Dr. L.S. Ravi Prakash, Bangalore V. Deputy Commissioner of Income Tax, Circle-5(1), Bangalore

ITA 30/BANG/2021

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9640 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 13-09-2022
• Assessment Year: 2011-2012
• Appeal Filed On: 31-01-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: THOSE COMPANIES DURING
• Keywords: Deemed to accrue or arise in india; Deemed dividend; Liquidation; Capital Gains
• Section: 2(22)(e); 13

Judgement Text

ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “C’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.30/Bang/2021 Assessment Year: 2011-12 Dr. L.S. Ravi Prakash C/o Kala Farm Rajarajeshwari Nagar P.O. Bangalore 560 098 PAN NO : AFSPP0916P Vs. Deputy Commissioner of Income-tax Circle-5(1) Bangalore APPELLANT RESPONDENT Appellant by : Shri G. Sathyanarayana, A.R. Respondent by : Shri Praveen Karanth, D.R. Date of Hearing : 14.09.2022 Date of Pronouncement : 28.10.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal filed by the assessee against the order of CIT(A)-2, Bangalore dated 20.11.2019 for the assessment year 2011-12. The assessee has raised following grounds of appeal:- 1. “The order of the learned CIT(A) in so far as it is against the Appellant is opposed to law, equity and weight of evidence, natural justice, facts and circumstances of the case. 2. The appellant denies himself to be liable to be assessed to total income of Rs.8,35,37,741/- - as against the total income returned of Rs.38,75,550/- on the facts and circumstances of the case. 3. The learned CIT(A) failed to appreciate that the jurisdiction of the appellant was with a different officer and the order passed was without jurisdiction on the facts and circumstances of the case. ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 2 of 21 4. The learned CIT(A) was not justified on fact in not appreciating that the advance received against agreement for sale of property of Rs.7,96,62,191/- the normal course of business, should not have be added as deemed dividend in the hands of the appellant on the facts and circumstances of the case. 5. Without prejudice and not conceding that the advances received during both the years were for sale of property, no additions could have been made of brought forward balances, on the facts and circumstances of the case. 6. The learned CIT(A) failed to appreciate that the additions if any, shall be restricted to the extent of the accumulated profits as at the close of the previous assessment year, on the facts and circumstances of the case. 7. Without, prejudice, the learned authorities below failed to appreciate that the balance - in the securities premium account within the meaning of section 78 of the Companies Act, 1956 cannot be treated as part of accumulated profits for the purposes of deemed dividend provisions under the Income Tax Act, 1961 and therefore the order of the authorities below are opposed to law and facts / of the case. 8. Without further prejudice, the learned assessing officer failed to appreciate that the payments made by one of the companies is not out of the accumulated profits but out of the property advances which it had obtained from another party and therefore could not be considered for the purpose of computing deemed dividend to that extent, on the facts and circumstances of the case. 9. The Appellant denies himself liable to be charged interest under sections 234 B and 234C of the Income-Tax Act, 1961 under the facts and circumstances of the case. Further the quantum, period and rate are not discernible from the assessment order on the facts and circumstances of the case. 10. The appellant craves leave of the Hon'ble Commissioner of Income Tax (Appeals), to add, alter, delete, amend or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing. 11. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.” 2. Facts of the case are that the assessee is an individual deriving income from agriculture, professional consultancy and other streams of income. The assessee filed Return of income showing total income of Rs 38,75,550 and agricultural income of Rs 26,51,000. The assessee owns agricultural land at ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 3 of 21 Bagandoddi, Anekal, Bangalore measuring about 20 acres. The companies, namely M/s Rushe Safetek Pvt Ltd and M/s Rushe Infratek Pvt Ltd in which the assessee is a director and shareholder are in the business of construction, consulting and development of land. The companies in which the assessee is a director were willing to undertake the project of development of the lands. The assessee, owning those agricultural lands entered into an agreement to sell the lands to the companies for transfer of the lands. Since the lands were agricultural lands and companies were barred from owning agricultural lands in terms of Karnataka Land Reforms Act, 1961, it was decided that the assessee would get the land converted from agricultural to non- agricultural use and the lands will be transferred after such conversion. In pursuance to the agreement for sale, the assessee received certain monies as advance for entering into the Agreement for Sale. Copies of the agreement were produced before the AO and the CIT(A), as acknowledged in the order of the lower authorities. The amount of advances given for the purchase of land by the company to the assessee and the amounts taken by the AO are as under : S. No. Name of the company Advance during the year Advance taken by the AO 1 Rushe Safetek Pvt Ltd 6,69,84,742 6,98,64,112 2 Rushe Infratek Pvt Ltd 13,81,280 1,34,05,933 3 Rushe Tyres Pvt Ltd (3,72,486) .. 13,20,546 6,79,93,537 8,45,90,591 ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 4 of 21 2.1 The accumulated profits as on 31.03.2010 for the three companies are as under : S. No. Name of the company Accumulated profit as on 31.03.2010 (in Rs.) 1 Rushe Safetek Pvt Ltd 19,22,875 2 Rushe Infratek Pvt Ltd 42,26,968 3 Rushe Tyres Pvt Ltd 19,53,765 Total 81,03,608 III. Assessment proceedings before the AO 2.2 The AO accepted that the advances were towards purchase of land, as clearly recorded at Page 5 of the assessment order. It is the contention of the AO that, i) advances received towards sale of lands cannot be taken as it is not in routine course of business ii) Such advances are covered under Section 2(22)( e) of the Act. 2.3 The AO added an amount of Rs 7,96,62,191 as deemed dividend u/s 2(22)( e) of the Act. IV. Appeal proceedings before CIT(A) 2.4 The assessee filed appeal before the Ld. CIT(A) raising various grounds of objections and making detailed submissions, relying on various decisions on the subject. While the Ld. CIT(A) extracted the various Grounds raised and the submissions made in the order, the Ld. CIT(A) dismissed the appeal and confirmed the ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 5 of 21 addition in a cryptic manner without adjudicating on any of the issues raised by the assessee. Against the order of the Ld. CIT(A), the assessee is in appeal before us. 3. The Ld. A.R. submitted as follows:- i) Advance for purchase of asset will not fall under Sec. 2(22)(e) 3.1 It is settled principle, upheld in several decisions, that advance for purchase of asset is for business purposes and will not fall under "deemed dividend" u/s 2(22)(e ) of the Act. Reliance is placed on the following decisions: (a)Bagmane Construction (P) Ltd. — Hon'ble Karnataka High Court (2015) 57 taxmann.com 120 (b)Bagmane Construction (P) Ltd. —Bangalore Tribunal ITA Nos. 446/Bang/2010 (c)Bagmane Leasing & Finance Pvt. Ltd., —Bangalore Tribunal ITA Nos. 442 to 444/Bang/2010 3.2 As mentioned above, the AO has accepted that the advances were towards purchase of land but yet has made the additions as "Deemed Dividend". Hence, the decision of the Hon'ble HC and this Tribunal cited above applies squarely to the facts of the assessee's case. ii) Land held in name of Director acceptable reason 3.3 The Tribunal has held that advances towards purchase of land is not covered u/s 2(22)( e) and the explanation that the land is held in the name of the Director as companies are not allowed to own agricultural lands is an acceptable reason. ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 6 of 21 Reliance is placed on the decision in the case of C.V. Reddy Vs ACIT —Bangalore Tribunal - ITA No.447/Bang/2012 iii) Only Gratuitous loan/ advance will fall under Sec. 2(22)(e) 3.4 Ld. A.R. submitted that the Tribunal has held that if loan or advance is given to share holder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, such advance or loan cannot be said to be a deemed dividend within the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not to the cases where the loan/advance is given in return to an advantage conferred upon the company by such shareholder. Reliance is placed on the decision in the case of C.V. Reddy Vs ACIT —Bangalore Tribunal - ITA No.447/Bang/2012 & CIT Vs. Narendra in ITA No.92 of 2015 dated 29.6.2021 (Karn.) iv. Computation of Deemed Dividend is wrong 3.5 Ld. A.R. further submitted that notwithstanding the submission that the advances received by the assessee is not covered under "deemed dividend" u/s 2(22)(e), the computation of "deemed dividend" made by the AO is wrong, due to the following reasons: (a)Deemed dividend assessable in earlier years has to be reduced from accumulated profits and no additions of brought forward balances - Ground No. 5 (b)Accumulated profit do not include current year profits - Ground No. 6 (c)Securities premium cannot be part of accumulated profits – ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 7 of 21 Ground No.7 (d) Property advances from another party is not accumulated profit - Ground No. 8 3.6 The Ld. A.R. submitted that the AO has erred in considering the advances received in the earlier years also as deemed dividend of this year. If at all deemed dividend should be assessed, it should be restricted only to the extent of advances received during the year and the brought forward balances should have been deducted. 3.7 The AO has erred in not considering that the amount of accumulated profit to be reckoned for computing the "deemed dividend" is the amount of accumulated profits as at the beginning of the year and accumulated profits for the purposes of Section 2(22)( e) does not include current year's profits 3.8 The AO has erroneously considered the "securities premium" as part of accumulated profits, for computation of deemed dividend. 3.9 Further, Ld. A.R. stated that in the case of Rushe tyres Pvt Ltd., the amounts were property advances received from another party and is not part of accumulated profits. Anyway, there has been no money advances from Rushe tyres during the current year and hence nothing is taxable. Reliance is placed on the decision in the case of P. Satya Prasad Vs ITO, Hon'ble Vishakhapatnam Tribunal - (2013) 31 taxmann.com 267 (Vishak) 3.10 The Ld. A.R. submitted that in the present case, the advance has been received by assessee to purchase the asset. As such, the provisions of section 2(22)(e) of the Act will not apply. He submitted that only gratuitous loans will fall u/s 2(22)(e) of the Act. ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 8 of 21 3.11 On behalf of the company to purchase land money has been given as an advance to the Directors which cannot be considered as a loan u/s 2(22)(e) of the Act. For this purpose, he relied on the judgement of Bangalore Bench of Tribunal in the case of C.V. Reddy Vs. ACIT vide ITA No.447/Bang/2012 dated 26.12.2012. Further, he submitted that accumulated profit do not include current year profits. Lack of jurisdiction 3.12 The Ld. A.R. submitted that the assessment order was passed by the Officer lacking jurisdiction. As the assessee is a Director of a company, the jurisdiction of the case lies with the Officer who has jurisdiction over the company. However, the assessment order has been passed by another officer. All the above points were raised before the Ld. CIT(A) as can be evidenced from the fact that the Ld. CIT(A) has extracted the submissions of the assessee in the order of the Ld. CIT(A). However, the Ld. CIT(A) has not adjudicated on any of the above issues. 4. The Ld. D.R. submitted that the assessee has received certain sums from 3 companies in which the assessee is beneficial owner of the shares with not less than 10% voting power. These sums were presumably received as advance towards purchase of certain property and the same was shown in the balance of the assessee for FY 2010-11 relevant to AY 2011-12 as unsecured loans. The AO applied deeming provisions u/s 2(22)(e) of the Income tax Act and treated the advances, as appearing on the balance sheet of the assessee, as deemed dividend in the hands of the assessee and added back the same to the total income of the assessee. The assessee has contested this addition in the appeal before Ld. CIT(A). The ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 9 of 21 assessee has contended that the AO should have restricted the deemed dividend to the extent of company's accumulated profits on each day of the advance made. The assessee further contended that the AO should have restricted the deemed dividend to the extent of advances actually received by the assessee during the AY 2011-12 only and should not have considered the advances received in the earlier years. He also drew our attention to the provisions of section 2(22)(e) of the Act. Further, he submitted that the provisions of section 2(22)(e) of the Act nowhere mention about any particular day on which the amount of accumulated profits is to be taken. As a natural corollary, the amount of accumulated profits is to be taken as appearing on the balance sheet at the end of the financial year. Unless otherwise specifically stated, the assessee's argument that the amount of accumulated profits should be taken as on the date of receipt of the advance cannot be accepted. The assessee has also contended that the AO should not have considered the advances received in earlier years but could not furnish any evidence or material in support of its claim. The purpose behind the introduction of section 2(22)(e) was to curb the avoidance of Dividend Distribution Tax (DDT) u/s 115-0 by changing the colour of the dividend payouts under the garb of advances, unsecured loans etc. Therefore, the AO is right in bringing to tax the sums paid by the companies to their shareholder, under the deeming provisions of section 2(22)(e) of the Act. 5. We have perused the records and considered the rival contentions carefully. The main dispute in this case is with regard to merit of additions made by the AO as deemed dividend u/s 2(22)(e) of the Act. Under the provisions of section 2(22)(e) of the Act, any ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 10 of 21 payment made by company, not being a company in which the public are substantially interested by way of advance or loan to a shareholder being a person who is the beneficial owner of shares holding not less than 10% of the voting power in the company or to any concern in which such shareholder is a member or partner and in which he has substantial interest or any payment by any such company on behalf or for individual benefit of any such shareholder has to be treated as deemed dividend to the extent to which the company in either case has accumulated profits. Further, item (ii) to section 2(22)(e) of the Act provides any advance or loan made to a shareholder or to the concern by the company in ordinary course of its business, where the lending of money is a substantial part of the business of the company is examined from the purview of section 2(22)(e) of the Act. The Ld. A.R. has argued that the provisions of section 2(22)(e) of the Act being a deeming provision should be strictly considered and applied only to loans/advances as mentioned in the said section. It was submission of the Ld. A.R. that the advance made in the assessment year under consideration only is to be considered to the extent of accumulated profits as on 31.3.2010 for all the 3 companies and not the profit earned by assessee in the assessment year under consideration and the profit earned in that assessment year under consideration cannot be called as accumulated profit. It was also submission of the assessee’s counsel that advance given for purchase of land by company to the assessee on account of commercial exigency cannot be considered as part of such advances u/s 2(22)(e) of the Act. With regard to the amount of advance given for the purpose of purchase of land by the company to the assessee, in our opinion, the nature of such transaction to be understood from the substance of the transaction and not depend upon the nomenclature used by the parties concerned. In the present case, though the assessee made a plea that the advance has been made by ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 11 of 21 the company to the assessee to purchase of land in the name of the assessee being a Director for the benefit of company in which assessee is a Director. However, we find that though there was an argument by the assessee’s counsel that advance made for the purchase of land which is not culminated finally with the purchase of land for the benefit of those companies in which assessee is a Director. During the year under consideration, no such property has been purchased by the assessee for the sole benefit of the companies i.e in favour of Rushe Safetek Pvt. Ltd., Rushe Infratek Pvt. Ltd. & Rushe Tyres Pvt. Ltd. Being so, this argument of the assessee’s counsel cannot be considered. We therefore, reject the argument that the assessee has received the advances, towards purchase of the land on behalf of those 3 companies. 5.1 Another argument made by assessee’s counsel is that the advance made during the assessment under consideration only to be considered and not the advance made by those 3 companies in earlier assessment years. We find force in this argument of the assessee’s counsel. In our opinion, each assessment year is an independent assessable unit and income of that assessment year would be assessed distinctively and separately. Being so, we are fully in agreement with the argument of the assessee’s counsel. The advance made during the assessment year under consideration to the assessee’s by these 3 companies to be considered for determining the deemed dividend u/s 2(22)(e) of the Act. 5.2 Next argument of the assessee’s counsel is that accumulated profit do not include current year profits. As such, the computation of deemed dividend has not been made correctly in this case. According to the Ld. A.R., accumulated profit would not include current year profit earned by these 3 companies but only includes ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 12 of 21 accumulated profits till end of immediately preceding assessment year i.e. income earned up to assessment year 2010-11. In other words, income earned up to financial year ending 31.3.2010 to be considered and not otherwise. For this purpose, he relied on the order of Visakhapatnam bench in the case of P. Satya Prasad cited (supra), wherein held as under:- “10. We have heard the rival contentions and carefully perused the record. There is no dispute with regard to the fact that the assessee is holding 37.88% of share holding in the company and was entitled to a share of 50% in the Partnership firm. Under sec. 2(22)(e) of the Act, the loan amount or the accumulated profit whichever is less is liable to be taxed as “deemed dividend”. We notice that the assessee is accepting the fact that the deemed dividend is liable to be assessed in his hands, provided there is “accumulated profit” in the hands of the company as per the provisions of sec. 2(22)(e) of the Act and further the adjustments towards dividend declared by the company is made. Thus, the first question that requires our consideration is about the determination of the quantum of accumulated profits for the purpose of assessment of deemed dividend for asst. year 2007-08. 11. Before us, the Ld A.R contended as under:- (a) As per the decision of the Hon’ble Supreme Court in the case of P. Sarada ((Supra)), the apex court held that the legal fiction embodied in sec. 2(22)(e) of the Act comes into play as soon as the monies are paid by the company. This view was reiterated by the Apex Court in the case reported in 236 ITR 327. (b) During the year relevant to the assessment year 2006-07, i.e., in the immediately preceding year, the company had paid a sum of Rs.77,50,000/- and the assessee had accumulated profits to the tune of Rs.55,87,174/- as on 31.3.2006. Hence the AO should have assessed the deemed dividend to the extent of accumulated profits stated above in the assessment year 2006-07 itself. Even if it is not so assessed, the amount to the extent of the deemed dividend so assessable should be reduced from the accumulated profits during the year under consideration. For this proposition, the Ld A.R placed reliance on the decision of Cochin bench of ITAT in the case of Gordhandas Khimji (Supra) and the decision of Delhi bench of Tribunal in the case of A.R.Chadha & Co India (P) Ltd (Supra). ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 13 of 21 (c) The Ld CIT(A) has refused to follow the decision of Cochin bench referred supra, since he was of the view that the Tribunal did not consider the definition of “accumulated Profits”, as given in Explanation 2 to sec. 2(22)(e) of the Act. However, the Ahmedabad bench of Tribunal in the case of M.B.Stock Holding (P) Ltd Vs. ACIT (2003)(84 ITD 542) has held that the accumulated profits are to be worked out up to the date of each payment/advancement of loan and further the profits of business accrue only at the end of the previous year. (d) The tax authorities have failed to take into consideration the amount of dividend actually declared by the assessee during the year relevant to the assessment year 2007-08. The assessee has declared dividend more than the current year’s profit. 12. The contentions of the Ld D.R can be summarized as under:- (a) The decision rendered by the Cochin bench in the case of Gordhandas Khimji, supra is not in accordance with the scheme of the Act. (b) In the case of P.K.Badani Vs. CIT (1976)(105 ITR 642), the Hon’ble Supreme Court has held that the “Accumulated Profits” means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the Act. (c) Hence the assessee is wrong in contending that the deemed dividend, which was not assessed earlier, is required to be deducted from the accumulated profits. In the case of CIT Vs. G.Narasimhan (Decd) (1979)(118 ITR 60), it was held that the loans advanced in earlier years and deemed to be dividend u/s 2(22)(e) have to be deducted. (d) As per clause (iii) of sec. 2(22)(e), the dividend does not include the amount paid by the company as dividend and which was set off by the company against the amount previously paid by it and which was treated as dividend u/s 2(22)(e) of the Act. In the instant case, the assessee has accepted that there was no such set off. This issue was addressed by Ld CIT(A) in para 5.7 of his order. (e) As per Explanation 2 to sec. 2(22)(e), the accumulated profit shall include all profits of the company up to the date of distribution or payment. The Ahmedabad bench of Tribunal also has held so in the case of M.B. Stock Holding (P) Ltd, supra. (f) If, by any chance, the Tribunal feels that a part of deemed dividend was assessable in the assessment year 2006-07, suitable direction may be given in that regard. ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 14 of 21 13. We notice that the Learned D.R is heavily taking support from the Explanation 2 to sec. 2(22)(e) and the said provision defines the term “accumulated profits” as under:- Explanation 2:- The expression “accumulated profits” in sub clauses (a),(b),(d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those clauses, and in sub clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place”. The Ahmedabad bench of Tribunal noticed that the Hon’ble Supreme Court in the case of CIT Vs. Asokbhai Chimanbhai (1965)(56 ITR 42) has held that the profits do not accrue from day to day or even from month to month and have to be ascertained by a comparison of assets at two stated points. It was further held that unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. Then the Tribunal went on to explain the purpose of Explanation 2 to sec. 2(22)(e) as under in para 24 of the order:- “Keeping in view the above interpretation of law, it cannot be said that Expln.2 to sec. 2(22)(e) is redundant. It is bound to be for a specific purpose. The question for determination is as to what is the purpose for which this Explanation has been incorporated when the Hon’ble Supreme Court in the case of CIT Vs. Ashokbhai Chimanbhai (supra) have held that the profits of business do not accrue from day to day or even from month to month. In our considered view, the legislature has taken into account the fact that where as the profits from business for the current year may not be determinable in the middle of the year, there are certain sources of income, the income from which is capable of determination which, according to the legislative intent, should also be taken into account while determining the accumulated profits on the day of advancing the loan. The company is a person. It may carry on business and may also derive income from various other sources. For example, the company may sell an asset from which capital gains are derived. If the capital gain is derived before the date of advancement of the loan that profit shall have to be taken in account in determining the accumulated profits notwithstanding the fact that such an event has taken place in the middle of the year. It is so the determination of capital gains is not to wait for the end of the previous year. Similarly, there can be income from other sources also such as receipt of dividend income or interest which may not have to wait for determination at the end of the year. Similarly, some ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 15 of 21 subsidy may be received from the Government which may be taxable on receipt basis. Such income shall also have to be taken into account in determining the accumulated profits as it has not to wait for determination of income at the close of the year”. The Hon’ble Tribunal has expressed the above said view, when it was pointed out to it by the counsel for the assessee that the Hon’ble Supreme Court in the case of CIT Vs. V.Damodaran (1980)(121 ITR 572) has held that the accumulated profits shall not include current year’s profit. Finally the Tribunal summarized the principles of sec. 2(22)(e) as under:- (i) That for purposes of s. 2(22)(e), the accumulated profits are to be worked out upto the date of each payment/advancement of loan. (ii) That there is a distinction between the “accumulated profits” of business and the current year’s profits of business. (iii) That profits of business accrue at the end of the previous year. (iv) That loan or advance treated as deemed income up to the date of fresh loan is to be reduced from accumulated profits. (v) That the repayment of loan during the same year is not to be deducted from the accumulated profits. Thus, it has been held that the accumulated profits do not include current year’s business profit, since it accrues only at the end of the year. Further the loan or advance treated as deemed income up to the date of fresh loan is to be reduced from the accumulated profits. Consistent with the view taken by the Ahmedabad bench in the above said case, we also hold so. 14. 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. For this proposition, the Ld A.R has placed reliance on the decision rendered by the Cochin bench of Tribunal in the case of Gordhandas Khimji (supra) and also the decision rendered by the Delhi bench of Tribunal in the case of A.R.Chadha & Co India (P) Ltd (Supra). The Ld CIT(A), as stated earlier, refused to follow the said decisions on the ground that the department is going to gain anything by postponing the taxability of deemed dividend. Further, the Learned CIT(A) has observed that the Cochin bench did not consider Explanation 2 to sec. 2(22)(e) of the Act. We have already noticed that the Ahmedabad bench of the Tribunal 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 years 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. ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 16 of 21 15. The Hon’ble Supreme Court has held in the case of P.Sarada (Supra), that the legal fiction embodied in sec. 2(22)(e) comes into play as soon as monies were paid by a company. The very same view was expressed by the Apex Court in the case of Smt. Tarulata Shyam Vs. CIT (1977)(108 ITR 345). The Cochin bench of Tribunal in the case of Gordhandas Khimji (supra) considered the decision of Hon’ble Supreme Court in the case of Tarulata Shyam (Supra) and has expressed the view that the deemed dividend assessable in any of the earlier years has to be reduced from the accumulated profits, even if it was not assessed in that year. The relevant observations made by the Cochin bench are extracted below:- “11. In Smt. Tarulata Shyam”s case (supra), it was held by the Supreme Court that the statutory fiction created by s. 2(6A)(e) would come into operation at the time of payment of advance or loan to a shareholder and tax is attracted to the loan or advance to the extent to which the company possesses accumulated profits the moment the loan or advance is received, and even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed to be ‘dividend’ if the conditions of the section are satisfied. It was also observed that the language of the section is clear and unambiguous and that there is no scope of importing into the statute words which are not there and that once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. ... 13. None of the discussions referred to above are directly on the point. But the line of discussion in those decisions gives some indication with regard to the correct position. We are unable to hold that loans and advances will become deemed dividends only when the Department chooses to treat the same as such and brings the same to tax as dividend. The section is not worded as an enabling section by which the Department can treat the loans and advances as deemed dividends. The section does not say that the amount will become deemed dividend only if it has been assessed as such. On the other hand, the provision is a clause in the inclusive definition, by which advances and loans are constituted as dividends. The moment an advance or loan satisfying the conditions of the section is made, it would become a dividend and it is immaterial whether 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 ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 17 of 21 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 particular advance as deemed dividend. If the contention of the Department is accepted, then if the ITO ignores the advances in earlier years and then goes down on the assessee in an assessment year in which he has drawn substantial advances, it will amount to allowing the Department to take advantage of its omissions to assess the earlier loans and advances as deemed dividends and to allow such omissions to bloat the accumulated profits, so that the whole of the large advances taken in the last assessment year are converted into deemed dividends. As rightly pointed out by the CIT(A), the advances or loans in the earlier assessment years should be treated as dividend which the Department omitted to assess. If so, it follows that the accumulated profits should be reduced by the earlier loans or advances in spite of the fact that they were not assessed to tax as deemed dividends by the Department.” It is a well settled proposition of law that an income pertaining to a particular assessment year can be assessed in that year only. For example, the income pertaining to the assessment year 2005-06 can be assessed only in that year, i.e., the said income cannot be assessed in any other assessment year, even if the tax authorities wish to do so. Hence, the assessee cannot be compelled to pay tax on the income which was omitted to be assessed in an earlier year, by assessing the said income in any other assessment year. Accordingly, we are inclined to follow the decision rendered by the Cochin bench in the case referred supra. Accordingly, the loan given by the company in the immediately preceding year, i.e., assessment year 2006-07, should have been assessed as deemed dividend in accordance with the provisions of sec. 2(22)(e) in that year. The deemed dividend so assessable in that year is liable to be deducted from the amount of “accumulated profits” for the purpose of computing the deemed dividend during the year under consideration. 16. Before the Learned CIT(A), the assessee has contended that the accumulated profits as on 31.3.2007 should be considered for the purposes of sec. 2(22)(e) of the Act. The said contention does not appear to be in accordance with the law, since the liability for taxation comes into play as soon as monies were paid by a company as held by Hon'ble Supreme Court in the case of P Sarada, (Supra). Hence the amount of accumulated profits has to be determined on the date on which the loans were given by the company. 17. Now let us turn to the facts of the instant case. The assessee has furnished copies of financial statements of the company pertaining to the year ending 31.3.2007 in the paper book and in page No. 15, the details of Reserves and Surplus are given. Based on the principles discussed above, the “accumulated profits”, which is required to be considered for the purpose of assessment year 2007-08 shall work out as given below:- ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 18 of 21 Reserves and surplus as on 31.3.2007 before dividends - 87,48,366 Less:- Current year’s business profits relating to F.Y 2006-07 - 31,61,192 55,87,174 Less:- Income assessable as deemed dividend in asst. year 2006-07:- (Loan given or accumulated profit whichever is less) (a) Loan given in a.y. 2006-07 (Pg. 7 of Paper book) 80,50,000 (b) Accumulated Profit:- (Pg. 15 of Paper book) Reserves and Surplus as on 31.3.06 - 55,87,174 Less:- Current year’s business profit (relating to F.Y 2005-06) 29,15,546 Asst. year : 2006-07 26,71,628 Lower of (a) or (b) 26,71,628 Accumulated profit for the purpose of ascertaining Deemed dividend in the year relevant to a.y. 2007-08 29,15,546 ----------------- We have already noticed that the aggregate amounts of loans given by the company to the assessee and the partnership firm during the financial year relevant to the assessment year 2007-08 was Rs.85,84,000/- (Rs.5,46,500/- to the assessee and 50% of the amount given to M/s PSV Enterprises – Rs.80,37,500/-). Under sec. 2(22)(e) of the Act, the lower of the loan amount or the accumulated profit is taken as deemed dividend., i.e. lower of Rs.85,84,000/-or Rs.29,15,546/- is taken as deemed dividend, i.e., Rs.29,15,546/- is to be taken as deemed dividend. Since the Learned A.R has claimed that the dividend declared and paid by the company is required to be deducted, the applicability of the provisions of clause (iii) of sec. 2(22)(e) requires verification. Similarly, the computations discussed above also require verification by the tax authorities. 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 Ld CIT(A) has observed that the assessee had stated that no such set off was made in the books of account. However, we notice that the assessee has furnished a copy of the Loan account of the assessee as available in the books of the company in Page 8 of the paper book. On the perusal of the said account, we notice that the dividend amount of Rs.31,25,100/- was adjusted by the company against the said loan amount. Thus, the observation made by Ld CIT(A) appears to be against the facts available on record. There ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 19 of 21 cannot be any dispute that the dividend amount so set off shall have to be deducted from the deemed dividend amount computed above. However, the observations made by Ld CIT(A) show that the tax authorities have not examined this aspect properly. Hence, the factual aspect on this matter, in our view, requires verification preferably at the end of the assessing officer. 19. The foregoing discussions show that the views entertained by the tax authorities on the matter of “accumulated profits” and “deemed dividend” are not in accordance with the settled position of the law. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the Assessing Officer with the direction to carry out due verification of the computations made with regard to the accumulated profits and also determine the amount of ‘deemed dividend’, if any, accordingly after verifying the record with regard to the amount to be deducted as per clause (iii) of sec. 2(22)(e) of the Act, which was discussed in the preceding paragraph.” 5.3 In our opinion, the argument of the assessee’s counsel that accumulated profits has to be included only the profit as on 31.3.2010 in case of all the 3 companies is justified. As held by the order of the Tribunal in the case of P. Satya Prasad cited (supra). Further, Hon’ble Supreme Court in the case of CIT Vs. V. Damodaran 121 ITR 572. The coordinate bench of Tribunal in the case of M.B. Stock Holdings Pvt. Ltd. Vs. ACIT 84 ITD 542 (Ahd) have taken a similar view. In view of the above, decisions accumulated profits for the purpose of computation of deemed dividend has to be considered only up to 31.3.2010. Further, as discussed in earlier opening balance of loan could not be considered for additions in the current year u/s 2(22)(e) of the Act as deemed dividend. It is to be noted that Coordinate Bench of Cochin Bench in the case of ITO Vs. Gordhandas Khimji (1985) 11 ITD 158 (Coch.) wherein held that opening balance of advances has to be excluded irrespective of the fact where the same treated as deemed dividend in the earlier year or not. Same view has taken by coordinate bench of Mumbai in the case of Mrs. Mola Sadhani in MA No.620/Mum/2006 in which mistake committed in relation to opening balance had been rectified by the Tribunal. It was held in that case that reserves and surplus till March 31, 2001 was ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 20 of 21 only Rs.97 lakhs and if the opening balance of loan of Rs.95 lakhs taken earlier was excluded addition could be only to the tune of Rs 2 lakhs. Considering this argument of the assessee’s counsel, we hold that the accumulated profit as on 31.3.2010 in respect of these 3 companies to be considered and not the current assessment year’s profit and also held that deemed dividend u/s 2 (22)(e) of the Act has to be applied only to loans received during the year by the assessee from these 2 companies and opening balance of loans was in fact not deemed loan u/s 2(22)(e) of the Act. 5.4 Being so, in the present case, the accumulated profit up to 31.3.2010 (AY 2010-11) to be considered to determine the deemed dividend u/s 2(22)(e) of the Act. Further, AO has to consider only the net advances made to present assessee by those 3 companies during the assessment year under consideration i.e. in AY 2011-12 and not the carried forward balance from earlier assessment years. In other words, opening balance as on 1.4.2010 (FY 2010-11) i.e. commencing of the financial year cannot be considered to determine the deemed dividend in assessment year 2011-12 and for clarity we direct the AO to consider the amount mentioned in para 2.1 of this order at Rs. 81,03,608/- to be considered as deemed dividend u/s 2(22) (e) of the Act. Ordered accordingly. 6. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 28 th Oct, 2022 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 28 th Oct, 2022. VG/SPS ITA No.30 /Bang/2021 Dr. L.S. Ravi Prakash, Bangalore Page 21 of 21 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.