TMI Blog2014 (11) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... a possible view, based on legal precedents, and the Commissioner is denuded from exercising his power under Section 263 of the Act. Amount assessable u/s 2(22)(e) – Held that:- The total 'accumulated profit' available is ₹ 2,61,19,957/- whereas four shareholders (including the assessee) having voting power more than 10% in the company, have received loans and advances of ₹ 3,81,69,640/-. The entire available 'accumulated profits' amounting to ₹ 2,61,19,957/- has been brought to tax as 'deemed dividend' u/s 2(22)(e) of the Act in the hands of the respective shareholders but as the addition was liable to be restricted to the total amount of 'accumulated profits', the same has been assessed in proportion to their shareholding in the company - the 'accumulated profits' only to the extent of shareholding was brought to tax, leaving an amount of 'accumulated profit' which was available to cover the untaxed amount of loan advanced to the shareholder - there is no justifiable grounds for invoking the jurisdiction u/s 263 – the order of the Commissioner is set aside – Decided in favour of assessee. Condonation of delay – delay of 20 months - Chartered Account filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, assessee was advised not to file an appeal against the said order and assessee was under a bona fide belief that the consequential order of the Assessing Officer under Section 143(3) read with Section 263 of the Act is only appealable before the CIT(A), and that the order passed under Section 263 of the Act cannot be separately challenged. Pursuant to the order of the Commissioner under Section 263 of the Act directing the Assessing Officer to verify the quantum of 'deemed dividend' assessable in the hands of the assessee, the Assessing Officer framed an assessment, which was challenged in appeal before the CIT(A). The CIT(A) merely relied upon on the findings of the Commissioner passed in the order under Section 263 of the Act without considering the merits of the case, and holding that the CIT(A) cannot sit over Commissioner's decision. The said unexpected decision of the CIT(A) made the assessee opt for filing of an appeal before the Tribunal against the order of the Commissioner passed under Section 263 of the Act. The aforesaid fact situation led to the delay in filing of appeal before the Tribunal. 5. The learned counsel for the assessee has explained that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 'deemed dividend' assessable in the hands of the assessee under Section 2(22)(e) of the Act . A perusal of the order of the Commissioner would reveal that the effect of the order was against the assessee; but the assessee misconstrued it by assuming that since the matter was remitted back to the Assessing Officer, he could agitate the consequential order to be passed by the Assessing Officer in the appeal/proceedings before the CIT(A) only. In view of the nature of the order passed by the Commissioner under Section 263 of the Act, assessee entertained a belief that as the original assessment had been set aside, there was no necessity of challenging the order of the Commissioner in appeal before the Tribunal. It was in fact after the decision of his appeal by the CIT(A) against the order of fresh assessment that the assessee realized that it ought to have challenged the order of the Commissioner passed under Section 263 of the Act in appeal before the Tribunal. In our considered opinion, misconstruction of the order of the Commissioner by the assessee and not filing an appeal against it within time is wrong but the same cannot be considered to be mala fide or with any ulte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was liable to be treated as a 'deemed dividend' under Section 2(22)(e) of the Act in the hands of the assessee to the extent the company possessed 'accumulated profits'. Apart from the assessee, there were three other shareholders in the company who had also received loans/advances during the year under consideration from the said company and their respective shareholding also exceeded 10%, the limit prescribed in Section 2(22)(e) of the Act in order to bring such payments within the fold of Section 2(22)(e) of the Act. The other three shareholders and the amount of loans received during the year were (i) Avinash Bhosale- ₹ 1,52,67,276/- (holding 59% shareholding); (ii) Inderkumar Jain- ₹ 76,33,928/- (holding 13% shareholding); (iii) Vimalkumar Jain- ₹ 76,33,928/-(holding 14% shareholding) thereby reflecting total loans of ₹ 3,81,69,640/-received by the shareholders during the year under consideration from the company which fell within the purview of Section 2(22)(e) of the Act in the hands of respective four shareholders, including the assessee. 12. For the A.Y 2003-04 i.e. assessment year under consideration, assessee originally f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e corresponding share of the assessee in the accumulated profits was taken at ₹ 36,56,738/- and accordingly, out of the total loan of ₹ 76,33,928/- received by the assessee from the company during the year under consideration, only an amount of ₹ 36,56,738/-, being his share of the accumulated profits of ₹ 2,61,19,957/-was assessed under Section 2(22)(e) of the Act. The Assessing Officer accepted the said position and in addition further taxed a sum of ₹ 5,92,270/- which according to him was the share of the assessee (i.e. 14%) of the accumulated profits reflected by the 'General Reserve' appearing in the Balance sheet as on 31.03.2003 at ₹ 42,30,501/-. In this manner, the Assessing Officer taxed an amount of ₹ 42,49,008/- under Section 2(22)(e) of the Act in the hands of the assessee. 15. As per the Commissioner, the action of the Assessing Officer in restricting the addition to ₹ 42,49,008/- i.e. 14% of the 'accumulated profits' corresponding to assessee's shareholding of 14% in the company, was incorrect, because there was nothing in Section 2(22)(e) of the Act permitting or prescribing such a restriction. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had explained that the advances or loans made in the earlier years to the shareholders were liable to be reduced from the opening balance of 'accumulated profits' for computing the 'accumulated profits' for the current year. As per the assessee, the loans advanced to the four shareholders in question, and which fell within the purview of Section 2(22)(e) of the Act, up to the preceding assessment year of 2002-03 was ₹ 3,73,65,065/- and therefore, there were no 'accumulated profits' as on 31.03.2002 to be considered for the year under consideration. In other words, the 'accumulated profits' up to 31.03.2002 amounting to ₹ 1,94,62,774/- was to be reduced to the extent of the loans and advances made in the earlier years and after doing so, there did not remain any positive figure. 17. In this context, it is to be noted that under Section 2(22)(e) of the Act, any payment by a company, not being a company in which the public are not substantially interested, of any sum by way of any loan or advance to a shareholder, to the extent that the company possesses 'accumulated profits', is liable to be considered as 'deemed dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,62,774/- while determining the 'accumulated profits' for the purposes of computing the amount assessable under Section 2(22)(e) of the Act. The Action of the Assessing Officer, is in line with the decision of Cochin Bench of the Tribunal in the case of Gordhandas Khimji (supra). In the course of hearing, learned counsel for the assessee pointed out that the subsequent decision of Visakhapatnam Bench of the Tribunal in the case of P. Satya Prasad v. ITO (2012), ITA No.293/Vizag/2012 dated 16.11.2012 and Delhi Bench of the Tribunal in the case of A.R. Chadha Co. India (P.) Ltd. v. Dy. CIT [2010] 133 TTJ (Delhi) 490 also support the proposition accepted by the Assessing Officer. In our considered opinion, the Commissioner has differed with the legal position accepted by the Assessing Officer without any justifiable reason. In fact, it would be in fitness to things to observe that the view adopted by the Assessing Officer on the aforesaid aspect was a possible view which is supported by judicial pronouncements and the Commissioner has not found it erroneous on the basis of any contrary judgment or legal position. Notably, the invoking of Section 263 of the Act can be justifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee canvassed that only one-fourth amount would be liable to be taxed as dividend under Section 2(6A)(e) read with Section 12(IB) of the erstwhile Indian Income-tax Act, 1922. The Hon'ble High Court referred to its earlier judgment in the case of CIT v. Bhagwat Tewari [1976] 105 ITR 62 (Cal.) and observed that ...the entirety of the payment in the hands of the shareholder to the extent the company possesses 'accumulated profit' would be deemed to be dividend in his hands .. . The Hon'ble High Court upheld the position that if a shareholder borrows money and is paid advances or loans in excess of the 'accumulated profit'; then the amount which would be treated as dividend in his hands would be limited to the extent of 'accumulated profit'. If, on the other hand, a shareholder takes advances or loans, which is less than the 'accumulated profit', then the entirety of the loan to the extent the company has 'accumulated profit' would be treated as dividend in the hands of the shareholder. In this manner, the Hon'ble High Court held that the advance made to the assessee to the extent of the 'accumulated profit' of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 21. Similarly in the cases of Smt. Ranjana Jain and Mr. Manish V. Jain vide ITA Nos.196 198/PN/2012, being appeals preferred against the respective orders passed by the Commissioner under Section 263 dated 31.03.2010 it was a common point between the parties that the facts and circumstances are similar to those considered by us in ITA No. 193/PN/2012. Accordingly, our decision in ITA No.193/PN/2012 applies mutatis mutandis in other two appeals also, and they stand allowed. 22. The appeals in ITA Nos. 194, 195 197/PN/2012 arise out of the respective orders of the CIT(A) dated 25.11.2011 which, in turn, have arisen from the order passed by the Assessing Officer dated 30.12.2010 under Section 143(3) read with Section 263 of the Act in consequence to the order passed by the Commissioner under Section 263 dated 31.03.2010. Since the order passed by the Commissioner of Section 263 of the Act has been set aside, the consequential assessments framed by the Assessing Officer also do not survive for consideration, and are accordingly quashed. Therefore, the aforesaid appeals of the assessee are accordingly allowed. 23. Resultantly, all captioned appeals stand allowed. - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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