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TMI Blog2018 (1) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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. - I.T.A. No. 462/Mds/2013 - - - Dated:- 4-9-2017 - SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER For The Appellant : Shri. K. Gangadhara Sastry, ITP For The Respondent : Shri. P. Suresh Rao, JCIT ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the assessee is directed against an order dated 18.01.2013 of ld. Commissioner of Income Tax (Appeals) III, Chennai for the assessment year 2007-2008. 2. Assessee in this appeal in aggrieved with regard to treating an amount of ?1,59,04,178/- as deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be treated as deemed dividend in the hands of the assessee being a shareholder of M/s. Classic Linens International Pvt. Ltd holding 83.71% share and ld. Assessing Officer issued show notice to the assessee. Ld. Assessing Officer relied on the following circular/case-law. 1. Circular No.495 dated 22.9.1987 issued by CBDT. 2. Miss. P.Sarada Vs. CIT (1998) 229 ITR 444 3. CIT Vs. S R Talwar 305 ITR 286 4. CIT vs. G. Narasimhan 236 ITR 329(1999) 5. CIT Vs. P.K. Badiani 6. Tarulata Shyam vs. CIT (1977) 108 ITR (SC) 7. CIT vs. Bhagwat Tewari (1976) 105 ITR 62 (Ca/). Thus, the AO concluded that the amount of loan received by the assessee company from M/s. Classic Linens International Ltd., to the extent of accumulated profit of ₹ 1,59,04,178/- as on 31.3.07 is treated as deemed dividend in the hands of the assessee and is chargeable to tax under the head income from Other Sources . Accordingly, ld. Assessing Officer invoked the provisions of Sec. 2(22) (e) of the Act and considered an amount of ₹ 1,59,04,178/- as deemed income of the assessee Aggrieved, assessee filed an appeal before ld. Commissioner of Income Tax (Appeals) 4. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not have any force as the said tax was not into existence at all when the sec.2(22)(e) corresponding to sec.2(6A)(e) of Indian Income Tax, 1922 was introduced. The dividend distribution tax has been introduced w.e.f. 01.05.1997 only therefore payment of dividend distribution tax does not affect the applicability of sec.2(22)(e) of the Act. The assessee's third argument is that the sums were advanced for an interim period to create an export arm while implementing the plan of expansion of the assessee's business in linen, the funds were used for creating a unit in SEZ, Tambaram and therefore there was commercial consideration in-built in the transaction under scrutiny. However, on consideration of the assessee's case, it is hard to agree that the transaction was on account of commercial considerations. The assessee has failed to prove any commercial expediency for advancing these amounts by M/s. Classic Linens International P. Ltd to the assessee. Assessee placed reliance on the judgment of CIT vs. Rajkumar 318 ITR 462 (Delhi High Court). However, in the instant case, the sums advanced are not Trade Advances , a fact which has not been disputed by the appellant. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voting power, or to any concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by any such company on behalf or for the individual benefit of any such share holders, to the extent to which the company in either case possess accumulated profits. The word accumulated profits in the Section 2(22)(e) is profits accumulated upto end of 31.03.2006. In the Assessment Year 2007-08, the addition has to made up to the accumulated profit till 31.03.2006 and therefore addition to accumulated profit beyond that date be deleted. He placed reliance on the decision of Co-ordinate Mumbai Bench, in the case of ITL Fabrics P. Ltd vs. ACIT (2012) 19 ITR (Trib) 499. According to AR, the purpose of Section 2(22) (e) accumulated profits do not include current year's business profits, since it accrues only at end of year and deemed dividend assessable in any of earlier year had to be reduced from accumulated profits, even if it was not assessed in that year. More so, amount of accumulated profits has to be determined on date on which loans were given by company and not at the end of year. The ld. AR also placed reliance on the decision of Vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions between the companies ; or between the companies and the directors. In these circumstances, the Tribunal after following other shareholder's case, namely that of C. Subba Reddy in I. T. A. No. 2975/Mds/04 for the assessment year 2001-02 vide order dated February 9, 2007 has held that the provisions of section 2(22)(e) of the Act would not be attracted. It was found from the copy of the accounts of the assessee in the books of CPDPL from April 1, 2001 to March 31, 2002 that the assessee had credit balance with an opening balance of ₹ 3.13 crores and a closing balance of ₹ 1.40 crores. This section intends the monies taken by substantially interested person otherwise by way of dividend. In this case, the assessee is holding substantial amount in crores with the company without interest and to brush aside this fact is against the spirit of the section. The Assessing Officer has stated that the assessee has been making payments for transactions done and the assessee cannot claim the excess money lying with CPDPL. The advance of ₹ 20,00,000 was made by CPDPL to CHPL on December 26, 2000 and balance of the assessee with company was ₹ 4,35,67,200. The con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits . Now before us, ld. Authorised Representative submitted that loans given by M/s. Classic Linens International Pvt Ltd is on account of commercial expediency. However there was no iota of evidence to support this claim of the assessee. The ld. Authorised Representative took support of the order of the Tribunal in the case of C.Rajini (supra) to say that funds were never misused by the assessee it was advanced to another company for the purpose of business transactions between two assessees and it cannot be treated as deemed dividend. However, as explained earlier if there is business t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is misconceived. The High Court has proceeded on the basis of the facts found by the Tribunal. There is no dispute that the assessee had withdrawn various sums of money between July 3, 1972, and March 22, 1973, when she did not have any credit balance with the company. In order to pay her these sums of money the account of Mahesh was not debited at all. The entire credit balance of Mahesh stood as it was till the very last day of the accounting year. On these facts found by the Tribunal, the High Court concluded that it was not possible to hold that the assessee was paid money out of the funds lying to the credit of Mahesh. The High Court decided the case entirely on the basis of the facts found by the Tribunal . 8.1 As per the above, withdrawals made by the shareholder from the company on various dates amounted to grant of loan or advance within the meaning of s. 2(22)(e) even though ultimately the amount was adjusted against the repayment of the said loan in the same assessment year. The jurisdictional High Court in the case of Sunil Kapoor in 375 ITR 01 (Mad.) wherein observed that any amount paid to assessee by company during the relevant year, that is less than amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumulated profits. Consistent with the view taken by the Ahmedabad Bench in the case of M.B.Stock Holding Pvt Ltd. Vs. CIT in (2003) 84 ITD 542(Ahd.), we also hold so. The contention of the assessee is that the amount of deemed dividend, which should have been assessed in any of the earlier years, should also be reduced from the accumulated profit even if it was not assessed as deemed dividend in that year. This view is fortified by the decision rendered by the Cochin Bench of Tribunal in the case of Gordhindas Khimji (11 ITD 158 (Cochin)) and also the decision rendered by the Delhi Bench of Tribunal in the case of A.R. Chadha Co India (P.) Ltd. VS. DCIT (133 TTJ 490). We have already noticed that the Ahmedabad Bench of the Tribunal in M.B.Stock Holding Pvt Ltd. Vs. CIT has explained about the area of operation of Explanation 2 to sec. 2(22)(e) of the Act and we have also concurred with the view that the accumulated profit does not include current year s profit from business. Accordingly, in our view, the Explanation 2 to sec. 2(22)(e) shall not alter the taxability of the dividend in the right year of assessment. The Hon'ble Supreme Court has held in the case of Miss P. Sara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the department has assessed the same as dividend or not. The decisions referred to above indicate that the deemed dividend has to be worked out on the basis of the conditions obtaining at the time when the loans or advances are made. In the case of Smt. Tarulata Shyam (supra), the Supreme Court observed that the statutory fiction created by the section would come into operation at the time of the payment of advance or loan. Similarly, the observations in the case of P.K. Badani (supra) (76 ITR 369) (Bom) would indicate that the accumulated profits should be reduced by the amount of loan or advance, immediately on making such loan or advance. Only if this is done, the subsequent loans or advances can be tested by verifying the accumulated profits on the dates on which they are made. As pointed out in the decision referred above, the repayments of the advances or loans will have no effect either on the advances or loan treated as dividend or on the accumulated profits as reduced by such advance or loan. As such, it does not seem to be neither practicable nor proper to postpone the whole process of ascertaining the accumulated profits till the Department chooses to treat a partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he whole or any part or any sum paid by it and treated as dividend within the meaning of Sec.2(22)(e) of the Act. The assessee has stated that no such set off was made by the lower authorities in spite of this claim of the same. The CIT(Appeals) observed in para-6 6.1 in page-5 6 of her order that the argument of the assessee that dividend distribution tax was not taken into consideration does not have any force as the said tax was not into existence at all when the Sec.2(22)(e) corresponding to Sec.2(6A)(e) of Income Tax Act, 1922 was introduced. The dividend distribution tax has been introduced w.e.f. 01.06.1997 only therefore payment of dividend distribution tax does not affect the applicability of sec.2(22)(e) of the Act. In our considered opinion, this finding of the CIT(Appeals) is contrary to the order of the Tribunal in the case of P.Satya Prasad cited supra wherein held in para-18 as follows:- 18. As per clause (iii) of sec. 2(22)(e), the dividend does not include any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as dividend within the meaning of sec. 2(22)(e) of the Act. The ..... 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