Bharat Bir Mohindra, CHENNAI V. ACIT, CHENNAI

ITA 462/CHNY/2013

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6192 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 14-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 19-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SURESH RAO
• Assessee Lawyers: K GANGADHARA SASTRY ITP
• Keywords: Deemed to accrue or arise in india; Deemed dividend; Commercial expediency
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI . . . , ! , ' #$ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ] ./ I.T.A. NO. 462/MDS/2013 / ASSESSMENT YEAR : 2007-2008 BHARAT BIR MOHINDRA , NO.3-E, MNASAROVAR, BINNY ROAD, POES GARDEN CHENNAI 600 006. VS. THE ASSISTANT COMMIS SIONER OF INCOME TAX, COMPANY CIRCLE II(3) CHENNAI. [PAN AAEPM 4105A] ( &' / APPELLANT) ( ()&' /RESPONDENT) / APPELLANT BY : SHRI. K. GANGADHARA SASTRY, ITP /RESPONDENT BY : SHRI. P. SURESH RA O, JCIT. /DATE OF HEARING : 14-06-2017 /DATE OF PRONOUNCEMENT : 04-09-2017 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST A N ORDER DATED 18.01.2013 OF LD. COMMISSIONER OF INCOME TAX (APPEALS) III, CHENNAI FOR THE ASSESSMENT YEAR 2007-2008. ITA NO.462/MDS/2013. :- 2 -: 2. ASSESSEE IN THIS APPEAL IN AGGRIEVED WITH REGARD TO TREATING AN AMOUNT OF ?1,59,04,178/- AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 3. FACTS OF THE CASE ARE THAT THE ASSESSEE IS A MANAGI NG DIRECTOR IN M/S. INDOKEM OVERSEAS LTD., AND HAS EARNED SALARY FROM THE SAID COMPANY. THE ASSESSEE IS ALSO DIRECTOR IN M/S. CLASSIC LINENS INTERNATIONAL PVT. LTD, M/S. ZEN LINEN INTERNATIONAL PVT. LTD, M/S. EAST COAST CLOTHING PVT. LTD AND PARTNER IN M/S. LOOMTEX EXPORTS. ASSESSEE FILED THE RETURN OF INCOME FOR THE A.Y. 2007-08 ON 26.10.2007 SHOWING AN INCOME OF ` 13,08,3201-. THE RETURN WAS PROCESSED U/S.143(1) AND THE CASE WAS SELECTED FOR SCRUTINY. NOTICE U/S.143(2) OF THE ACT WAS ISSUED ON 21.8.2008 AND NOTICE U/S.142(1) WAS ISSUED ON 29.9.2009. THE AO, AFTER HEARING THE ASSESSEE, COMPLETED ASSES SMENT U/S. 143(3) ON 09.12.2009 DETERMINING TOTAL INCOME AT ` 1 ,72,44,604/- BY MAKING ADDITION OF ` 1 ,59,04,178/- AS DEEMED DIVIDEND U/S. 2(22)(E). THE AO FOUND THAT THE ASSESSEE HAD RECEIVED SUBSTANTIAL AMOUNT FROM THE SAID CONCERN ON VARIOUS DATES DURING THE YEAR. . TH E AO GAVE THE DETAILS OF AMOUNTS RECEIVED ON VARIOUS DATES IN A T ABULAR FORM AND QUANTIFIED THE AMOUNT QUALIFYING AS DEEMED DIVIDEND AT ` 1,71 ,57,874/-. THE AO FURTHER NOTED THAT M/S. CLASSIC INTERNATIONAL PVT. LTD IS A COMPANY IN WHICH THE PUBLIC ARE NOT S UBSTANTIALLY INTERESTED AND POSSESS ACCUMULATED PROFIT OF ` 1,27,08,173/- AS ON ITA NO.462/MDS/2013. :- 3 -: 1.4.2006 AND ` 1 ,59,04,178/- AS ON 31.3.2007. THE ASSESSEE HOLDS MORE THAN 83.71 % SHARES OF M/S. CLASSIC INTERNATIONAL PVT. LTD DURING THE FINANCIAL YEAR 2006-07. THE AO ENUMERATED FOUR CONDITIONS AND HELD THAT AS PER SEC.2(22)(E) OF THE IT ACT, 1961, LOAN OR ADVANCE TO A SHAREHOLDER IS TREATED AS DIVIDEND IN THE HANDS OF SHAREHOLDER IF THESE CONDITIONS ARE SATISFIED. (A) PAYMENT BY WAY OF LOAN ON ADVANCE IS GIVEN BY A COMPANY IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERE STED. (B) SUCH LOAN IS GIVEN TO A REGISTERED SHAREHO LDER. (C) THE SHAREHOLDER (GETTING THE LOAN) BENEFICI ALLY HOLDS 10% OR MORE OF EQUITY SHARES IN THE COMPANY (GIVING THE LO AN). (D) THE COMPANY POSSESS ACCUMULATED PROFITS AT THE TIME IT MAKES PAYMENT OF LOAN OR ADVANCE. THE AO NOTED THAT SINCE ALL THE AFORESAID CONDITION S ARE SATISFIED IN THIS CASE, THE AMOUNT OF LOAN RECEIVED BY THE ASSES SEE FROM M/S. CLASSIC LINENS INTERNATIONAL PVT. LTD TO THE EXTENT AT ACCUMULATED PROFIT OF ` 1,59,04,178/- AS ON 31.3.07 IS TO BE TREATED AS DEE MED DIVIDEND IN THE HANDS OF THE ASSESSEE BEING A SHARE HOLDER OF M/S. CLASSIC LINENS INTERNATIONAL PVT. LTD HOLDING 83.71 % SHARE AND LD. ASSESSING OFFICER ISSUED SHOW NOTICE TO THE ASSESSE E. 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/). ITA NO.462/MDS/2013. :- 4 -: THUS, THE AO CONCLUDED THAT THE AMOUNT OF LOAN RECE IVED BY THE ASSESSEE COMPANY FROM M/S. CLASSIC LINENS INTERNATI ONAL 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 ASSE SSEE AND IS CHARGEABLE TO TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. ACCORDINGLY, LD. ASSESSING OFFICER INVOKED THE PROV ISIONS 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. LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED T HAT THE ASSESSEE HAD RECEIVED AN ADVANCE OF ` 1,71 ,57,874/- FROM M/S. CLASSIC LINENS INTERNATIONAL PVT. LTD. THE AO HAS A DDED A SUM OF ` 1,59,04,178/- AS DEEMED DIVIDEND U/S 2(22)(E) IN TH E HANDS OF THE ASSESSEE . AS PER SEC. 2(22) OF THE ACT, IT IS CLE AR THAT COMPREHENDS MANIFOLD REQUIREMENTS, THE FIRST BEING THAT THE PAY MENT SHOULD BE MADE BY; WAY OF LOAN OR ADVANCE. THE SECOND REQUIRE MENT IS THAT THE COMPANY MAKING THE PAYMENT SHOULD NOT BE A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED. THIRDLY, THE P AYMENT OF ADVANCE OR LOAN TO THE EXTENT OF ACCUMULATED PROFITS (EXCLUDIN G CAPITALIZED PROFITS) SHOULD BE TO (I) AN EQUITY SHAREHOLDER, WHO IS BENE FICIAL OWNER OF ITA NO.462/MDS/2013. :- 5 -: SHARES HOLDING NOT LESS THAN 10 PER CENT OF VOTING POWER; OR (II) ANY CONCERN IN WHICH SUCH SHAREHOLDER (HOLDING NOT LESS THAN 10 PER CENT OF VOTING POWER) IS A MEMBER OR A PARTNER AND IN WH ICH HE HAS A SUBSTANTIAL INTEREST; OR (III) ANY PERSON, ON BEHAL F, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER (HOLDING NOT LESS THAN 10 PER CENT VOTING POWER). LD. COMMISSIONER OF INCOME TAX (APP EALS) FOUND THAT ALL THE ABOVE REQUIREMENTS ARE SATISFIED IN THE CAS E OF THE ASSESSEE AND THEREFORE ASSESSING OFFICER HAS RIGHTLY APPLIE D THE DEEMING PROVISIONS OF SEC.2(22)(E). IT IS SEEN THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THAT ASSESSEE AGREED TO T HE APPLICATION OF SEC.2(22)(E), BUT CONTENDED THAT THE DECLARED DIVID END SUM OF ? 80 LAKHS ON WHICH DIVIDEND DISTRIBUTION TAX HAS BEEN P AID THE COMPANY SHOULD BE REDUCED FROM THE TOTAL ADVANCE TAKEN AND ONLY BALANCE AMOUNT OF ` 51,72,144/- IS SUBJECTED TO SEC. 2(22) ( E) OF THE ACT. THE ASSESSEE HAS CONTESTED AGAINST THE SAID ADDITION ON THE GROUNDS THAT THE REPAYMENTS WERE NOT TAKEN INTO CONSIDERATION, T HE DIVIDEND TAX PAID WAS NOT TAKEN INTO CONSIDERATION AND 'NON-APPL ICABILITY OF THE DEEMING ! PROVISIONS OF SEC.2(22)(E) FOR COMMERCIAL TRANSACTI ONS. AS REGARDS THE ASSESSEES FIRST ARGUMENT REGARDING REPA YMENTS NOT BEING TAKEN INTO CONSIDERATION, HE RELIED ON THE HON'BLE SUPREME COURT'S DECISION IN THE CASE OF TARULATA SHYAM VS. CIT (1977) 108 ITR 345. THE REPAYMENT OF LOAN OR ADVANCE DURING THE YEAR OR SU BSEQUENTLY ITA NO.462/MDS/2013. :- 6 -: DOES NOT AFFECT THE DEEMING PROVISIONS OF SEC.2(22) (E). THE ASSESSEE'S ARGUMENT THAT DIVIDEND DISTRIBUTION TAX WAS NOT TAK EN INTO CONSIDERATION DOES NOT HAVE ANY FORCE AS THE SAID T AX WAS NOT INTO EXISTENCE AT ALL WHEN THE SEC.2(22)(E) CORRESPONDIN G TO SEC.2(6A)(E) OF INDIAN INCOME TAX, 1922 WAS INTRODUCED. THE DIVIDEN D DISTRIBUTION TAX HAS BEEN INTRODUCED W.E.F. 01.05.1997 ONLY THEREFOR E PAYMENT OF DIVIDEND DISTRIBUTION TAX DOES NOT AFFECT THE APPLI CABILITY OF SEC.2(22)(E) OF THE ACT. THE ASSESSEE'S THIRD ARGUM ENT IS THAT THE SUMS WERE ADVANCED FOR AN INTERIM PERIOD TO CREATE AN EXPORT ARM WHILE IMPLEMENTING THE PLAN OF EXPANSION OF THE ASS ESSEE'S BUSINESS IN LINEN, THE FUNDS WERE USED FOR CREATING A UNIT IN S EZ, TAMBARAM AND THEREFORE THERE WAS COMMERCIAL CONSIDERATION IN-BUI LT IN THE TRANSACTION UNDER SCRUTINY. HOWEVER, ON CONSIDERATI ON OF THE ASSESSEE'S CASE, IT IS HARD TO AGREE THAT THE TRAN SACTION 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 ASS ESSEE. 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. THUS, THE FACTS OF THE ASSESSEE'S CASE B EING TOTALLY DIFFERENT FROM THAT OF CIT VS. RAJKUMAR 318 ITR 462 , THE SAME IS NOT APPLICABLE. ITA NO.462/MDS/2013. :- 7 -: ASSESSEE ALSO PLACED RELIANCE IN THE CASE OF CIT VS . CREATIVE DYEING & PRINTING 318 ITR 476. THE HIGH COURT IN THIS CASE, MORE OR LESS, ENDORSED THE VIEW TAKEN BY IT EARLIER IN CIT VS. RAJKUMAR(SUPRA) . IN THE ASSESSEE'S CASE, THE TRANSACTION UNDER CONSIDER ATION IS DEFINITELY NOT A 'BUSINESS TRANSACTION' AND IT DOES NOT RESULT IN ANY BENEFIT TO THE COMPANY MAKING PAYMENT, THEREFORE THIS CASE DOES NO T SUPPORT THE CASE OF THE ASSESSEE IN ANY WAY. THE FACTS OF THE CASE IN PRADIP KUMAR MALHOTRA VS. CIT IN 338 ITR 538 (CAL) RELIED ON BY THE ID.AR ARE ENTIRELY DIFFERENT FROM THAT OF THE ASSESSEES CASE. THE PROVISIONS OF SEC 2(22)(E) CREATE A FICTION BRINGING IN AMOUNT PAID OTHERWISE THAN AS DIVIDEND INTO THE NET OF DIVIDENDS. THEREFORE, A CCORDING TO CIT(A), THIS CLAUSE MUST BE GIVEN A STRICT INTERPRETATION A S HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. C.P. SARATHY M UDALIAR IN 83 ITR 170(SC). THE HISTORICAL PERSPECTIVE OF SEC 2(22)(E) WAS ALSO DISCUSSED BY THE HON'BLE MUMBAI ITAT SPECIAL BENCH IN THE CAS E OF ACIT V. BHAUMIK COLOUR P LTD (118 ITO 1) . LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT IN THE CASE OF THE ASSESSE E , ALL THE CONDITIONS STIPULATED IN SEC 2(22)(E) ARE SATISFIED . IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND AUTHORITATI VE JUDICIAL PRECEDENTS, THE LOAN RECEIVED BY THE ASSESSEE FROM M/S. CLASSIC LINEN LNTERNATIONAL PVT. LTD TO THE EXTENT OF ACCUM ULATED PROFIT OF ` 1,59,04,178/- AS ON 31.03.07 WAS RIGHTLY TAXED AS DEEMED DIVIDEND ITA NO.462/MDS/2013. :- 8 -: IN THE HANDS OF THE ASSESSEE AND IS CHARGEABLE TO TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES' AND DISMISSED THE APPEAL OF THE ASSESSEE. AGAINST THIS, THE ASSESSEE IS IN APPEAL B EFORE US. 5. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT A S PER SECTION 2(22) (E) ' DIVIDEND INCLUDES ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS O F THE COMPANY OR OTHERWISE) MADE AFTER THE 31 ST DAY OF MAY, 1987, BY WAY OF ADVANCE 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 RIGHT TO PARTICIPATE IN PROFITS HOL DING NOT LESS THAN TEN PERCENT OF THE VOTING POWER, OR TO ANY CONCERN IN W HICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS SUBSTANTIAL INTEREST OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHA LF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHARE HOLDERS, TO TH E 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 T ILL 31.03.2006 AND THEREFORE ADDITION TO ACCUMULATED PROFIT BEYOND THA T DATE BE DELETED. HE PLACED RELIANCE ON THE DECISION OF CO-ORDINATE M UMBAI BENCH, IN THE CASE OF ITL FABRICS P. LTD VS. ACIT (2012) 19 I TR (TRIB) 499. ITA NO.462/MDS/2013. :- 9 -: ACCORDING TO AR, THE PURPOSE OF SECTION 2(22) (E) A CCUMULATED PROFITS DO NOT INCLUDE CURRENT YEAR'S BUSINESS PROFITS, SIN CE IT ACCRUES ONLY AT END OF YEAR AND DEEMED DIVIDEND ASSESSABLE IN ANY O F EARLIER YEAR HAD TO BE REDUCED FROM ACCUMULATED PROFITS, EVEN IF IT WAS NOT ASSESSED IN THAT YEAR. MORE SO, AMOUNT OF ACCUMULATED PROFITS H AS TO BE DETERMINED ON DATE ON WHICH LOANS WERE GIVEN BY COM PANY AND NOT AT THE END OF YEAR. THE LD. AR ALSO PLACED RELIANCE ON THE DECISION OF VISHAKA BENCH OF THE TRIBUNAL IN THE CASE OF P.SATYA PRASAD VS ITO 141 ITD 403 (VISHAKA TRIB ). LD. AR FURTHER SUBMITTED THAT M/S CLASSIC LINENS INTERNATIONAL PVT LTD IS A COMPANY IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED AND POSSESS ACCUMULATED PR OFIT OF ` 1,27,08,173/- AS ON 01/04/2006 AND ` 1,59,04,178/- AS ON 31/03/2007. THE ASSESSEE HOLDS 83.71% SHARES OF M/S CLASSIC LINENS INTERNATIONAL PVT LTD DURING THE FINANCIAL YEAR 200 6-07. FURTHER, HE RELIED ON THE ORDER OF THE CHENNAI BENCH OF THE TRI BUNAL IN THE CASE OF ACIT VS. C.RAJINI AND ACIT VS. SUBBA REDDY (HUF) (1 40 TTJ 216) HAD HELD AS 19. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISS IONS AS PUT FORTH BEFORE US, WE ARE OF THE CONSIDERED OPINI ON THAT SECTION 2(22)(E) OF THE ACT IS A DEEMING PROVI SION WHICH ASSUMES EXISTENCE OF CERTAIN FACTS IF THE CONDITIONS SPECIFIED IN A PARTICULAR SECTION ARE FU LFILLED. WE AGREE THAT THESE PROVISIONS ARE TO BE STRICTLY CONSTRUED. THIS LEGAL FICTION HAS TO BE CARRIED TO SUCH LOGICAL ENDS AND NOT TO ILLOGICAL LENGTHS. ONLY A L OAN, WHICH WOULD INCLUDE THE PAYMENTS MENTIONED IN SECTI ON ITA NO.462/MDS/2013. :- 10 - : 2(22)(E) CAN BE DEEMED TO BE DIVIDEND AND TO THAT EXTENT OF THE COMPANY HAS ACCUMULATED PROFITS ON TH E DATE OF PAYMENT. WE HAVE GONE THROUGH THE TRIBUNAL ORDER DATED MARCH 9, 2007 PASSED IN THIS ASSESSEE'S CASE FOR THE ASSESSMENT YEAR 2002-03 ON WHICH THE LEARNED AUTHORISED REPRESENTATIVE HAS HEAVILY RELIE D. IN THAT YEAR FROM THE COPY OF ACCOUNT OF CHPL IN THE B OOKS OF CPDPL FOR THE PERIOD APRIL 1, 2001 TO MARCH 31, 2002 THE ASSESSING OFFICER FOUND THAT AS ON APRIL 1, 200 1 THE ACCOUNT OF CHPL STARTED WITH A DEBIT BALANCE OF RS. 2.5 CRORES AND ODD AND THEREAFTER THERE WERE VARIOUS DE BIT ENTRIES AGGREGATING TO RS. 2.75 CRORES WHICH ACCORD ING TO THE ASSESSING OFFICER, WERE OVER AND ABOVE THE PAYMENTS ALREADY MADE BY CPDPL AS ON MARCH 31, 2001 TO CHPL. THE ASSESSING OFFICER ACCORDINGLY PROPOSED TO THE ASSESSEE THAT THE PAYMENTS TO THE EXTENT OF RS. 2.75 CRORES BY CPDPL TO CHPL WOULD ATTRACT THE PROVISIONS OF SECTION 2(22)(E) IN THE H ANDS OF THE SUBSTANTIAL SHAREHOLDERS. IT WAS ARGUED ON B EHALF OF THE ASSESSEE THAT THE RECEIPTS BY CPDPL WERE ON ACCOUNT OF CONTRACT PAYMENTS BY CHPL AND THAT THE TRANSACTIONS BETWEEN THESE TWO COMPANIES WERE PUREL Y BUSINESS TRANSACTIONS AND THAT THE PROVISIONS OF SE CTION 2(22)(E) WOULD NOT BE APPLIED TO THE BUSINESS TRANSACTIONS BETWEEN THE COMPANIES ; OR BETWEEN THE COMPANIES AND THE DIRECTORS. IN THESE CIRCUMSTANCES , THE TRIBUNAL AFTER FOLLOWING OTHER SHAREHOLDER'S CA SE, 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 ACCOUN TS OF THE ASSESSEE IN THE BOOKS OF CPDPL FROM APRIL 1, 20 01 TO MARCH 31, 2002 THAT THE ASSESSEE HAD CREDIT BALA NCE WITH AN OPENING BALANCE OF RS. 3.13 CRORES AND A CLOSING BALANCE OF RS. 1.40 CRORES. THIS SECTION IN TENDS THE MONIES TAKEN BY SUBSTANTIALLY INTERESTED PERSON OTHERWISE BY WAY OF DIVIDEND. IN THIS CASE, THE ASSESSEE IS HOLDING SUBSTANTIAL AMOUNT IN CRORES WI TH THE COMPANY WITHOUT INTEREST AND TO BRUSH ASIDE THI S FACT IS AGAINST THE SPIRIT OF THE SECTION. THE ASSE SSING OFFICER HAS STATED THAT THE ASSESSEE HAS BEEN MAKIN G PAYMENTS FOR TRANSACTIONS DONE AND THE ASSESSEE CANNOT CLAIM THE EXCESS MONEY LYING WITH CPDPL. THE ADVANCE OF RS. 20,00,000 WAS MADE BY CPDPL TO CHPL ON DECEMBER 26, 2000 AND BALANCE OF THE ASSESSEE WITH COMPANY WAS RS.4,35,67,200. THE CONTRACT ITA NO.462/MDS/2013. :- 11 - : REFERRED TO BY THE ASSESSING OFFICER WAS COMPLETED AFTER TWO YEARS IN A TOTAL AMOUNT OF RS. 8 CRORES. IT WAS STATED THAT THE ASSESSEE WAS ADVANCING ALL HER FUND S IN THE TWO COMPANIES IN WHICH SHE IS A DIRECTOR, FOR T HE PURPOSE OF BUSINESS. A LETTER DATED DECEMBER 15, 20 06 CLEARLY SHOWS THAT THE ASSESSEE HAD A CURRENT ACCOU NT WITH THE COMPANY AND WAS ADVANCING MONIES TO THE COMPANY AS AND WHEN REQUIRED FOR THE PURPOSE OF BUSINESS OF THE COMPANY. THEREFORE, WE ARE ALSO IN AGREEMENT WITH COMMISSIONER OF INCOME-TAX (APPEALS) THAT THIS SECTION CAN BE INVOKED TO CURTAIL THE MIS USE OF THE FUNDS BELONGING TO A PRIVATE LIMITED COMPANY BY ITS SHAREHOLDER BUT NOT WHEN THERE IS A BUSINESS TRANSACTION BETWEEN THE TWO ENTITIES ; AND FUNDS OF THE DIRECTOR WERE ALSO LYING WITH THE COMPANY. IN THIS CASE, THE ASSESSEE'S MONEY RANGING BETWEEN RS.313.72 LAKH S AND RS. 490.67 LAKHS WITH CEEBROS PROPERTY DEVELOPMENT P. LTD., THE PAYMENT BY THE SAME COMPANY TO CEEBROS HOTELS P. LTD. OF RS. 20,00,000 CANNOT BE TREATED AS INTENDED DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. THESE FACTS HAVE NOT B EEN DENIED BY THE ASSESSING OFFICER. CONSEQUENTLY, WE D O NOT FIND ANY INFIRMITY IN THE APPELLATE ORDER. SO, THERE IS NO LEGALITY IN MAKING IMPUGNED ADDITION. 5.1 ACCORDING TO LD. A.R, THE PROVISIONS OF S. 2(2 2)(E) COULD NOT BE INVOKED WHEN THERE IS A GENUINE BUSINESS TRANSACTIO N BETWEEN TWO ASSESSEES AND FUNDS OF THE ASSESSEE WERE ALSO LYIN G WITH THE COMPANY AND PRAYED THAT THE APPEAL OF THE ASSESSEE TO BE ALLOWED. 6. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY OPPOSED TO THE SUBMISSIONS OF THE LD. AU THORISED REPRESENTATIVE. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. ASSESSEE HAS RECEIVED A SUM OF ` 1,71,57,874/- AS LOAN FROM M/S. CLASSIC LINENS INTERNATIONAL P. LTD. THE SAI D LIMITED COMPANY IS ITA NO.462/MDS/2013. :- 12 - : HAVING ACCUMULATED PROFIT OF ` 1,27,08,173/- AS ON 01.04.2006 AND ?1,59,04,178/- AS ON 31.03.2007. ASSESSEE HOLD MOR E THAN 83.71% OF SHARES IN M/S. CLASSIC LINENS INTERNATIONAL P. LTD DURING THE FINANCIAL YEAR 2006-2007. AS PER PROVISIONS OF SEC. 2(22) (E ) OF THE ACT ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS RE PRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFTER THE 31ST DAY OF MAY, 1987 , BY WAY OF ADVANCE OR LOAN TO A SHAREHOL DER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT B EING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN P ER 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 PAY MENT 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. C LASSIC LINENS INTERNATIONAL PVT LTD IS ON ACCOUNT OF COMMERCIAL EXPEDIENCY. HOWEVER THERE WAS NO IOTA OF EVIDENCE TO SUPPORT T HIS 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 ITA NO.462/MDS/2013. :- 13 - : WERE NEVER MISUSED BY THE ASSESSEE IT WAS ADVANCED TO ANOTHER COMPANY FOR THE PURPOSE OF BUSINESS TRANSACTIONS BE TWEEN TWO ASSESSEES AND IT CANNOT BE TREATED AS DEEMED DIVI DEND. HOWEVER, AS EXPLAINED EARLIER IF THERE IS BUSINESS TRANSACTI ONS BETWEEN THESE TWO ASSESSEES, IT IS DUTY OF THE ASSESSEE TO BRING ON RECORD CIRCUMSTANCES UNDER WHICH IT WAS ADVANCED. LD. COMMISSIONER OF I NCOME TAX (APPEALS) GIVEN A CATEGORICAL FINDING BY PLACING RE LIANCE ON THE JUDGMENT OF DELHI HIGH COURT IN THE CASE OF CIT VS. RAJKUMAR, 318 ITR 462 OBSERVING THAT IT WAS NOT A BUSINESS ADVANCE. BEING SO, WE ARE NOT IN A POSITION TO APPRECIATE THE ABOVE ARGUMEN T OF THE LD. AUTHORISED REPRESENTATIVE. ACCORDINGLY, THIS ARGUM ENT OF THE A.R IS REJECTED. 8. ANOTHER ARGUMENT MADE BY THE LD. AUTHORISED REPRESENTATIVE IS THAT THE AMOUNT OF PAYMENT OF DEE MED DIVIDEND CANNOT EXCEED ACCUMULATED PROFITS OF THE COMPANY A S ON DATE OF THE PAYMENT. IN OTHER WORDS WHEN PAYMENT IS MADE, THE ACCUMULATED PROFIT TO BE NOTIONALLY REDUCED BY THE AMOUNT OF AL L LOANS AND LAST PAYMENT WILL BE DEEMED TO BE DIVIDEND ONLY TO THE E XTENT OF BALANCE ACCUMULATED PROFIT. IF SOME AMOUNT IS REPAID BY TH E SHAREHOLDER OR BY THE COMPANY TO WHICH IT WAS ADVANCED, THE AMOUNT SO REPAID CANNOT GO TO THE PART OF THE ACCUMULATED PROFIT. THIS ARG UMENT OF THE ITA NO.462/MDS/2013. :- 14 - : ASSESSEE WAS EXAMINED BY SUPREME COURT IN THE CAS E OF P. SARADA VS. CIT 229 ITR 444 , AND OBSERVED HEREUNDER:- IN THE INSTANT CASE, EXCESS WITHDRAWALS WERE MADE BY THE ASSESSEE ON VARIOUS DATES BETWEEN JULY 3, 1972, AND MARCH 22, 1973, WHEN THE ACCOUNT OF MAHESH HAD NOT BEEN DEBITED. THE ASSESSEES ACCOUNT WAS CONSEQUENTLY OVERDRAWN. ON THE VERY LAST DAY OF THE ACCOUNTING YEAR SOME ADJUSTMENT WAS MADE BUT THAT WILL NOT ALTER THE POSITION THAT THE ASSESSEE HAD D RAWN A TOTAL AMOUNT OF RS. 93,027 BETWEEN JULY 3, 1972, TO MARCH 22, 1973, FROM THE COMPANY WHEN HER ACCOUNT WITH THE COMPANY DID NOT HAVE ANY CREDIT BALANCE AT ALL. THAT MEANS THESE ADVANCES MADE BY THE COMPANY TO THE ASSESSEE WILL HAVE TO BE TREATED AS DEEMED DIVIDENDS PAID ON THE DATES WHEN THE WITHDRAWALS WE RE ALLOWED TO BE MADE. SUBSEQUENT ADJUSTMENT OF THE ACCOUNT MADE ON THE VERY LAST DAY OF THE ACCOUNTING YEAR WILL NOT ALTER THE POSITION THAT THE ASSESSEE HAD RECEIVED NOTIONAL DIVIDENDS ON THE VARIOUS DATES WH EN SHE WITHDREW THE AFORESAID AMOUNTS FROM THE COMPANY . A POINT WAS TAKEN THAT THE HIGH COURT HAS REAPPRAIS ED THE FACTS AND HAD DISBELIEVED THE LETTER DATED APRI L 3, 1972, WHICH WAS ACCEPTED AS GENUINE BY THE TRIBUNAL . IT WAS CONTENDED THAT IT WAS NOT OPEN TO THE HIGH C OURT TO DOUBT THIS LETTER. THIS ARGUMENT 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 HE R 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 ACCOU NTING YEAR. ON THESE FACTS FOUND BY THE TRIBUNAL, THE HIG H COURT CONCLUDED THAT IT WAS NOT POSSIBLE TO HOLD TH AT THE ASSESSEE WAS PAID MONEY OUT OF THE FUNDS LYING TO THE CREDIT OF MAHESH. THE HIGH COURT DECIDED THE CA SE ENTIRELY ON THE BASIS OF THE FACTS FOUND BY THE TRIBUNAL. ITA NO.462/MDS/2013. :- 15 - : 8.1 AS PER THE ABOVE, WITHDRAWALS MADE BY THE SHAR EHOLDER FROM THE COMPANY ON VARIOUS DATES AMOUNTED TO GRANT OF L OAN OR ADVANCE WITHIN THE MEANING OF S. 2(22)(E) EVEN THOUGH ULTIM ATELY 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 A NY AMOUNT PAID TO ASSESSEE BY COMPANY DURING THE RELEVANT YEAR, TH AT IS LESS THAN AMOUNT REPAID BY ASSESSEE IN A SAME YEAR, SHALL BE DEEMED TO BE CONSTRUED AS 'DIVIDEND' FOR ALL PURPOSES. FURTHER I T IS NOTED BY THE JURISDICTIONAL HIGH COURT IN THAT CASE THAT WHILE C OMPUTING THE DEEMED DIVIDEND ONE HAS TO BE CONSIDERED THE PAYMENTS MADE BY THE ASSESSEE TO THE COMPANY. HENCE IT IS OBSERVED BY THE COURT T HAT EACH DEBIT WILL HAVE TO BE INDIVIDUALLY CONSIDERED BECAUSE IT MAY O R MAY NOT BE A LOAN. THE AO IS, THEREFORE, DIRECTED TO VERIFY THE EACH DEBIT ENTRY ON THE AFORESAID LOAN AND TREAT ONLY THE EXCESS AMOUNT OF DEBIT IN THE BOOKS OF ACCOUNTS OF THE COMPANY AS A DEEMED DIVIDE ND U/S.2(22)(E) OF THE ACT. IN OTHER WORDS, ONLY THOSE NET AMOUNTS WHICH REFLECTED THE DEBIT SIDE OF THE BOOKS OF ACCOUNTS OF THE ASSESSEE FALLING UNDER THE DEFINITION OF THE LOANS AND ADVANCES IN THE RELEVAN T ASSESSMENT YEARS WILL BE ENTITLED TO BE TAKEN AS A DEEMED DIVIDEND. IN OTHER WORDS, THE AO HAS TO COMPUTE THE DAY TO DAY DEBIT BALANCE OF T HIS ASSESSEE IN THE BOOKS OF ACCOUNTS OF THE COMPANY AND COMPARE WITH I T, ACCUMULATED ITA NO.462/MDS/2013. :- 16 - : PROFIT IN RESPECT OF COMPANY AND LOWER OF THESE TO BE CONSIDERED AS DEEMED DIVIDEND IN THE HANDS OF PRESENT ASSESSEE. 8.2 FURTHER, LD. AUTHORISED REPRESENTATIVE MADE AN ARGUMENT THAT ACCUMULATED PROFIT SHALL NOT INCLUDE CURRENT Y EAR PROFIT. FOR THIS PURPOSE, HE PLACED RELIANCE ON THE DECISION OF VIZA G BENCH AND MUMBAI BENCH CITED (SUPA). IT WAS HELD BY THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. V. DAMODARAN, 121 ITR 572 THAT ACCUMULATED PROFIT SHALL NOT INCLUDE CURRENT YEARS PROFIT. SO AS POINTED OUT BY THE LD. AUTHORISED REPRESENTATIVE, T HIS WAS CONSIDERED BY THE VIZAG BENCH OF THE TRIBUNAL IN THE CASE OF P. SATYA PRASAD VS. ITO (141 ITD 403) AND OBSERVED THAT FOR PURPOSES O F S. 2(22)(E), THE ACCUMULATED PROFITS ARE TO BE WORKED OUT UP TO THE DATE OF EACH PAYMENT/ADVANCEMENT OF LOAN. THAT THERE IS A DISTI NCTION BETWEEN THE 'ACCUMULATED PROFITS' OF BUSINESS AND THE CURRENT Y EAR'S PROFITS OF BUSINESS, THAT PROFIT OF BUSINESS ACCRUE AT THE END OF THE PREVIOUS YEAR. THAT LOAN OR ADVANCE TREATED AS DEEMED INCOM E UP TO THE DATE OF FRESH LOAN IS TO BE REDUCED FROM THE ACCUMULATED PROFITS. THUS, IT HAS BEEN HELD THAT THE ACCUMULATED PROFITS DO NOT I NCLUDE CURRENT YEAR'S BUSINESS PROFIT, SINCE IT ACCRUES ONLY AT TH E END OF THE YEAR. FURTHER THE LOAN OR ADVANCE TREATED AS DEEMED INCOM E 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 C ASE OF ITA NO.462/MDS/2013. :- 17 - : 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 O F DEEMED DIVIDEND, WHICH SHOULD HAVE BEEN ASSESSED IN ANY OF THE EARLIER YEARS, SHOULD ALSO BE REDUCED FROM THE ACCU MULATED PROFIT EVEN IF IT WAS NOT ASSESSED AS DEEMED DIVIDEND IN THAT Y EAR. THIS VIEW IS FORTIFIED BY THE DECISION RENDERED BY THE COCHIN BE NCH 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 A REA OF OPERATION OF EXPLANATION 2 TO SEC. 2(22)(E) OF THE ACT AND WE HA VE ALSO CONCURRED WITH THE VIEW THAT THE ACCUMULATED PROFIT DOES NOT INCLUDE CURRENT YEARS PROFIT FROM BUSINESS. ACCORDINGLY, IN OUR VI EW, 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 H ELD IN THE CASE OF MISS P. SARADA (SUPRA), THAT THE LEGAL FICTION E MBODIED IN SEC. 2(22)(E) COMES INTO PLAY AS SOON AS MONIES WERE PAI D BY A COMPANY. THE VERY SAME VIEW WAS EXPRESSED BY THE APEX COURT IN THE CASE OF SMT TARULATA SHYAM VS. CIT [L977] 108 ITR 345. THE COCHIN BENCH OF TRIBUNAL IN THE CASE OF GORDHANDAS KHIMJI (SUPRA) C ONSIDERED THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TA RULATA SHYAM ITA NO.462/MDS/2013. :- 18 - : (SUPRA) AND HAS EXPRESSED THE VIEW THAT THE DEEMED DIVIDEND ASSESSABLE IN ANY OF THE EARLIER YEARS HAS TO BE RE DUCED 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 CREATE D BY S. 2(6A)(E) WOULD COME INTO OPERATION AT THE TIME OF P AYMENT OF ADVANCE OR LOAN TO A SHAREHOLDER AND TAX IS ATTR ACTED TO THE LOAN OR ADVANCE TO THE EXTENT TO WHICH THE COMP ANY POSSESSES ACCUMULATED PROFITS THE MOMENT THE LOAN O R ADVANCE IS RECEIVED, AND EVEN IF THE LOAN OR ADVANC E 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 LANGUA GE OF THE SECTION IS CLEAR AND UNAMBIGUOUS AND THAT THERE IS NO SCOPE OF IMPORTING INTO THE STATUTE WORDS WHICH ARE NOT T HERE AND THAT ONCE IT IS SHOWN THAT THE CASE OF THE ASSESSEE COMES WITHIN THE LETTER OF THE LAW, HE MUST BE TAXED, HOW EVER GREAT THE HARDSHIP MAY APPEAR TO THE JUDICIAL MIND TO BE. ... 13. NONE OF THE DISCUSSIONS REFERRED TO ABOVE ARE D IRECTLY ON THE POINT. BUT THE LINE OF DISCUSSION IN THOSE DECI SIONS 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 WHI CH THE DEPARTMENT CAN TREAT THE LOANS AND ADVANCES AS DEEM ED 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 A RE CONSTITUTED AS DIVIDENDS. THE MOMENT AN ADVANCE OR LOAN SATISFYING THE CONDITIONS OF THE SECTION IS MADE, I T 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 DEEME D DIVIDEND HAS TO BE WORKED OUT ON THE BASIS OF THE C ONDITIONS OBTAINING AT THE TIME WHEN THE LOANS OR ADVANCES AR E MADE. IN THE CASE OF SMT. TARULATA SHYAM (SUPRA), THE SUP REME COURT OBSERVED THAT THE STATUTORY FICTION CREATED B Y THE SECTION WOULD COME INTO OPERATION AT THE TIME OF TH E PAYMENT OF ADVANCE OR LOAN. SIMILARLY, THE OBSERVAT IONS IN THE CASE OF P.K. BADANI (SUPRA) (76 ITR 369) (BOM) WOULD INDICATE THAT THE ACCUMULATED PROFITS SHOULD BE RED UCED BY ITA NO.462/MDS/2013. :- 19 - : THE AMOUNT OF LOAN OR ADVANCE, IMMEDIATELY ON MAKIN G SUCH LOAN OR ADVANCE. ONLY IF THIS IS DONE, THE SUBSEQUE NT LOANS OR ADVANCES CAN BE TESTED BY VERIFYING THE ACCUMULA TED PROFITS ON THE DATES ON WHICH THEY ARE MADE. AS POI NTED OUT IN THE DECISION REFERRED ABOVE, THE REPAYMENTS OF T HE ADVANCES OR LOANS WILL HAVE NO EFFECT EITHER ON THE ADVANCES OR LOAN TREATED AS DIVIDEND OR ON THE ACCUMULATED P ROFITS AS REDUCED BY SUCH ADVANCE OR LOAN. AS SUCH, IT DOES N OT SEEM TO BE NEITHER PRACTICABLE NOR PROPER TO POSTPONE TH E WHOLE PROCESS OF ASCERTAINING THE ACCUMULATED PROFITS TIL L THE DEPARTMENT CHOOSES TO TREAT A PARTICULAR ADVANCE AS DEEMED DIVIDEND. IF THE CONTENTION OF THE DEPARTMENT IS AC CEPTED, THEN IF THE ITO IGNORES THE ADVANCES IN EARLIER YEA RS AND THEN GOES DOWN ON THE ASSESSEE IN AN ASSESSMENT YEA R IN WHICH HE HAS DRAWN SUBSTANTIAL ADVANCES, IT WILL AM OUNT TO ALLOWING THE DEPARTMENT TO TAKE ADVANTAGE OF ITS OM ISSIONS 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 INT O DEEMED DIVIDENDS. AS RIGHTLY POINTED OUT BY THE CIT(A), TH E 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 REDU CED BY THE EARLIER LOANS OR ADVANCES IN SPITE OF THE FACT THAT THEY WERE NOT ASSESSED TO TAX AS DEEMED DIVIDENDS BY THE DEPARTMENT.' 8.3 IT IS A WELL SETTLED PROPOSITION OF LAW THAT A N INCOME PERTAINING TO A PARTICULAR ASSESSMENT YEAR CAN BE ASSESSED IN THAT YEAR ONLY. FOR EXAMPLE, THE INCOME PERTAINING TO THE ASSESSMENT YE AR 2006-07 CAN BE ASSESSED ONLY IN THAT YEAR, I.E., THE SAID INCOM E CANNOT BE ASSESSED IN ANY OTHER ASSESSMENT YEAR, EVEN IF THE TAX AUTHO RITIES 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. ACCORDING LY, WE ARE INCLINED TO FOLLOW THE DECISION RENDERED BY THE COCHIN BENCH IN THE CASE REFERRED SUPRA. ACCORDINGLY, THE LOAN GIVEN BY THE COMPANY ONLY IN THE ITA NO.462/MDS/2013. :- 20 - : IMMEDIATE PRECEDING YEAR, I.E., ASSESSMENT YEAR 200 7-08, SHOULD BE ASSESSED AS DEEMED DIVIDEND IN ACCORDANCE WITH THE PROVISIONS OF SEC. 2(22)(E) IN THAT YEAR. THE DEEMED DIVIDEND SO ASSES SABLE IN THAT EARLIER ASSESSMENT YEAR IS LIABLE TO BE DEDUCTED FR OM THE AMOUNT OF 'ACCUMULATED PROFITS' FOR THE PURPOSE OF COMPUTING THE DEEMED DIVIDEND DURING THE YEAR UNDER CONSIDERATION. 8.4 FURTHER, ARGUMENT OF THE LD. AUTHORIZED REPRES ENTATIVE IS THAT DIVIDEND DECLARED AND PAID BY THE COMPANY IS REQUIR ED TO BE REDUCED FROM THE ACCUMULATED PROFIT AS WELL AS FROM DEEMED DIVIDEND AND STATED THAT NO SUCH SET OFF WAS MADE BY THE LOWER A UTHORITIES. AS PER CLAUSE (III) TO SEC. 2(22)(E) OF THE ACT DEEMED DIV IDEND DOES NOT INCLUDE ANY DIVIDEND PAID BY A COMPANY, WHICH IS SE T OFF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OR ANY SUM PA ID 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 B Y 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 ORDE R THAT THE ARGUMENT OF THE ASSESSEE THAT DIVIDEND DISTRIBUTION TAX WAS NOT TAKEN INTO CONSIDERATION DOES NOT HAVE ANY FORCE AS THE S AID TAX WAS NOT INTO EXISTENCE AT ALL WHEN THE SEC.2(22)(E) CORRESPONDI NG TO SEC.2(6A)(E) OF INCOME TAX ACT, 1922 WAS INTRODUCED. THE DIVIDE ND DISTRIBUTION TAX HAS BEEN INTRODUCED W.E.F. 01.06.1997 ONLY THEREFOR E PAYMENT OF ITA NO.462/MDS/2013. :- 21 - : DIVIDEND DISTRIBUTION TAX DOES NOT AFFECT THE APPLI CABILITY 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 TRIBUN AL 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 DIVID END 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 N OTICE THAT THE ASSESSEE HAS FURNISHED A COPY OF THE LOAN ACCOUNT O F 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) APP EARS TO BE AGAINST THE FACTS AVAILABLE ON RECORD. THERE CANNOT BE ANY DISPUTE THAT THE DIVIDEND AMOUNT SO SET OFF SHALL HAVE TO BE DED UCTED FROM THE DEEMED DIVIDEND AMOUNT COMPUTED ABOVE. HOWEVER, THE OBSERVATIONS MADE BY LD CIT(A) SHOW THAT THE TAX AUTHORITIES HAV E NOT EXAMINED THIS ASPECT PROPERLY. HENCE, THE FACTUAL ASPECT ON THIS MATTER, IN OUR VIEW, REQUIRES VERIFICATION PREFERABLY AT THE END O F THE ASSESSING OFFICER. IN VIEW OF THE ABOVE, DEEMED DIVIDEND DOES NOT INCL UDE ANY DIVIDEND PAID BY THE COMPANY IN THE ASSESSMENT YEAR UNDER CO NSIDERATION AND IT IS TO BE SET OFF AGAINST THE AMOUNT OF DEEMED DI VIDEND. HENCE, THE FACTUAL ASPECT ON THIS MATTER REQUIRES VERIFICATION FROM THE END OF THE LD. ASSESSING OFFICER. ACCORDINGLY ON THE MATTER O F ACCUMULATED PROFITS AND DEEMED DIVIDEND COMPUTED BY THE LOWER AUTHORITI ES, WHICH ARE ITA NO.462/MDS/2013. :- 22 - : NOT IN ACCORDANCE WITH THE PROVISIONS OF SEC. 2(22) (E) OF THE ACT. 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 D ETERMINE THE QUANTUM OF DEEMED DIVIDEND AS DISCUSSED ABOVE SPECI FICALLY WITH REFERENCE TO SEC. 2(22)(E)(III) OF THE ACT AND TO C ONSIDER THE ACCUMULATED PROFIT WHICH DO NOT INCLUDE CURRENT YEA RS 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 ASS ESSEE BY THE ASSESSING OFFICER. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON 04 TH SEPTEMBER, 2017, AT CHENNAI. SD/ - SD/ - ( . . . ! ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ! ) (CHANDRA POOJARI) ' / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED: 04 TH SEPTEMBER, 2017. KV/KSSUNDARAM %&'' ()'*) / COPY TO: ' 1 . / APPELLANT 3. ' +',! / CIT(A) 5. )-.' / / DR 2. / RESPONDENT 4. ' + / CIT 6. .0'1 / GF