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TMI Blog2016 (1) TMI 931X X X X Extracts X X X X X X X X Extracts X X X X ..... ion ‘accumulated profits’, any capital profits which are not liable to capital gains tax. Accordingly, even going by the provisions of the statute, it can safely be concluded that the capital gains could be included for reckoning the accumulated profits only when the said capital gains has been duly subjected to tax. In the instant case, the capital gains derived by the company to the tune of ₹ 197.20 lacs is exempt and hence the same should not be included in accumulated profits and if the same is excluded, then there is only negative accumulated profits available with the company. Admittedly, the provisions of section 2(22)(e) could be invoked only to the extent of the company possessing accumulated profits. In the absence of accumulated profits, there is no scope for making any addition towards deemed dividend. Thus we hold that the exempted capital gains shall not enter the stream of the expression ‘accumulated profits’ and the company BKFCPL has got only negative accumulated profits after exclusion of exempted capital gains and hence the provisions of section 2(22)(e) of the Act cannot be invoked in the facts and circumstances of the case.- Decided in favour of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, securities and other investments. The original assessment was completed u/s 143(3) of the Act on 10.11.2009. Later this assessment was sought to be revised by the Administrative CIT u/s 263 of the Act in order to examine the aspect of deemed dividend in respect of amounts overdrawn by the assessee from BKFCPL to the tune of ₹ 49,12,000/- during the assessment year under appeal. The show cause notice was issued by the Learned CIT was issued to bring to tax only a sum of ₹ 49,12,000/- . Later an order u/s 263 of the Act was also passed stating the order passed by the Learned AO as erroneous and prejudicial to the interests of the revenue to the extent of ₹ 49,12,000/- towards deemed dividend in respect of amounts overdrawn by Mr.Manoj Murarka (assessee herein). 4.2. The Learned AO while giving effect to the order u/s 263 of the Act passed the impugned assessment order u/s 143(3) read with section 263 of the Act on 28.3.2013 wherein the amounts overdrawn by the following persons were added as deemed dividend:- Manoj Murarka (Assessee) - 49,12,000 Nishita Murarka (Daughter) - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be invoked. 4. Because that the ld. Commissioner of Income Tax (Appeal) was erred in law as well as in facts in not accepting that the deeming provision should be construed strictly, and in the given facts and circumstances of the case, as there was negative accumulated profits after excluding exempt capital gains income in the hands of Batlivala and Karnani Financial Consultants Pvt. Ltd from whom the appellant had taken loan, there would be no addition u/s. 2(22)(e) of the I.T Act 1961. Department appeal in ITA No. 2015/Kol/2014 A.Y 2007-08 1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting that deemed dividend can be applied in the hands of a person who is the beneficial owner of shares in the company as provided u/s. 2(22)(e) of the I.T Act and the family members of the appellant are not covered under section 2(22)(e). 2. On the facts and circumstances of the case and in law, the CIT(A) has erred in not applying section 64 of the I.T Act. 5. At the outset, the appeal of the revenue is time barred by 7 days and on query from the Bench to the Learned AR as to whether there is any objection on his part f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Learned AO had travelled beyond the jurisdiction vested on him by the order of the Learned CIT u/s 263 of the Act by treating the amounts overdrawn by the son and daughter of the assessee thereby bringing the same to tax as deemed dividend. The relevant operative portion of the section 263 order of the Learned CIT is reproduced herein below:- It has been noticed that the following issues are involved in this case- [i] Deemed dividend of ₹ 73.05 lakhs in the hand of Manoj Murarka for AY 2007-08, who is a substantial share holder of 41.84% in M/s. Bathlivala and Karnai Financial Consultants Pvt. Ltd. Hence, all the conditions mentioned in sec. 2(22)(e) of the I.T Act, 1961 are satisfied. In the instant case, it was clear that after the assessee had filed his return, a notice under section 143(2) was issued to him for the purpose of carrying out a scrutiny in respect of the return of income filed by him. In the course of scrutiny no enquiry or investigation was made by the Assessing officer on the applicability of section 2(22)(e) of the Income Tax Act 1961. The assessee is a substantial share holder (41.84%) in M/s. Bathlivala and Karnai Financial Consultants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y verbatim repeated the order which had been passed by him in the rectification order dated January 7, 1986. The addition of ₹ 32,00,000 and odd was maintained in the fresh assessment order and upon the same reasoning as was adopted in the order passed under Section 154. We have received excellent assistance from both sides in this matter where the facts are slightly unusual ; but the sustained efforts and expertise of Mr. Poddar certainly deserve special mention. From the first part of the two compilations of cases given to us by Mr. Poddar, two Division Bench decisions of the reference court of our High Court, make it amply clear that, even if a superior departmental authority sets aside the entire assessment order and calls for the assessment to be made again, that does not mean that the Income-tax Officer in his new exercise will treat the matter as if it is coming before it for the first time. Rather, the Income-tax Officer would have to examine the body of the order of the superior departmental authority and gather from it the points upon which the assessment has been directed to be made once again. Excepting for making changes in the new areas as indicated, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Officer had no authority to say anything new about the sales tax addition ; this is so, simply because the Commissioner in revision did not permit, in the reasoning portion of his order, any change to be made in the Section 43B matter of addition of the sales tax amount received . CIT vs Howrah Flour Mills Ltd reported in (1999) 236 ITR 156 (Cal) . .. It is all the more so, because the revenue has not been given any right of appeal under the Act against an order of the Commissioner under section 263(1) of the Act In case he proceeds thereunder after hearing the assessee in pursuance of the notice given by him, then the appeal filed by the assessee under section 253(1)(c) of the Act cannot be treated on the same footing as an appeal against the order of the Appellate Assistant Commissioner passed in assessment proceedings, where both the parties have been given the right of appeal In this view of the matter, the argument raised on behalf of the revenue, that, in appeal, the Tribunal may uphold the order appealed against on the grounds other than those taken by the Commissioner in his order, is not tenable Under section 263 of the Act it is only the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the same has to be treated as deemed dividend. Whereas in the instant case, the monies were advanced directly by the company to the son and daughter of the assessee and it is not the case of the revenue that the monies were subsequently transferred by son and daughter to the assessee and the children merely acted as a conduit to draw monies from the company for onward transmission to the assessee. We hold that the provisions of section 2(22)(e) of the Act creates a deeming fiction and hence needs to be viewed strictly. Reliance in this regard is placed on the decision of CIT vs C.P.Sarathy Mudaliar reported in (1972) 83 ITR 170 (SC) , wherein it was held that:- Before a payment can be considered as dividend under section 2(6A)(e), the following conditions will have to be satisfied: 1. It must be a payment by a company not being a company in which the public are substantially interested within the meaning of section 23A of any sum whether as representing a part of the assets of the company or otherwise by way of advance or loan. 2. (a) It must be an advance or loan to a shareholder, or 2.(b) a payment by the company on behalf or for the individual benefit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exempted capital gains does not get into the stream of accumulated profits and even as per Explanation 1 to section 2(22)(e) of the Act. He argued that the expression accumulated profits would include capital gains only if it is chargeable to tax u/s 45 of the Act and not otherwise. He placed reliance on the following decisions in support of his contentions:- CIT vs Mangesh J Sanzgiri reported in 119 ITR 962 (Bom) ACIT vs Gautam Sarabhai Trust No. 23 reported in (2202) 81 ITD 677 (AHD ITAT) The Learned AR also stated that he could not find any contrary decisions from the Supreme Court or any other High Court on this issue and accordingly prayed for exclusion of exempted long term capital gains from accumulated profits and consequently there would be no positive profits to invite the provisions of section 2(22)(e) of the Act. 7.1. In response to this, the Learned DR argued that the expression accumulated profits did not include capital gains only upto 1.4.1956 and not thereafter and hence there is no scope for reducing the exempted long term capital gains from accumulated profits and hence pleaded for confirmation of the order of the lower authorities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Tribunal was right in holding that the distribution to the assessees of the amount attributable to compensation and sale price received by the Periyar and Pareekanni Rubbers Ltd., on the acquisition and sale, respectively, of agricultural lands, was, in the hands of the assessees, receipt of dividend assessable to income-tax under the Income-tax Act, 1961? It is an admitted fact that the company itself is not liable to pay any tax by way of capital gains on the said receipts of compensation/sale price. In First ITO v. Short Brothers P. Ltd. [1966] 60 ITR 83, a Bench of the Supreme Court consisting of Subba Rao, Shah and Sikri JJ. had held that capital appreciation in respect of the lands from which the income was derived was agricultural income ; and that was not taxable in the hands of the company as capital gains would not, on distribution, be liable to be so taxed as dividend under Section 12 of the Indian Income-tax Act, 1922. In Tea Estate India P. Ltd. v. CIT [1976] (03 ITR 785, the Supreme Court had reiterated this position. Again, in CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849, the Supreme Court held as follows (at p. 852) : There is no warrant fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2(6A). ' Accumulated profits' are, therefore, profits which are so regarded in commercial practice, and capital gains as defined in the Income-tax Act. Realisation of appreciated value of assets in commercial practice is regarded as realisation of capital rise, and not profits of the business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act. Counsel for the Department contended, relying upon Mrs. Bacha F. Guzdar v. CIT [1955J 27 ITR I (SC), that since dividend received by a shareholder of a company out of the profits earned from agricultural income is not exempt from liability to tax under Section 4(3)(viii), dividend distributed from profits earned out of sale of capital assets inclusive of land from which the income derived is agricultural income, is also not exempt from income-tax. But the company does not claim exemption from liability to tax under Section 4(3)(viii) : it claims exemption because the receipt is not income which is chargeable to tax under Section 12 under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not form part of accumulated profits . We hold that the legal fiction created in the Explanation 2 to section 2(22) of the Act that accumulated profits shall include all profits of the company upto the date of distribution or payment should be understood to include the current year profits of the company and not otherwise. In other words, for reckoning the accumulated profits, apart from the opening balance of accumulated profits, the profits earned in the current year also are to be added and then the total accumulated profits should be considered for the purpose of calculation of dividend out of accumulated profits, if any. The said Explanation nowhere contemplates to bring within the ambit of expression accumulated profits , any capital profits which are not liable to capital gains tax. Accordingly, even going by the provisions of the statute, it can safely be concluded that the capital gains could be included for reckoning the accumulated profits only when the said capital gains has been duly subjected to tax. In the instant case, the capital gains derived by the company to the tune of ₹ 197.20 lacs is exempt and hence the same should not be included in accum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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