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2008 (4) TMI 349 - AT - Income TaxDetermination of Accumulated Profits - share premium should be excluded from the accumulated profits? - Addition on account of deemed dividend under s. 2(22)(e) - contention of the Revenue is that "accumulated profits" includes all profits, including capital profits and is not restricted to commercial or revenue profits - no exclusion was provided for capital profits expressly - HELD THAT:- Sec. 78(1) of the Companies Act deals with the application of premium received on issue of shares. It says that the premium received shall be transferred to a separate account styled "the share premium account" and further says that the provisions of the Companies Act relating to the reduction of the share capital of the company shall apply as if the share premium account were paid up share capital of the company. Sub-s. (2) mentions five purposes for which alone the share premium account may be applied without attracting the provisions of the Companies Act relating to the reduction of the share capital. Except in the five cases, any other application of proceeds of the share premium account will be treated as a reduction of the company's share capital and the provisions of the Companies Act dealing with this subject stand attracted. The share premium account cannot be used otherwise than for the specific purposes mentioned above and this position has been recognised by the Supreme Court in CIT vs. Allahabad Bank Ltd. [1969 (2) TMI 5 - SUPREME COURT]. In P.K. Badiani vs. CIT [1976 (9) TMI 3 - SUPREME COURT], it was held by the Supreme Court that the term "profits" occurring in s. 2(6A)(e) of the 1922 Act means profits in the commercial sense, that is to say, the profits made by the company in the real and true sense of the term. The share premium account cannot be stated to be commercial profits in the true sense of the term, having regard to the provisions of the Companies Act referred. Applying the judgment in Badiani's case, it was held in Urmila Ramesh[1998 (1) TMI 2 - SUPREME COURT] that where assets of the company were sold at a price less than the purchase price, the amount so received, apart from being in the nature of return of capital, cannot represent profits of the company. Therefore, we are in agreement with the decision of the CIT(A) that the amount of Rs. 1,85,821 alone out of the amount of Rs. 25,42,772 can be assessed as deemed dividend under s. 2(22)(e) of the IT Act. We affirm his order on this point and dismiss the appeal filed by the Revenue with no order as to costs.
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