ACIT, CIR-35, KOLKATA, Kolkata V. Shri Manoj Murarka, Kolkata

ITA 294/KOL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0728 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 26-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DAVID Z CHAWNGTHU CITSR
• Assessee Lawyers: ARVIND AGARWAL
• Keywords: Capital asset; Question of law; Deemed dividend; Reassessment proceedings
• Section: 2(14); 12

Judgement Text

1 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 , A , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: KOL KATA () BEFORE .., /AND , ) [BEFORE SHRI A. T. VARKEY, JM & SHRI WASEEM AHMED, AM] I.T.A. NO. 294/KOL/2016 ASSESSMENT YEAR: 2006-07 ASSISTANT COMMISSIONER OF INCOME- TAX, CIRCLE-35, KOLKATA. VS. SHRI MANOJ MURARKA (PAN: AENPM6243E) APPELLANT RESPONDENT DATE OF HEARING 16.10.2017 DATE OF PRONOUNCEMENT 13.12.2017 FOR THE APPELLANT SHRI DAVID Z. CHAWNGTHU, ADDL. CI T,SR. DR FOR THE RESPONDENT SHRI ARVIND AGARWAL, ADVOCATE ORDER PER SHRI A.T.VARKEY, JM THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A)-10, KOLKATA DATED 15.12.2015 FOR AY 2006-07. 2. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF LD. CIT(A) IN DELETING THE ADDITION OF RS. 29.93 LACS MADE BY THE AO INV OKING THE PROVISION OF SEC. 2(22)(E) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO A S THE ACT). 3. BRIEF FACTS AS NOTED BY THE AO ARE THAT THE ASSE SSEE HAS FILED HIS RETURN FOR AY 2006- 07 ON 29.07.2016 ON A TOTAL INCOME OF RS.3,79,890/- . THE RETURN WAS PROCESSED U/S. 143(1) OF THE ACT ON 06.02.2007 AT A TOTAL INCOME DECLARED BY THE ASSESSEE. THE CASE WAS SELECTED FOR SCRUTINY BY CASS AND ASSESSMENT WAS MADE U/S. 1 43(3) OF THE ACT ON 19.02.2008 ON A TOTAL INCOME OF RS.3,79,890/-. LATER, THE AO REOPEN ED THE ASSESSMENT U/S. 147/148 OF THE ACT TAKING NOTE THAT ASSESSEE BEING SUBSTANTIAL SHA REHOLDER OF M/S BATHILIVALA & KARANI FINANCIAL CONSULTANTS PVT. LTD. (IN SHORT M/S. BK FCPL) HAS TAKEN ADVANCE/LOAN WHICH SHOULD BE TREATED AS DEEMED DIVIDEND U/S/. 2(22)(E) OF THE ACT, AND THEREFORE THERE IS AN 2 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 ESCAPEMENT OF INCOME WARRANTING RE-OPENING OF ASSES SMENT. IN THE REASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE IS A SU BSTANTIAL SHAREHOLDER IN THE SAID COMPANY M/S BKFCPL HOLDING 41.84% OF SHARES AND SINCE A SUM OF RS.73.05 LACS WAS ADVANCED BY THE SAID COMPANY M/S. BKFCPL TO THE ASSESSEE DURING THE AY 2006-07, AND THE SAID COMPANY M/S. BKFCPL IS NOT ENGAGED IN THE BUSINESS OF MONEY LENDING AND IS ACTUALLY ENGAGED IN THE BUSINESS OF DEALING IN SHARES, SECUR ITIES AND OTHER INVESTMENTS, THE ADVANCE/LOAN GIVEN TO ASSESSEE SHOULD BE TREATED AS DEEMED DIVIDEND U/S/. 2(22)(E) OF THE ACT. THE AO OBSERVED THAT AS PER BALANCE SHEET AS ON 31.03.2006 PART C, THERE IS RESERVE AND SURPLUS OF RS.69,56,924/-. SO, FOR REASSESSMEN T PURPOSE, IT WAS REGARDED BY THE AO AS THE ACCUMULATED PROFIT OF M/S. BATLIVALA & KARANI F INANCIAL CONSULTANTS PVT. LTD. IN WHICH ASSESSEE WAS HOLDING SHARES 41.84%, SO ACCORDING TO AO, PROVISION OF SECTION 2 (22)(E) OF THE ACT APPLIES IN ASSESSEES CASE. 4. BEFORE THE AO, THE ASSESSEE SUBMITTED THAT THE ACCUMULATED PROFIT IS IN THE NEGATIVE AND, THEREFORE, SEC. 2(22)(E) OF THE ACT IS NOT ATT RACTED. THE AO DID NOT ACCEPT THE AFORESAID CONTENTION OF ASSESSEE. ACCORDING TO AO, ON THE DAT E OF DIVIDEND DISTRIBUTION THAT IS ON 09.01.2006, THE ACCUMULATED PROFIT AS ON 08.01.2006 IS RS. 58,03,889/- (SCHEDULE B OF BALANCE SHEET). THE AMOUNT OF LOAN IS RS. 29,93,169 /-. ACCORDING TO AO, ON THE DATE OF DIVIDEND DISTRIBUTION, THE COMPANY M/S BATHLIVALA AND KARANI FINANCIAL CONSULTANTS PVT. LTD. HAD ACCUMULATED PROFIT OF RS.58,03,889/- AND A S PER THE AO, THE ASSESSEES RELIANCE ON ACCUMULATED PROFIT AS ON 3L.03.2005 IS NOT ACCEPTAB LE. HENCE, ACCORDING TO AO, THE PROVISION OF SECTION 2(22)(E) OF THE ACT IS APPLICA BLE AND THE SAME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL, THE LD. CIT(A) FOLLOWING THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2007-08 DATED 20.11.2 015 HAS DELETED THE ADDITION. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUG H THE FACTS AND CIRCUMSTANCES OF THE CASE. AT THE TIME OF HEARING, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE BY THE DECIS ION OF COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN AY 2007-08 VIDE ORDER DAT ED 20.11.2015 AND THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION BY FOLLOWING THE AFORE SAID DECISION OF TRIBUNAL. ON THE OTHER 3 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 HAND, LD. DR HEAVILY RELIED ON THE ORDER OF THE AO. WE FIND THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION, CITED SUPRA. IN THE SAID D ECISION, THE TRIBUNAL HAS HELD AS UNDER: 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIALS AVAILABLE ON RECORD. IT IS PERTINENT TO UNDERSTAND THE MEANING OF THE EXPRESSI ON ACCUMULATED PROFITS. EXPLANATION 2 TO SECTION 2(22) OF THE ACT STATES AS BELOW:- THE EXPRESSION ACCUMULATED PROFITS IN SUB-CLAUS ES (A) , (B), (D) AND (E) SHALL INCLUDE ALL PROFITS OF THE COMPANY UPTO THE DATE OF DISTRIBUTIO N OR PAYMENT REFERRED TO IN THOSE SUB- CLAUSES, AND IN SUB-CLAUSE (C) SHALL INCLUDE ALL PR OFITS OF THE COMPANY UPTO THE DATE OF LIQUIDATION. EXPLANATION 1 TO SECTION 2(22) OF THE ACT STATES AS BELOW:- THE EXPRESSION ACCUMULATED PROFITS , WHEREVER IT OCCURS IN THIS CLAUSE, SHALL NOT INCLUDE CAPITAL GAINS ARISING BEFORE THE 1 ST DAY OF APRIL, 1946, OR AFTER THE 31 ST DAY OF MARCH, 1948, AND BEFORE THE 1 ST DAY OF APRIL, 1956. WE FIND THAT FOR THE PURPOSES OF ARTIFICIAL CATEGOR IES OF DIVIDENDS WHICH ARE CREATED BY THE PROVISION S CONTAINED IN SECTION 2(22) OF THE ACT, ACCUMULATED PROFITS DO NOT INCLUDE ANY CAPITAL GAINS, EXCEPT THOSE WHICH ARE TAXABLE AS SUCH. THUS, ACCUMULATED PROFITS WOULD NOT INCLUDE CAPITAL GAINS MADE DURING A PERIOD WHEN THEY WERE NOT TAXABLE UNDER TH E ACT, NOR CAPITAL GAINS WHICH ARE NOT CHARGEABLE EVEN DURING THE PERIOD THE CAPITAL GAIN TAX IS IN F ORCE. CONSEQUENTLY, ANY PAYMENT MADE TO A SHAREHOLDER OF A COMPANY OF NON-TAXABLE CAPITAL GAI NS OF THE COMPANY WOULD NOT BE DIVIDEND. WE PLACE RELIANCE ON THE FOLLOWING DECISIONS IN THIS R EGARD:- CIT VS MANGESH J SANZGIRI REPORTED IN 119 ITR 962 ( BOM) IT WAS HELD THAT : IT IS THUS CLEAR THAT THE ACCUMULATED PROFITS WO ULD NOT INCLUDE CAPITAL GAINS WHICH ARE NOT CHARGEABLE TO TAX EVEN DURING THE PERIOD THE CAPITA L GAINS TAX IS IN FORCE. DISTRIBUTION MADE TO THE SHAREHOLDER OF A COMPANY OUT OF NON-TAXABLE ACCUMUL ATED CAPITAL GAINS OF A COMPANY WOULD NOT BE DIVIDEND. IN THE CASE BEFORE THE BOMBAY HIGH COURT, THE DIVID END WAS DISTRIBUTED IN THE MONTH OF MAY 1961 AND ASSESSMENT YEAR INVOLVED THEREIN WAS ASST YEAR 1962-63 AND THE DECISION WAS RENDERED BY DULY CONSIDERING THE EXPLANATION 1 TO SECTION 2(22) OF T HE ACT. SMT.CHECHAMMA THOMAS VS CIT REPORTED IN (1986) 161 ITR 718 (KER) IT WAS HELD THAT : THE QUESTION OF LAW COMMON TO BOTH THE REFERENCES REFERRED TO THIS COURT FOR DECISION IS AS FOLLOWS : 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE DISTRIBUTION TO THE ASSESSEES OF T HE AMOUNT ATTRIBUTABLE TO COMPENSATION AND SALE PRICE RECEIVED BY THE PERIYAR AND PAREEKANNI RUBBER S LTD., ON THE ACQUISITION AND SALE, RESPECTIVELY, OF AGRICULTURAL LANDS, WAS, IN THE HANDS OF THE ASS ESSEES, RECEIPT OF DIVIDEND ASSESSABLE TO INCOME-TA X 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 PRI CE. 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 4 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 CAPITAL APPRECIATION IN RESPECT OF THE LANDS FROM W HICH THE INCOME WAS DERIVED WAS AGRICULTURAL INCOME ; AND THAT WAS NOT TAXABLE IN THE HANDS OF T HE 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 REITERAT ED 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 FOR THE VIEW EXPRESSED BY THE TRIBUNAL THAT THE DEFINITION OF 'DIVIDEND' ONLY INCLUDES DEEMED DIVIDEND. TO HOLD THAT THE CAP ITAL GAINS WITHIN THE EXCEPTED PERIOD ARE NOT PART OF THE ACCUMULATED PROFITS FOR THE PURPOSE OF THE D EFINITION UNDER SECTION 2(6A) AND A DISTRIBUTIVE SHARE THEREOF DOES NOT ON THAT ACCOUNT FALL WITHIN THE DEFINITION OF 'DIVIDEND' AND, THEREFORE, OF INCOME CHARGEABLE TO TAX AND STILL TO REGARD THEM A S A PART OF ACCUMULATED PROFITS FOR THE PURPOSE OF DIVIDEND IN THE POPULAR CONNOTATION AND TO BRING TH E SHARE TO TAX IN THE HANDS OF THE SHAREHOLDERS IS TO NULLIFY AN EXPRESS PROVISION OF THE STATUTE. WE DO NOT SEE ANY REASON WHY SUCH A STRAINED CONSTRUCTION SHOULD BE ADOPTED.' WE DO NOT ALSO AGREE WITH THE TRIBUNAL'S REASONING THAT THE DECISIONS IN SHORT BROTHERS' CASE [1966] 60 ITR 83 (SC) AND IN TEA ESTATE INDIA P. LT D.'S CASE [1976] 103 ITR 785 (SC), WOULD NOT APPLY TO THE PRESENT CASE BECAUSE THERE HAD BEEN CH ANGES IN THE DEFINITION OF SECTION 2(22) OF THE ACT, WHICH CORRESPONDS TO SECTION 2(6A) OF THE 1922 ACT. THE TRIBUNAL HAS NOT ENLIGHTENED AS TO HOW THE DIFFERENCE IN THE DEFINITION HAD RENDERED THE D ECISIONS INAPPLICABLE. THE PRINCIPLE ENUNCIATED IN THOSE CASES, WHICH IS APPLICABLE TO THE PRESENT CAS E, IS CONTAINED IN THE LAST TWO PARAGRAPHS IN THE DECISION IN SHORT BROTHERS' CASE [1966] 60 ITR 83, WHICH READS AS FOLLOWS (AT PP. 89 AND 90) : 'THE QUESTION WHICH REMAINS TO BE CONSIDERED IS WHE THER CAPITAL APPRECIATION IN RESPECT OF THE LANDS FROM WHICH THE INCOME DERIVED IS AGRICULT URAL INCOME AND WHICH WAS NOT TAXABLE IN THE HANDS OF THE COMPANY AS CAPITAL GAINS WOULD STILL O N DISTRIBUTION BE LIABLE TO BE TAXED AS DIVIDEND UNDER SECTION 12 OF THE INCOME-TAX ACT. AS WE HAVE ALREADY POINTED OUT, CAPITAL GAINS UNDER SECTION 12B ATE CHARGEABLE IN RESPECT OF ANY PROFITS ARISING F ROM TRANSFER OF 'CAPITAL ASSETS', AND 'CAPITAL ASSETS' DO NOT INCLUDE LANDS FROM WHICH THE INCOME DERIVED IS AGRICULTURAL INCOME. PROFITS DERIVED BY TRANSFER OF LANDS FROM WHICH THE INCOME DERIVED IS AGRICULTURAL INCOME WOULD NOT, THEREFORE, BE CHARGEABLE ON A COMBINED READING OF SECTION 12B WITH SECTION 2(4A) OF THE INCOME-TAX ACT UNDER THE HEAD 'CAPITAL GAINS'. THE EXPRESSION 'ACCUMULAT ED PROFITS' DOES NOT INCLUDE CAPITAL GAINS ARISING WITHIN THE EXCEPTED PERIODS: VIDE EXPLANATION TO SECTION 2(6A) . ' ACCUMULATED PROFITS' ARE, THEREFORE, PROFITS WHICH ARE SO REGARDED IN COMMERCIAL PRACTIC E, AND CAPITAL GAINS AS DEFINED IN THE INCOME-TAX ACT . REALISATION OF APPRECIATED VALUE OF ASSETS IN COM MERCIAL PRACTICE IS REGARDED AS REALISATION OF CAPITAL RISE, AND NOT PROFITS OF THE BUSINESS. UNLE SS, THEREFORE, APPRECIATION IN THE VALUE OF CAPITAL ASSETS IS INCLUDED IN THE CAPITAL GAINS, DISTRIBUTI ON BY THE LIQUIDATOR OF THE RISE IN THE CAPITAL VAL UE 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 SH AREHOLDER OF A COMPANY OUT OF THE PROFITS EARNED FROM AGRICULTURAL INCOME IS NOT EXEMPT FROM LIABILI TY TO TAX UNDER SECTION 4(3)(VIII) , DIVIDEND DISTRIBUTED FROM PROFITS EARNED OUT OF SALE OF CAPI TAL 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 'DIVIDEND'. THE CASE OF MRS. BACHA F. GUZDAR V. CIT [1955] 27 ITR 1 (SC) HAS, THEREFORE, NO APPLICATIO N TO THIS CASE.' CAPITAL GAIN, IN FACT, IS MADE TAXABLE BY SECTION 45 OF THE INCOME-TAX ACT, 1961, AS SUCH A SPECIAL DEEMING PROVISION WAS FELT NECESSARY BECAUS E CAPITAL GAINS WOULD NOT OTHERWISE COME WITHIN THE ORDINARY COMMERCIAL CONCEPT OF PROFIT. BY VIRTU E OF THE DEFINITION OF 'CAPITAL ASSET', IN SECTION 5 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 2(14) , AGRICULTURAL LAND IS EXCLUDED ; HENCE CAPITAL GAI N ON AGRICULTURAL LAND IS NEITHER PART OF NORMAL COMMERCIAL PROFIT NOR TAXABLE CAPITAL GAINS. ACIT VS GAUTAM SARABHAI TRUST NO. 23 REPORTED IN (2 202) 81 ITD 677 (AHD ITAT) IT WAS HELD THAT : SECTION 2(22) DEALS WITH VARIOUS TYPES OF CASES AN D CREATES A FICTION BY WHICH CERTAIN AMOUNTS WHICH ARE ACTUALLY NOT DISTRIBUTED AS DIVID ENDS, ARE ALSO BROUGHT WITHIN THE NET OF DIVIDEND. IT IS A CARDINAL RULE OF INTERPRETATION THAT SUCH A DEEMING SECTION MUST RECEIVE A STRICT INTERPRETATI ON. THE OBJECT AND PURPOSE OF INTRODUCING THE LEGAL FIC TION IN THE STATUTE IS TO FRUSTRATE ANY ATTEMPT BY A COMPANY TO AVOID DIVIDEND TAX BY DISTRIBUTING THE PROFITS OF THE COMPANY TO ITS SHAREHOLDERS UNDER THE GUISE OF LOAN, REDUCTION OF CAPITAL, ETC. IN SO FAR AS PROFITS OF CAPITAL NATURE ARE CONCERNE D ARISING FROM THE SALE OF CAPITAL ASSETS, SUCH PROFITS ARE TO BE EXCLUDED FOR THE PURPOSE OF ASCER TAINING THE ACCUMULATED PROFITS U/S 2(22) UNLESS SUCH CAPITAL PROFITS HAVE BEEN SUBJECTED TO CAPITAL GAINS U/S 45. IN FIRST ITO VS SHORT BROS (P) LTD REPORTED IN (1966) 60 ITR 83 (SC), IT HAS BEEN 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 DISTRIB UTION BE LIABLE TO BE SO TAXED AS DIVIDEND UNDER SECTION 12 OF THE INDIAN INCOME TAX ACT 1922. IN A NUTSHELL, IT MAY BE SAID THAT NO PART OF ANY C APITAL PROFITS, EXCEPT CAPITAL GAINS AS ASSESSABLE U/S 12(B) OF THE 1922 ACT AS WELL AS UND ER SECTION 45 OF THE 1961 ACT, OF A COMPANY CAN ORDINARILY BE INCLUDED IN ACCUMULATED PROFITS FOR THE PURPOSE OF DETERMINATION OF DIVIDEND U/S 2(22). IN VIEW OF SPECIFIC PROVISION IN THE CONSTI TUTION OF ALKAPURI INVESTMENT PVT LTD (AIPL) CAPITA L PROFITS OF THE COMPANY COULD NOT BE DISTRIBUTED AND , THEREFORE, SUCH PROFIT, UNLESS CHARGED TO CAPITAL GAINS TAX, WOULD NOT FORM PART OF ACCUMULATED PROF ITS. WE HOLD THAT THE LEGAL FICTION CREATED IN THE EXPLA NATION 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 PROFI TS, APART FROM THE OPENING BALANCE OF ACCUMULATED PROFITS, THE PROFITS EARNED IN THE CURR ENT YEAR ALSO ARE TO BE ADDED AND THEN THE TOTAL ACCUMULATED PROFITS SHOULD BE CONSIDERED FOR THE PU RPOSE 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 PR OFITS WHICH ARE NOT LIABLE TO CAPITAL GAINS TAX. ACCORDINGLY, EVEN GOING BY THE PROVISIONS OF THE ST ATUTE, IT CAN SAFELY BE CONCLUDED THAT THE CAPITAL GAINS COULD BE INCLUDED FOR RECKONING THE ACCUMULAT ED PROFITS ONLY WHEN THE SAID CAPITAL GAINS HAS BEEN DULY SUBJECTED TO TAX. IN THE INSTANT CASE, T HE CAPITAL GAINS DERIVED BY THE COMPANY TO THE TUNE OF RS. 197.20 LACS IS EXEMPT AND HENCE THE SAME SH OULD NOT BE INCLUDED IN ACCUMULATED PROFITS AND IF THE SAME IS EXCLUDED, THEN THERE IS ONLY NEGATIV E ACCUMULATED PROFITS AVAILABLE WITH THE COMPANY. ADMITTEDLY, THE PROVISIONS OF SECTION 2(22)(E) COUL D 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. 9. IN VIEW OF THE AFORESAID FINDINGS AND RESPECTFU LLY FOLLOWING THE AFORESAID JUDICIAL PRECEDENTS RELIED UPON , WE HOLD THAT THE EXEMPTED CAPITAL GAI NS SHALL NOT ENTER THE STREAM OF THE EXPRESSION ACCUMULATED PROFITS AND THE COMPANY BKFCPL HAS GO T ONLY NEGATIVE ACCUMULATED PROFITS AFTER EXCLUSION OF EXEMPTED CAPITAL GAINS AND HENCE THE P ROVISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT BE INVOKED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 6 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 6. WE NOTE FROM PERUSAL OF PAGES 56 AND 57 OF THE P APER BOOK THAT THE ASSESSEE HAD AS ON 08.01.2006 LONG TERM CAPITAL GAIN ON SALE OF SHA RES TO THE TUNE OF RS.1.77 CR. AND SURPLUS IN P&L ACCOUNT CARRIED FORWARD TO BALANCE SHEET WAS RS. 58 LACS (WHICH INCLUDES RS.1.77 CR.). WE NOTE THAT THE LOAN TAKEN WAS OF RS.29,93, 169/- AND WE FURTHER NOTE THAT FROM THE P&L ACCOUNT FOR THE YEAR ENDED 31.03.2005 (IMMEDIAT E PRECEDING PREVIOUS YEAR) THERE WAS ACCUMULATED LOSS BROUGHT FORWARD OF RS.1,58,96,347/ -. WHEREAS THE RESERVE & SURPLUS AS ON 31.03.2005 WAS RS.13,51,379/-. HENCE, AT THE BE GINNING OF THE YEAR I.E. ON 01.04.2005 BEFORE GIVING LOAN TO SHRI MANOJ MURARKA BY M/S. BK FCPL THERE WAS NO ACCUMULATED PROFIT, RATHER THERE WAS NEGATIVE BALANCE OF RS.1,4 5,44,968/- (RS.1,58,96,347 RS.13,51,379). THE NET PROFITS BEFORE TAX EARNED BY M/S. BKFCPL FOR THE PERIOD 01.04.2005 TO 08.01.2006 WAS RS.2,17,00,236/-. THI S ADMITTEDLY INCLUDES EXEMPT CAPITAL GAINS OF RS.1,77,54,637/-. IF IT IS EXCLUDED, THEN THE PROFITS FOR THE SAID PERIOD (BOTH REVENUE AND CAPITAL) CHARGEABLE TO TAX AND THEREBY AVAILABL E FOR DISTRIBUTION OF DIVIDENDS WOULD WORK OUT TO RS.39,45,599/-. HENCE, THE TOTAL ACCUM ULATED LOSS AS ON 08.01.2006 WOULD BE RS.1,05,99,369/- (- RS.1,45,44,968 + RS.39,45,599). THEREFORE, THERE WAS NEGATIVE ACCUMULATED PROFIT WHEN THE ADVANCE/LOAN WAS GRANTE D BY M/S. BKFCPL. RESPECTFULLY FOLLOWING THE RATIO DECIDENDI AS LAID DOWN IN ASSES SEES OWN CASE, CITED SUPRA, AND SINCE THE LD. DR WAS UNABLE TO CONTROVERT THE AFORESAID FINDI NG OF THE LD. CIT(A) BY BRINGING TO OUR NOTICE ANY CHANGE IN FACT OR LAW, WE FIND NO INFIRM ITY IN THE ORDER OF THE LD. CIT(A) AND THE SAME IS HEREBY UPHELD. THE APPEAL OF REVENUE IS, T HEREFORE, DISMISSED. 7. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D. ORDER IS PRONOUNCED IN THE OPEN COURT ON 13TH DECEM BER, 2017 SD/- SD/- (WASEEM AHMED) (ABY. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13TH DECEMBER, 2017 JD.(SR.P.S.) 7 ITA NO.294/KOL/2016 MANOJ MURARKA., AY 2006-07 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT ACIT, CIRCLE-35, KOLKATA. 2 RESPONDENT SHRI MANOJ MURARKA, 7, LYONS RANGE, ROOM NO. 3 & 4, 3 RD FLOOR, KOLKATA-700 001. 3. THE CIT(A) , KOLKATA. 4. 5. CIT , KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, SR. PVT. SECRETARY