2001 (3) TMI 229 - AT - Income Tax

Summary

Issues Involved:
1. Deemed Dividend u/s 2(22)(a)
2. Accumulated Profits Calculation
3. Capital Gains Tax

Summary:

1. Deemed Dividend u/s 2(22)(a):
The primary issue was whether the distribution of capital by Alkapuri Investment Pvt. Ltd. (AIPL) to its shareholders due to the reduction of share capital should be treated as deemed dividend u/s 2(22)(a). The Assessing Officer (AO) included the distributed amount as deemed dividend, but the CIT(A) held that in the absence of accumulated profits, no dividend could be deemed. The Tribunal upheld the CIT(A)'s decision, stating that the distribution of capital does not attract the provisions of section 2(22)(a) in the absence of accumulated profits.

2. Accumulated Profits Calculation:
The calculation of accumulated profits was contentious. The AO included various reserves and current profits, while the CIT(A) excluded certain items, resulting in a negative accumulated profit figure. The Tribunal analyzed the nature of accumulated profits, emphasizing that they should be commercial profits, not merely assessable income. The Tribunal excluded capital reserves arising from amalgamations and mergers, as well as certain capital gains, from the accumulated profits. It also allowed deductions for tax liabilities, ultimately concluding that AIPL did not possess accumulated profits as defined u/s 2(22).

3. Capital Gains Tax:
The issue of capital gains tax arose due to the reduction of share capital, which could be considered a transfer u/s 2(47). The CIT(A) ruled against the levy of capital gains without detailed reasoning. The Tribunal referred to Supreme Court decisions, noting that the reduction of share capital constitutes a transfer, potentially attracting capital gains tax. The Tribunal remanded the issue back to the AO for re-examination in light of these principles, directing a reassessment of the capital gains tax liability.

Conclusion:
The Tribunal upheld the CIT(A)'s decision that no deemed dividend is includible due to the absence of accumulated profits. It directed the AO to re-examine the issue of capital gains tax on the reduction of share capital. The appeal of the revenue was partly allowed.