Subject: Brief facts of the case are that the assessee filed his return of income for the AY. 2012-13,
Referred Sections:
Section 2(22)(e) of the Act
Section 2(22)(e) of LT. Act 1961,
Referred Cases / Judgments
ACIT Vs. Gautam Sarabhai Trust [2375 TTJ 151] (Ahd.)
Kedarnath Jute Mfg. Co. Ltd. vs. CIT (supra)
CIT vs. G. Narasimhan (1979) 9 CTR (Mad) 210 : (1979) 118 ITR 60 (Mad)
CIT vs. V. Damodaran (1972) 85 ITR 590
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
I.T.A. No. 1536/HYD/2018
Assessment Year: 2012-13
Shyamsunder Rao Gone, Income Tax Officer,
Manchiryal, ADILABAD Vs Ward-17(3),
[PAN: AFSPG8207N] HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri K.C. Devdas, AR
For Revenue : Shri Nilanjan Dey, DR
Date of Hearing : 03-04-2019
Date of Pronouncement : 18-04-2019
ORDER
PER S. RIFAUR RAHMAN, A.M. :
This appeal filed by the assessee is directed against the
order of the Commissioner of Income Tax (Appeals)-5,
Hyderabad, dated 07-06-2018.
2. Brief facts of the case are that the assessee filed his
return of income for the AY. 2012-13, declaring income of Rs.
5,54,570/- and the return was processed u/s. 143(1) of the
Income Tax Act [Act] on 28-10-2013.
3. During the assessment proceedings in the case of M/s.
United India Construction Co. (P) Ltd., for the AY. 2012-13, it
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was noticed that the company has advanced loans and
advances of Rs. 18,61,380/- to the assessee, who is holding
the position of Joint Managing Director in the above said
company. As per the return filed by the company, the
shareholdings of the assessee are 22.5% of the existing shares
of the company. On the date of Balance sheet, the company
has a reserve of Rs. 14,99,138/- and the book profit of the
relevant year is Rs. 14,55,238/-. Therefore, the provisions of
Section 2(22)(e) of the Act are attracted in the case of assessee.
Accordingly, assessment was reopened with a prior approval of
the authorities. Accordingly, notices u/s. 148 and 142(1) of the
Act were issued.
4. In response, the AR of the assessee appeared and
submitted that there will not be any reserves from the financial
years 2009-10, 2010-11 and 2011-12 because of MAT
liabilities to the extent of Rs. 1.10 Crores paid in the year
2016-17 against the demand raised in the orders passed u/s.
154 of the Act and he requested not to charge any deemed
dividend and also further stated that reserves shown in the
Balance Sheet of FY. 2011-12 relevant for AY 2012-13not
deducted by taxes of Rs. 4,50,132/- paid during the year.
4.1. The Assessing Officer rejected the contentions of the AR
and opined that the payment towards MAT liabilities arising in
subsequent years and by the time the books of account are
already finalised for the FYs. 2009-10, 2010-11 and 2011-12
as per the Companies Act. However, he considered tax
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deduction paid of Rs. 4,50,132/- from reserved which were
paid during the year. Accordingly, he made the addition of Rs.
10,49,006/- as deemed dividend u/s. 2(22)(e) of the Act.
4.2. Aggrieved with the above order, assessee preferred an
appeal before the CIT(A).
5. Before the CIT(A), assessee made the similar
submissions, which were made before the Assessing Officer
along with appeal papers. Ld.CIT(A) dismissed the appeal of
assessee due to non-compliance and non-representation of
assessee's appeal before him and observed as below:
"6.4 The appellant owns 22.5% shares In the company
Mis United India construction Pvt. Ltd. and it has reserves
as on 31.03.2012 at Rs. 14,99,138/-. The appellant has
been advanced loan of Rs. 18,61,380/- during the year.
The AO noted that all the conditions of deemed dividend ul
s. 2(22}(e) are satisfied as the loan has been given to a
shareholder by a company in which public arc not
substantially interested and having reserves more than
the quantum of loan advanced to the appellant.
The AR stated that the reserves will not exist as there is a
subsequent liability of MAT which has not been charged to
the reserves of the company. The AO noted that at the time
of finalization of the accounts for the year ended
31.03.2012 no such charge was made and the liability
has arisen in the subsequent years.
The contention of the AO is correct and the Reserves and
Surplus are to be seen as provided u! s. 2(22)(e) of the Act
in the term accumulated profits which are given as per
explanation 1 and explanation 2 of the said subsection
and nowhere such clarification is provided or intended as
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contended by the AR. Therefore, a subsequent charge of
liability after giving loans and advances and in a
subsequent year will not have a bearing on the year in
which such deemed dividend has arisen
Therefore, the contentions of the appellant as submitted in
the facts of the case are rejected. It has already been
stated that none attended in spite of providing opportunity
on 03.04.2018, 11.04.2018, 09.05.2018 and 28.05.2018
leaving the matter to be decided as per the submissions
made in the form of appeal. There is nothing as such
which can be supplemented as prima facie the matter is
based on facts and figures and the assessee's contention
is devoid of facts and merits in the case."
In view of the above the ground no. 1 and 2 are dismissed
accordingly.
5.1. Aggrieved with the said order, assessee preferred an
appeal before us, raising the following Grounds of Appeal:
"1 Both AO & Learned CIT (A)-5 erred in law and facts of
the case.
2. The Hon'ble CIT (A)-5 ought to have appreciated the
facts and law while dismissing the appeal.
3. The Section 2(22)(e) of LT. Act 1961, by the AO is
arbitrary and liable to be deleted on account of existing
tax liabilities because of which there were no free reserves
as on that date of31.03.2012.
4. Any other ground at the time of hearing."
6. Before us, Ld.AR submitted that the company M/s
United India Construction Co. (P) Ltd. filed return of income
for the AY. 2011-12 and accordingly, return was processed
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u/s. 143(1) of the Act on 17-01-2012, determining tax liability
of Rs. 49,51,416/- and similarly, for the AY. 2010-11,
company filed its return of income on 26-09-2010 and return
was processed u/s. 143(1) of the Act dt. 25-02-2011,
determining the tax liability of Rs. 49,27,550/-. The company
has finalised the Balance Sheet for the AY. 2012-13 and filed
the return of income on 11-08-2012. He submitted that even
though the company was aware of the tax liabilities for the
AYs. 2010-11 and 2011-12, it has not brought the above
liability on record while completing the Balance Sheet on 31-
03-2012. He submitted that by bringing on record the
established liability of income tax, the reserves declared by the
company in the Balance Sheet, which is placed on record at
Pg.14 of the Paper Book will be NIL. Therefore, the reserves of
the company is NIL. The provisions of Section 2(22)(e) of the
Act will not be attracted in the case of assessee. Further, he
submitted that the company has also paid the tax liability for
the AYs. 2010-11 and 2011-12 during the AY. 2016-17. In
support of the above claim, he filed a payment voucher dt. 24-
08-2016, which is placed at Pg. 23 of the Paper Book. In
support of his argument, he relied on the case of ACIT Vs.
Gautam Sarabhai Trust [2375 TTJ 151] (Ahd.)
7. On the other hand, Ld. DR submitted that the assessee
has not adjusted the determined the liability in the Balance
Sheet prepared for the AY. 2012-13. Assessing Officer will
only consider the Balance Sheet, which is placed before him.
As per which, assessee is having an accumulated reserve and
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Assessing Officer has rightly invoked the provisions of Section
2(22)(e) of the Act. He further submitted that the Ld.CIT(A)
has confirmed the addition by bringing the proper merit in
para 6.4 of his order.
8. Considered the rival submissions and material on record.
We noticed that the company, M/s. United India Construction
Co. (P) Ltd., filed its return of income for the AY. 2012-13 and
completed the Balance sheet with the accumulated reserve to
the extent of Rs. 14,99,138/-. During the year, assessee has
taken an advance over and above the accumulated profit
declared in the Balance sheet of the company, M/s. United
India Construction Co. (P) Ltd. There is no doubt that the
conditions of Section 2(22)(e) of the Act satisfies in the given
case. However, we noticed that the company, M/s. United
India Construction Co. (P) Ltd., no doubt declared favourable
accumulated profit in the Balance Sheet. However, it has
accumulated tax liability as determined by the department
u/s. 143(1) of the Act on the Balance Sheet date. Since it is an
established tax liability and as per the decision relied on by the
assessee, the department should consider the above tax
liability while considering the status of the accumulated profit
of the assessee in order to initiate any proceedings u/s.
2(22)(e) of the Act. The relevant portion in the case of M/s
Gautam Sarabhai (supra), on which reliance placed by the
Ld. AR, is reproduced below:
"41. We have considered the matter and are inclined to accept the
contention of the learned counsel for deduction of the tax liabilities of
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Rs. 17,38,04,000 as well as Rs. 23,47,000. The various decisions cited
by the learned counsel fully support the claim for deduction in respect of
tax liabilities for the purpose of ascertaining the profits of the company.
The Supreme Court has held in Kedarnath Jute Mfg. Co. Ltd. vs. CIT
(supra) :
"Whether the assessee is entitled to a particular deduction or not will
depend on the provision of law relating thereto and not on the view
which the assessee might take of his rights; nor can the existence or
absence of entries in his books of account be decisive or conclusive in
the matter."
The decision of Gujarat High Court in Nagri Mills Co. Ltd.'s case supra
cited by the learned counsel further supports the claim for deduction.
The Gujarat High Court held that the assessee was entitled to deduction
of liability on account of gratuity even though provision for the liability
has been made by way of a foot note in the balance sheet and this was
in accordance with the accountancy practice". We have already held
above that accumulated profits are to be construed as commercial
profits for the purposes of s. 2(22) of the IT Act. Since tax liabilities
have been created by the IT authorities and assessment orders as well
as demand notices in support of the said liabilities have been produced
during the assessment proceedings, such liabilities are to be taken note
of, even if not provided in the books for ascertaining the accumulated
profits. In the absence of specific reserves for taxation created by the
company those liabilities may have to be met from the general
reserves. In such circumstances to take the figure of general reserve
from the balance sheet for ascertaining the accumulated profits would
not be a correct procedure for the quantum of the general reserves
would not represent the accumulated profits.
42. It has been observed by the Madras High Court in CIT vs. G.
Narasimhan (1979) 9 CTR (Mad) 210 : (1979) 118 ITR 60 (Mad) : --
"If the liabilities that accrued from year to year has been taken into
account year by year and the accumulated profits had been depleted
year by year by writing down the accumulated profits and only the
balance carried over, the total of the accumulated profits in any given
year will be less than in cases where there has been no deduction made
for accrued liabilities."
43. In CIT vs. V. Damodaran (1972) 85 ITR 590 (Ker) cited by the
learned counsel it has been held :
"The expression "accumulated" necessarily relates to profits which could
be accumulated by a company from time to time. This means that all
liabilities due from the company will have to be deducted from the
profits to enable the company to accumulate the same."
Having regard to the aforesaid reasons we hold that deduction is liable
to be made for ascertaining accumulated profits."
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From the above decision, it is clear that the accumulated
profit, which is freely available for distribution of dividend, it
does means that the profit after deduction of all liabilities due
from the company is still profit which is available for
distribution of dividend. The profit which is completely free
from liabilities are the profit available for distribution of
dividend. In the given case, no doubt, it is showing
accumulated profit, but, it has determined tax liabilities, after
deducting the tax liabilities, the profit available in the business
for the purpose of dividend is negative accumulated profit.
Therefore, the accumulated profit for the purpose of section
2(22)(e) is nil, hence, we delete addition u/s 2(22)(e) even
though in this case, all the ingredients available to invoke the
provision but the company does not have enough
accumulated profit for distribution of dividend after deduction
of tax liabilities. Accordingly, ground raised by the assessee is
allowed.
9. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 18th April, 2019
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 18th April, 2019
TNMM / KV
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ITA No. 1536/Hyd/2018
Copy to :
1. Shri Shyamsunder Rao Gone, Adilabad. C/o. Shri K.C.
Devdas, C/o. Sekhar & Co., 133/4, R.P. Road,
Secunderabad.
2. Income Tax Officer, Ward-17(3), Hyderabad.
3. CIT(Appeals)-5, Hyderabad.
4. Pr.CIT-5, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.
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