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TMI Blog2011 (9) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 25 per cent shares in that company. The Assessing Officer noticed from the assessment record of the VEIL for the assessment year 2004-05 that the said company has advanced money to the assessees herein as detailed below:- Shri Y. Rajasekhar Babu - Rs. 1,03,96,950 (a) Shri T. Naga Prasad - Rs. 1,01,83,381 The Assessing Officer assessed the above said amounts as deemed dividend under section 2(22)(e) of the Act in the respective hands of the assessees herein. The appeals filed by these assessees before Ld. CIT(A) were allowed. Hence the revenue is in appeals before us challenging the said decision of Ld. CIT(A). 4. Ld. D.R. submitted that the Ld. CIT(A) has not properly appreciated the facts surrounding the issue. The impugned assessees are directors in VEIL holding more than 10 per cent of the voting power and they have taken loans from the said company and the company is also having accumulated profits in excess of the aggregate loan amounts given to both the assessees. Hence the loan so taken by these assessees are to be considered as deemed dividend under section 2(22)(e) of the Act. 5. On the other hand, the Ld A.R contended vehemently that the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any VEIL have carried out series of financial transactions over the years. Hence the transactions between the assessees herein and the company should be treated as transactions carried out in the ordinary course of business. Hence the provisions of section 2(22)(e) shall not apply to such transactions. Reliance was placed on the following case law: (a) NH Securities Ltd. v. D.C.I.T (2007)(11 SOT (Mum.) 302) (b) D.C.I.T v. Lakra Brothers (2007) (106 TTJ (Chd.) 250) (f) Accumulated profits do not include "Current Profits" and all liabilities are to be deducted from profits for ascertaining the accumulated profits. The company must possess accumulated profits on the date of giving loan. Reliance was placed on the following case law: (a) CIT v. Damodaran (1972)(85 ITR 590)(Ker.). (b) R.K. Soni v. ITO (2006)(6 SOT (Del.) 292) (c) Pramod Kumar Dang (2006)(6 SOT (Del.) 301) (d) CIT v. Jamnadas Khimji Kothari (1973)(92 ITR 105)(Bom.) (e) CIT v. Bhagwat Tewari (1976)(105 ITR 62)(Cal.) (f) Pramod Kumar Dang v. J.C.I.T (6 SOT 301 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e limiting factor being that these payments must be, to the extent of accumulated profits, possessed by such a company." 7. The Learned A.R. contended that the impugned company cannot be called to be a company in which public are not substantially interested. However, we notice that the term "Company in which the public are substantially interested" has been defined under section 2(18) of the Act. The company herein, Ms. VEIL does not fall in any of the categories listed out in that section. Hence, the impugned company will fall in the category of "not being a company in which the public are substantially interested" and hence it would be covered by the provisions of section 2(22)(e) of the Act. There is no dispute with regard to the fact that the assessees herein have invested a sum of Rs. 70.00 lakhs each in the share capital of the company and accordingly their respective voting rights are more than 10 per cent of the total voting power. Hence the transactions carried out between the assessees herein and the impugned company would be hit by the provisions of section 2(22)(e) of the Act, unless such transactions fall in any one of the exceptions provided in the said section. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sbursement of funds represented by the loan. The methodology normally adopted is to deposit said loan funds initially into the bank account of the company. Then the company will issue cheques to the assessees herein, which will be deposited in their respective bank accounts. There after, they will have to issue cheques to their respective creditors from out of their respective bank accounts. The net effect of these transactions is that the funds obtained by the company through the loan account would reach the creditors of the assessees herein. However, in the instant cases, the above said net effect has been followed straight away without following the regular methodology discussed above, i.e. the bank has issued cheques directly to the creditors of the assessees herein. However, in the books of the impugned company, correct journal entries have been passed, i.e., by crediting the bank loan account and debiting these assessees' account, which means that the company has accepted the loan liability and the impugned payments have also been, treated as having been paid to the assessees herein. In the similar manner, both the assessees have also passed correct journal entries in their r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regate of both the credit amounts works out to Rs. 38,61,873.50. During the course of the accounting year, the company has debited a sum of Rs. 1,42,58,854 to his account, which has resulted into a net debit balance of Rs. 1,03,96,980.50 in the ledger account of Sri Y.V. Rajasekhara Babu as on 31-3-2004. The Assessing Officer has assessed the net debit balance cited above as "deemed dividend" in his hands. 14. Similarly in the case of Sri T. Naga Prasad, the ledger account shows a opening credit balance of Rs. 46,52,296.80 as on 1-4-2003. During the course of the year, there was further credit of Rs. 10,64,135.00. Thus the aggregate of both the credit amounts works out to Rs. 57,16,431.80. During the course of the accounting year, the company has debited a sum of Rs. 1,68,19,813, which has resulted into a net debit balance of Rs. 1,11,03,381.20 in the account of Shri T. Naga Prasad as on 31-3-2004. However, the Annual report of the company shows a debit balance of Rs. 1,01,83,381.20 in the name of Shri T. Naga Prasad as on 31-3-2004 and accordingly the said amount was assessed as the deemed dividend in his hands. 15. Thus, in the hands of both the assessees, the repayment of outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also contended that the assessed income surrendered during the course of search and survey should not be considered for the purpose of determining the amount of accumulated profits for the reason that they were quantified subsequent to 31-3-2004. We have already noted that the Assessing Officer has made a reference to the assessed profits vis-à-vis accumulated profits. The contentions of the Learned A.R also need to be examined at the end of the Assessing Officer. Hence, in our view, the question of determination of the quantum of accumulated profits that were available in the hands of the company on the date of entering into the impugned transactions requires to be examined afresh. 19. The Learned CIT(A) has given relief to the assessees herein on the ground that there is no payment made by the company to the assessees herein, since the impugned payments were made by the bank directly to the creditors. However, our discussions would show that the said view of the Learned CIT(A) is not sustainable. Accordingly, we set aside the impugned orders of Learned CIT(A). Since the issue of determination of accumulated profits needs to be reexamined, we restore the said issue to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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