under section 2(22)(e), leading to tax implications.

Issue 2: Treatment of excess amount withdrawn by the assessee from the company

The AO, based on scrutiny proceedings, added the excess amount withdrawn by the assessee to the total income as deemed dividend. The CIT(A) upheld a portion of the addition, considering the advance made during the year and the opening debit balance in the assessee's account. The ITAT analyzed the transactions and the nature of the withdrawals to determine the tax liability of the assessee.

Issue 3: Determination of deemed dividend in the hands of the assessee

The ITAT considered the submissions of the assessee and the revenue authorities regarding the calculation of deemed dividend under section 2(22)(e). The tribunal examined the nature of the transactions, the shareholding pattern, and the financial implications of the withdrawals to arrive at a decision on the tax treatment of the excess amount withdrawn by the assessee.

Issue 4: Calculation of reserves and surplus on the date of advance to the directors

The assessee raised concerns about the calculation of reserves and surplus on the date of advance to the directors. The ITAT reviewed the financial records and ledger accounts to assess the correctness of the calculations made by the AO. The tribunal considered the provisions of the Companies Act and the IT Act in determining the reserves and surplus for tax purposes.

Issue 5: Business exigency for the withdrawals made by the assessee

The ITAT evaluated the business exigency claimed by the assessee for the withdrawals made from the company. The tribunal assessed the nature of the transactions, the reasons behind the withdrawals, and the impact on the company's operations to determine the validity of the business exigency argument put forth by the assessee.

Issue 6: Application of judgments and case laws in determining the tax liability

Both the assessee and the revenue authorities relied on judgments and case laws to support their arguments regarding the tax liability arising from the deemed dividend under section 2(22)(e). The ITAT considered these references along with the facts of the case to arrive at a decision partly allowing the appeals of the assessees based on the merits of each case.

This detailed analysis covers the key issues involved in the legal judgment delivered by the ITAT Hyderabad, providing a comprehensive understanding of the case and the tribunal's decision-making process.

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