ITO (OSD), CHENNAI V. Shri K.C.Rajan, CHENNAI

ITA 512/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4916 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-06-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 21-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Deemed dividend
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI (BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER) .. I.T.A. NO. 512/MDS/2010 ASSESSMENT YEAR : 2002-03 THE INCOME TAX OFFICER (OSD), COMPANY CIRCLE III(3), CHENNAI 600 034. (APPELLANT) V. SHRI K.C. RAJAN, NO.109/7, ANGAPPA NAICKEN ST., CHENNAI 600 001. PAN : AAEPR0597B (RESPONDENT) APPELLANT BY : SHRI SHAJI P. JACOB RESPONDENT BY : SHRI S. SR IDHAR O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANCE IS THAT CIT(APPEALS) DELETED AN ADDITION FOR DEEMED DIVIDEN D MADE BY THE A.O. UNDER SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER CALLED THE ACT). AS PER THE REVENUE, THE ADVANC E APPEARING IN THE NAME OF ASSESSEE HAD TO BE TREATED AS DEEMED DIVIDE ND BY VIRTUE OF THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CA SE OF WALCHAND & CO. LTD. V. CIT (100 ITR 598). I.T.A. NO. 512/MDS/10 2 2. LEARNED A.R. HAS FILED AN ADJOURNMENT PETITION W HICH IS REJECTED SINCE NO PROPER REASONS HAVE BEEN MENTIONE D FOR SEEKING ADJOURNMENT. 3. SHORT FACTS APROPOS ARE THAT ASSESSEE, A DIRECTO R IN A FIRM CALLED WESTERN AGENCIES (MADRAS) P. LTD., HAD FILED HIS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ADMITTING T OTAL INCOME OF ` 8,04,113/-. M/S WESTERN AGENCIES (MADRAS) P. LTD. WHICH WAS A CLOSELY HELD COMPANY IN WHICH ASSESSEE WAS A DIRECT OR, HOLDING MORE THAN 10% OF SHARES, HAD ADVANCED LOAN TOTALLIN G TO ` 12,66,140/- TO THE ASSESSEE. ASSESSEE WAS PUT ON N OTICE BY THE A.O. THAT PROVISIONS OF SECTION 2(22)(E) OF THE ACT WOUL D BE ATTRACTED SINCE M/S WESTERN AGENCIES (MADRAS) P. LTD. WAS HAVING AC CUMULATED PROFITS IN EXCESS OF THE LOAN AMOUNT. REPLY OF THE ASSESSEE WAS THAT THE SECTION 2(22)(E) WOULD APPLY ONLY WHEN THERE WE RE ACTUAL ACCUMULATED PROFITS IN THE COMPANY AND THOUGH ITS R ESERVE AS ON 31.3.2002 STOOD AT ` 1,97,33,800/-, IT HAD UNADJUSTED TAX PAYMENTS APPEARING IN ITS BALANCE SHEET ON THE ASSET SIDE OF ` 2,80,74,859/-. AS PER THE ASSESSEE, THESE TAX PAYMENTS OUGHT HAVE DEBITED IN PROFIT AND LOSS ACCOUNT AND IF IT HAD BEEN DONE SO, THERE WOULD NOT BE ANY I.T.A. NO. 512/MDS/10 3 ACCUMULATED PROFIT IN M/S WESTERN AGENCIES (MADRAS) P. LTD. LD. A.O., HOWEVER, WAS OF THE OPINION THAT SINCE ` 2,80,74,859/- STATED BY THE ASSESSEE TO BE UNADJUSTED INCOME-TAX PAYMENTS W ERE APPEARING ON ASSET SIDE OF THE BALANCE SHEET OF M/S WESTERN A GENCIES (MADRAS) P. LTD. AS A PART OF ITS SCHEDULE F, IT COULD NOT B E CONSIDERED AS ANY TAX DUES. HE, THEREFORE, WAS OF THE OPINION THAT N O SUCH ADJUSTMENT AS SOUGHT BY THE ASSESSEE COULD BE DONE AND MADE AD DITION IN ASSESSEES HAND OF ` 12,66,140/- CONSIDERING THE LOAN AMOUNT AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 4. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT THE INCOME-TAX PAYMENT OF ` 2,80,74,859/- THOUGH SHOWN IN ASSET SIDE OF THE BALANCE SHEET, SHOULD HAVE BEEN A CTUALLY WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT AND HAD IT BEEN DONE SO, THERE WOULD NOT HAVE BEEN ANY ACCUMULATED PROFITS. AS PER THE ASSESSEE, THE RESERVE AS APPEARING IN THE BALANCE SHEET WAS NOT O NLY NOTIONAL AND IMAGINERY BUT, WAS IN FACT A NEGATIVE FIGURE. LD. CIT(APPEALS), AFTER GOING THROUGH THE SUBMISSION OF THE ASSESSEE, WAS O F THE OPINION THAT IN ORDER TO APPLY SECTION 2(22)(E), THE COMPAN Y WHICH HAD GIVEN LOANS OR ADVANCES TO A SHAREHOLDER SHOULD POSSES AC CUMULATED PROFITS. AS PER LD. CIT(APPEALS), THE COMPANY M/S WESTERN AGENCIES I.T.A. NO. 512/MDS/10 4 (MADRAS) P. LTD. WAS NOT POSSESSING ANY ACCUMULATED PROFITS SINCE THERE WERE UNADJUSTED INCOME-TAX PAYMENTS OF EARLIE R YEARS APPEARING IN THE DEBIT SIDE OF BALANCE SHEET. HE, THEREFORE, WAS OF THE OPINION THAT THERE WAS NO REASON FOR INVOKING S ECTION 2(22)(E) OF THE ACT AND DELETED THE ADDITION MADE IN THE HANDS OF THE ASSESSEE. 5. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF LD. CIT(APPEALS), SUBMITTED THAT IF THE PAYMENT OF ` 2,80,74,859/- AS CLAIMED BY THE ASSESSEE WAS INCOME-TAX DUES, THEN N ECESSARILY IT SHOULD HAVE BEEN GONE INTO THE PROFIT AND LOSS ACCO UNT OF THE ASSESSEE. AS PER THE LEARNED D.R., ASSESSEE IN HIS AUDITED BALANCE SHEET PREPARED IN ACCORDANCE WITH COMPANIES ACT AND WHICH WAS PRESENTED BY IT BEFORE ITS ANNUAL GENERAL MEETING, HAD SHOWN THE INCOME-TAX PAYMENTS ON THE ASSET SIDE OF ITS BALANC E SHEET AND HENCE, COULD NOT NOW BE HEARD TO SAY THAT SUCH PAYM ENTS WERE INCOME-TAX DUES AND IF CONSIDERED, THERE WOULD NOT HAVE BEEN ACCUMULATED PROFITS. RELIANCE WAS PLACED ON THE DE CISION OF HON'BLE APEX COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT (255 ITR 273). 6. PER CONTRA, LEARNED A.R. SUBMITTED THAT THE QUES TION WAS WHETHER THE COMPANY M/S WESTERN AGENCIES (MADRAS) P . LTD. I.T.A. NO. 512/MDS/10 5 POSSESSED ACCUMULATED PROFITS. ACCORDING TO HIM, M /S WESTERN AGENCIES (MADRAS) P. LTD. HAD SUBSTANTIAL PAYMENT O F INCOME-TAX, BUT, WHICH WERE SHOWN AS AN ASSET FORMING PART OF I TS SCHEDULE F OF BALANCE SHEET AS ON 31.3.2002. ACCORDING TO HIM, S UCH TAX PAYMENTS APPEARING ON THE ASSET SIDE WOULD NECESSARILY GO TO REDUCE THE EFFECTIVE SURPLUS AVAILABLE TO THE COMPANY AND JUST BECAUSE THERE WAS A BALANCE IN RESERVE ACCOUNT IT WOULD NOT BE PR OPER TO ASSUME THAT SUCH AMOUNT REPRESENTED ACCUMULATED PROFITS. 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. UNDISPUTED FACTS ARE THAT ASSESSEE WAS HOLDING MORE THAN 10% SHARES OF M/S WESTERN AGENCIES (MADRAS) P. LTD. M/ S WESTERN AGENCIES (MADRAS) P. LTD. WAS A CLOSELY HELD COMPA NY. M/S WESTERN AGENCIES (MADRAS) P. LTD. HAD ADVANCED LOAN S TO ASSESSEE TO THE EXTENT OF ` 12,66,140/-. BALANCE SHEET OF M/S WESTERN AGENCIES (MADRAS) P. LTD. AS ON 31.3.2002 SHOWED A BALANCE UNDER THE HEAD RESERVE OF ` 1,97,33,800/-. THE SAID BALANCE SHEET ALSO SHOWED A SUM OF ` 2,80,74,859/- UNDER THE HEAD UNADJUSTED INCOME-TAX PAYMENTS ON THE ASSET SIDE FORMING PART OF SCHEDULE F. CONTENTION OF THE ASSESSEE IS THAT SUCH UNADJUSTED INCOME-TAX PAYMENTS WERE TO BE CONSIDERED AND SET OFF AGAINST THE RESERVE AND I.T.A. NO. 512/MDS/10 6 IF IT WAS SO DONE, THERE WOULD BE NO BALANCE WHATSO EVER OF ANY ACCUMULATED PROFITS. IN OTHER WORDS, AS PER THE AS SESSEE, THE INCOME-TAX PAYMENTS OUGHT HAVE GONE THROUGH THE PRO FIT AND LOSS ACCOUNT. NEVERTHELESS, IT IS ALSO TRUE THAT ASSESS ING OFFICER HAD TAKEN THESE FIGURES FROM THE AUDITED BALANCE SHEET OF M/S WESTERN AGENCIES (MADRAS) P. LTD. NOW, IF WE LOOK AT THE D EFINITION OF ACCUMULATED PROFITS WHICH IS GIVEN IN EXPLANATION 1 AND 2 TO SUB- SECTION (22) TO SECTION 2, IT APPEARS AS UNDER:- EXPLANATION 1 - THE EXPRESSION ACCUMULATED PROFIT S, WHEREVER IT OCCURS IN THIS CLAUSE, SHALL NOT INCLUD E 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, 1946, OR AFTER THE 31 ST DAY OF MARCH, 1948, AND BEFORE THE 1 ST DAY OF APRIL, 1956. EXPLANATION 2 - THE EXPRESSION ACCUMULATED PROFITS IN SUB-CLAUSES (A), (B), (D) AND (E), SHALL INCLUDE AL L PROFITS OF THE COMPANY UP TO THE DATE OF DISTRIBUTION OR PAYMENT REFERRED TO THOSE IN SUB-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 TI ME BEING IN FORCE, INCLUDE ANY PROFITS OF THE COMPANY PR IOR TO THREE SUCCESSIVE PREVIOUS YEARS IMMEDIATELY PRECEDING THE PREVIOUS YEAR IN WHICH SUCH ACQUISITION TOOK PLACE. I.T.A. NO. 512/MDS/10 7 A READING OF EXPLANATION 2 WOULD SHOW THAT THE ACCU MULATED PROFITS SHOULD INCLUDE ALL PROFITS OF THE COMPANY UP TO THE DATE OF DISTRIBUTION OF DIVIDEND, WHICH INTER ALIA, INCLUDE ADVANCE OR L OAN GIVEN TO A SHAREHOLDER HOLDING NOT LESS THAN 10% OF VOTING POW ER BY VIRTUE OF DEEMING PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE QUESTION IS WHETHER THE TERM ACCUMULATED PROFITS USED IN CLAU SE (E) OF SUB- SECTION (22) OF SECTION 2 CAN BE EQUATED WITH RESER VE. ALL RESERVES APPEARING IN A BALANCE SHEET OF THE COMPANY NEED NO T BE COMING FROM ACCUMULATED PROFITS. ACCUMULATED PROFITS WOUL D BE PROFITS OF THE COMPANY ACCUMULATING ON AN YEAR TO YEAR BASIS TO TH E EXTENT IT REMAINED UNAPPROPRIATED. HERE, THE CLAIM OF THE AS SESSEE IS THAT IT HAD INCOME-TAX DUES WHICH WERE SHOWN BY IT IN THE A SSET SIDE OF THE BALANCE SHEET. THE EXPRESSION ACCUMULATED PROFITS APPEARING IN THE EXPLANATION 1 AND 2 OF SECTION 2(22)(E) OF THE ACT IS NOT LINKED TO SCHEDULE VI OF THE COMPANIES ACT OR PROFIT AND LOSS ACCOUNT AND BALANCE SHEET PREPARED UNDER THE COMPANIES ACT. SO , THE ACCUMULATED PROFITS MENTIONED IN SECTION 2(22)(E) OF THE ACT HAS TO BE CONSTRUED AS AGGREGATE OF PROFITS AVAILABLE TO A COMPANY UP TO THE DATE ON WHICH IT HAD GIVEN ADVANCE OR LOANS TO A SU BSTANTIAL SHAREHOLDER. NATURALLY SUCH PROFITS WOULD HAVE TO BE CALCULATED I.T.A. NO. 512/MDS/10 8 CONSIDERING ALL EXPENSES INCLUDING INCOME-TAX OUTGO ES. THE LEGISLATIVE INTENTION BEHIND DEEMING ADVANCES AND L OANS GIVEN BY A CLOSELY HELD COMPANY TO A SUBSTANTIAL SHAREHOLDER A S DEEMED DIVIDEND WAS TO PUT A STOP TO THE MISCHIEF OF CLOSE LY HELD COMPANIES FOLLOWING A POLICY OF NOT DECLARING DIVIDEND AND IN THE COURSE THEREOF ACCUMULATING SUBSTANTIAL RESERVES AND DISTRIBUTING ITS PROFITS AS LOANS TO ITS SHAREHOLDERS. AS A NATURAL COROLLARY, WHEN THERE ARE NO ACCUMULATED PROFITS, DEEMING PROVISION MENTIONED IN SECTION 2(22)(E) WOULD NOT HAVE ANY APPLICATION. RELIANCE PLACED BY LEARNED D.R. ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF A POLLO TYRES LTD. (SUPRA) IS NOT APPROPRIATE, IN OUR OPINION. THERE, HON'BLE APEX COURT WAS CONSIDERING A QUESTION REGARDING ADJUSTMENT TO BE CARRIED OUT ON THE BOOK PROFITS FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY UNDER SECTION 115 OF THE ACT. SECTIONS 115, 115JA AND 11 5JB OF THE ACT, ALL CLEARLY MENTIONED THAT SUCH ADJUSTMENTS HAD TO START FROM THE BOOK PROFITS AS PER THE PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT, 1956. AS AGAINST THIS, ACCUMULATED PROFITS MENTI ONED IN EXPLANATION 1 AND 2 OF SECTION 2(22) OF THE ACT HAS NOT BEEN LINKED BY THE LEGISLATURE TO THE COMPANIES ACT AT ALL. HE NCE, IT WOULD NOT BE I.T.A. NO. 512/MDS/10 9 POSSIBLE TO COME TO A CONCLUSION THAT ACCUMULATED PROFITS MENTIONED IN SECTION 2(22)(E) OF THE ACT WOULD BE A LWAYS EQUAL TO RESERVE AND SURPLUS MENTIONED IN A BALANCE SHEET PR EPARED UNDER THE COMPANIES ACT. NO COMPANY WOULD HAVE MADE INCO ME-TAX PAYMENTS TOTALLING TO A SUBSTANTIAL AMOUNT OF ` 2,80,74,859/- WITHOUT ANY TAX LIABILITY BEING FASTENED ON IT AND TO PRESU ME THAT SUCH PAYMENTS WERE MADE WITHOUT ANY LIABILITY OR DEMAND WOULD BE FOOLHARDY. SO, EFFECTIVELY HERE AGAINST AN INCOME- TAX PAYMENTS OF ` 2,80,74,859/- , THE RESERVE OF THE COMPANY STOOD AT ` 1,97,33,800/-. RESULTANTLY, THE ACCUMULATED PROFITS WOULD EFFECTIV ELY BE A NEGATIVE FIGURE ONLY. IN OUR OPINION, IN SUCH CIRCUMSTANCES , APPLICATION OF SECTION 2(22)(E) OF THE ACT, ON LOANS AND ADVANCES GIVEN TO A SUBSTANTIAL SHAREHOLDER WILL NOT BE CORRECT. AS FO R THE RELIANCE PLACED BY THE LEARNED D.R. ON THE DECISION OF HON'BLE BOMB AY HIGH COURT IN THE CASE OF WALCHAND & CO. LTD. (SUPRA), THERE THE QUESTION WAS REGARDING TREATMENT OF LOAN/ADVANCE TO A SHAREHOLDE R, WHICH WAS REPAID BY SUCH SHAREHOLDER WITH INTEREST WITHIN A S HORT PERIOD OF 23 DAYS. THE FACTS OF THAT CASE ARE NOT AT ALL TALLYI NG WITH THE ISSUE BEFORE US. WE ARE, THEREFORE, OF THE OPINION THAT LD. CIT(APPEALS) HAD I.T.A. NO. 512/MDS/10 10 RIGHTLY DELETED THE ADDITION MADE UNDER SECTION 2(2 2)(E) OF THE ACT. NO INTERFERENCE IS CALLED FOR. 8. IN THE RESULT, APPEAL FILED BY REVENUE STANDS DI SMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 17 TH JUNE, 2011. SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 17 TH JUNE, 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-III, CHENNAI (4) CIT, CHENNAI-I, CHENNAI (5) D.R. (6) GUARD FILE