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2016 (1) TMI 931 - ITAT KOLKATA

2016 (1) TMI 931 - ITAT KOLKATA - TMI - Deemed dividend u/s 2(22)(e) - applicability of clubbing provision for deemed income - whether the exempt capital gain is to be excluded from accumulated profits for the purpose of section 2(22)(e)? - whether the provisions of section 2(22)(e) of the Act could be invoked on the family members of the assessee who are not shareholders in the lending company and accordingly whether clubbing provision would be applicable for deemed income? - Held that:- The le .....

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f calculation of dividend out of accumulated profits, if any.

The said Explanation nowhere contemplates to bring within the ambit of expression ‘accumulated profits’, any capital profits which are not liable to capital gains tax. Accordingly, even going by the provisions of the statute, it can safely be concluded that the capital gains could be included for reckoning the accumulated profits only when the said capital gains has been duly subjected to tax.

In the instant ca .....

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Thus we hold that the exempted capital gains shall not enter the stream of the expression ‘accumulated profits’ and the company BKFCPL has got only negative accumulated profits after exclusion of exempted capital gains and hence the provisions of section 2(22)(e) of the Act cannot be invoked in the facts and circumstances of the case.- Decided in favour of assessee. - I.T.A No. 1703/Kol/2014, I.T.A No. 2140/Kol/2010 - Dated:- 20-11-2015 - Shri M. Balaganesh, Accountant Member, and Shri S. .....

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inafter referred to as the Act ). 2. Both the appeals arise out of the common order of the Learned CIT(A) and the issues involved are identical and they are taken up together for adjudication herein and disposed off by a common order for the sake of convenience. 3. The only issue to be decided in the appeal of the assessee is as to whether the exempt capital gain is to be excluded from accumulated profits for the purpose of section 2(22)(e) of the Act. 3.1 The only issue to be decided in the app .....

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company holding 41.84% of shares. The following monies were advanced by the said company BKFCPL to the assessee and his family members :- Manoj Murarka (Assessee) - 73,05,169 Nishita Murarka (Daughter) - 25,90,000 Saahil Murarka (Son) - 70,07,000 Swapana Murarka (Wife) - 17,60,000 1,86,62,169 4.1. The said company BKFCPL is not engaged in the business of money lending and is actually engaged in the business of dealing in shares, securities and other investments. The original assessment was comp .....

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der passed by the Learned AO as erroneous and prejudicial to the interests of the revenue to the extent of ₹ 49,12,000/- towards deemed dividend in respect of amounts overdrawn by Mr.Manoj Murarka (assessee herein). 4.2. The Learned AO while giving effect to the order u/s 263 of the Act passed the impugned assessment order u/s 143(3) read with section 263 of the Act on 28.3.2013 wherein the amounts overdrawn by the following persons were added as deemed dividend:- Manoj Murarka (Assessee) .....

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the company from which monies were drawn. 4.4. The Learned CITA however, confirmed the addition made towards deemed dividend in respect of amount overdrawn by Mr. Manoj Murarka (the assessee herein) during the assessment year under appeal to the tune of ₹ 49,12,000/- by ignoring the contentions of the assessee that there is only negative accumulated profits if the long term capital gains which is exempt from tax is excluded from accumulated profits. Aggrieved, both the assessee as well as .....

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ause that the ld. Commissioner of Income Tax (Appeal) was erred in law as well as in facts in not accepting that, as there was a negative accumulated profit of Batlivala and Karnani Financial Consultants Pvt. Ltd from whom the appellant had taken loan, the addition under the provision of section 2(22)(e) of the I.T Act 1961 could not be sustained. 3. Because that the ld. Commissioner of Income Tax (Appeal) was erred in law as well as in facts in not accepting that the exempt capital gains income .....

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f the case, as there was negative accumulated profits after excluding exempt capital gains income in the hands of Batlivala and Karnani Financial Consultants Pvt. Ltd from whom the appellant had taken loan, there would be no addition u/s. 2(22)(e) of the I.T Act 1961. Department appeal in ITA No. 2015/Kol/2014 A.Y 2007-08 1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting that deemed dividend can be applied in the hands of a person who is the beneficial ow .....

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be condoned. The Learned DR has filed an affidavit explaining the reasons for delayed filing of appeal. The reasons adduced seems to be satisfactory and hence in the interest of justice, the delay of 7 days is condoned and appeal of the revenue is admitted. 5.1. In respect of appeal of the revenue, the Learned DR argued that the clubbing provisions contemplated under section 64 of the Act does not bifurcate clubbing of regular income and clubbing of deemed income. It only states that income of m .....

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overdrawn by Nishita Murarka (daughter) to the tune of ₹ 25,90,000/- and by Saahil Murarka (Son) to the tune of ₹ 70,07,000/- which were not the subject matter of revision proceedings u/s 263 of the Act by the Learned CIT. In other words, he argued that the Learned CIT directed the Learned AO to examine the aspect of deemed dividend only in respect of amounts overdrawn by the assessee and not in respect of other family members. In this regard , he placed reliance on the following dec .....

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deeming fiction and hence has to be construed strictly. In this regard, he placed reliance on the decision of the Hon ble Apex Court in the case of CIT vs C.P.Sarathy Mudaliar reported in (1972) 83 ITR 170 (SC). 6. We have heard the rival submissions and perused the materials available on record. We find that the Learned AO had travelled beyond the jurisdiction vested on him by the order of the Learned CIT u/s 263 of the Act by treating the amounts overdrawn by the son and daughter of the assess .....

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are satisfied. In the instant case, it was clear that after the assessee had filed his return, a notice under section 143(2) was issued to him for the purpose of carrying out a scrutiny in respect of the return of income filed by him. In the course of scrutiny no enquiry or investigation was made by the Assessing officer on the applicability of section 2(22)(e) of the Income Tax Act 1961. The assessee is a substantial share holder (41.84%) in M/s. Bathlivala and Karnai Financial Consultants Pvt .....

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ce is substantial. Hence, the inquiries were necessary and required but were not made by the Assessing Officer. In this circumstances, I feel that, the assessment made by the Assessing officer is prejudicial to the interest of the Revenue. During the course of 263 proceeding, the assessee has furnished the details of advance/loan taken from M/s. Bathlivala and Karnani Financial Consultants Pvt. Ltd. It was submitted that the carried forward balance of loan from previous year could not be treated .....

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ue and pass a fresh order as per provision of the Act. Before passing the fresh assessment order, the AO shall grant the assessee a reasonable opportunity of being heard. In this regard, the following decisions relied upon by the Learned AR are well placed :- CIT vs Hindustan Coconut Oil Mill reported in (2002) 255 ITR 428 (Cal) Broadly speaking, the Tribunal has opined that in the order passed in the revision there being no specific mention of the sales tax matter, it could form no part of the .....

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,000 and odd was maintained in the fresh assessment order and upon the same reasoning as was adopted in the order passed under Section 154. We have received excellent assistance from both sides in this matter where the facts are slightly unusual ; but the sustained efforts and expertise of Mr. Poddar certainly deserve special mention. From the first part of the two compilations of cases given to us by Mr. Poddar, two Division Bench decisions of the reference court of our High Court, make it ampl .....

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for making changes in the new areas as indicated, the Income-tax Officer has no Jurisdiction to touch on his own once again the matters which have already formed the subject of assessment before him, and which parts the superior departmental authority has left completely untouched. The two cases mentioned above are the cases of Katihar Jute Mills (P.) Ltd. v. CIT andSurrendra Overseas Ltd. v. CIT . Those were, of course, both cases of income-tax appeals and not of revision. In one of the cases .....

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ebate because the ships were sold within two years. This time the decision went in favour of the assessee ; even though the ships had actually been sold, the rebate could not be withdrawn because the appellate authority's remand order did not permit the Income-tax Officer to reshape its assessment order on those issues. After the amendments made in the year 2001, Section 263, which deals with revision, and Section 251, which deals with appeals, have marked differences in wording. But previou .....

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of the Calcutta High Court would have to be followed by us, there being no material differences between the appellate provisions and the provisions for revision, at the relevant time. We respectfully opine that we are in full agreement with the reasoning of the two above cases, and we follow those cases here. On this basis, we would no doubt have to opine that the Tribunal was quite right in forming the view that the Income-tax Officer had no authority to say anything new about the sales tax ad .....

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fter hearing the assessee in pursuance of the notice given by him, then the appeal filed by the assessee under section 253(1)(c) of the Act cannot be treated on the same footing as an appeal against the order of the Appellate Assistant Commissioner passed in assessment proceedings, where both the parties have been given the right of appeal In this view of the matter, the argument raised on behalf of the revenue, that, in appeal, the Tribunal may uphold the order appealed against on the grounds o .....

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rpose of any action under section 263(1) of the Act In this situation, the Tribunal, while hearing an appeal filed by the assessee, cannot substitute the grounds which the Commissioner himself did not think proper to form the basis of his order" CIT vs Jagadhri Electric Supply & Industrial Co. reported in (1993) 140 ITR 490 ( P & H): We respectfully adopt the reasoning given in the Punjab and Haryana High Court in the case of CIT vs Jagadhri Electric Supply & Industrial Co. repo .....

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t case, the debt having become barred a long-term ago was never a matter on which the Commissioner had passed any revising order under section 263. The Tribunal did not enter into this question in this form either. We also do not enter this question as it would not be right to do so. 6.1. With regard to the decision relied upon by the Learned DR in the case of L. Alagusundaram Chettiar vs CIT reported in (2001) 252 ITR 893 (SC), we would like to state that the facts in the said case are totally .....

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areholder and hence the same has to be treated as deemed dividend. Whereas in the instant case, the monies were advanced directly by the company to the son and daughter of the assessee and it is not the case of the revenue that the monies were subsequently transferred by son and daughter to the assessee and the children merely acted as a conduit to draw monies from the company for onward transmission to the assessee. We hold that the provisions of section 2(22)(e) of the Act creates a deeming fi .....

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e assets of the company or otherwise by way of advance or loan. 2. (a) It must be an advance or loan to a shareholder, or 2.(b) a payment by the company on behalf or for the individual benefit of the shareholder, and 3. to the extent to which the company in either case possesses accumulated profits. There is no dispute that the first and the last conditions are satisfied in the present case. The question is whether conditions Nos.2(a) and 2(b) are satisfied. We shall first take up condition No.2 .....

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High Court, in our opinion, was right in not going into that question because on the facts found by the Tribunal was not possible to decide that contention . 6.2. Moreover, it is also observed that both the son and daughter of the assessee are not shareholders in the lending company (i.e BKFCPL) and hence the deemed dividend, if any, could be assessed only in the hands of the shareholders and not otherwise. This argument was taken by the assessee even before the lower authorities and the revenue .....

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cumulated profits in the instant case or not and whether exempted capital gains is to be included or excluded for reckoning the accumulated profits or not. 7. With regard to the appeal of the assessee, the Learned AR argued that the accumulated profits figure as on 31.3.2007 of ₹ 128.21 lacs admittedly includes exempted long term capital gains to the tune of ₹ 197.20 lacs and hence if the same is reduced then there will be only negative accumulated profits and accordingly the provisi .....

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62 (Bom) • ACIT vs Gautam Sarabhai Trust No. 23 reported in (2202) 81 ITD 677 (AHD ITAT) The Learned AR also stated that he could not find any contrary decisions from the Supreme Court or any other High Court on this issue and accordingly prayed for exclusion of exempted long term capital gains from accumulated profits and consequently there would be no positive profits to invite the provisions of section 2(22)(e) of the Act. 7.1. In response to this, the Learned DR argued that the expressi .....

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expression accumulated profits in sub-clauses (a) , (b), (d) and (e) shall include all profits of the company upto the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company upto the date of liquidation . Explanation 1 to section 2(22) of the Act states as below:- The expression accumulated profits , wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 3 .....

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gain tax is in force. Consequently, any payment made to a shareholder of a company of non-taxable capital gains of the company would not be dividend. We place reliance on the following decisions in this regard:- • CIT vs Mangesh J Sanzgiri reported in 119 ITR 962 (Bom) It was held that : It is thus clear that the accumulated profits would not include capital gains which are not chargeable to tax even during the period the capital gains tax is in force. Distribution made to the shareholder o .....

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ed to this court for decision is as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the distribution to the assessees of the amount attributable to compensation and sale price received by the Periyar and Pareekanni Rubbers Ltd., on the acquisition and sale, respectively, of agricultural lands, was, in the hands of the assessees, receipt of dividend assessable to income-tax under the Income-tax Act, 1961?" It is an admitted f .....

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d as dividend under Section 12 of the Indian Income-tax Act, 1922. In Tea Estate India P. Ltd. v. CIT [1976] (03 ITR 785, the Supreme Court had reiterated this position. Again, in CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849, the Supreme Court held as follows (at p. 852) : "There is no warrant for the view expressed by the Tribunal that the definition of 'dividend' only includes deemed dividend. To hold that the capital gains within the excepted period are not part of the accum .....

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tion should be adopted." We do not also agree with the Tribunal's reasoning that the decisions in Short Brothers' case [1966] 60 ITR 83 (SC) and in Tea Estate India P. Ltd.'s case [1976] 103 ITR 785 (SC), would not apply to the present case because there had been changes in the definition of Section 2(22) of the Act, which corresponds to Section 2(6A) of the 1922 Act. The Tribunal has not enlightened as to how the difference in the definition had rendered the decisions inapplica .....

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to be taxed as dividend under Section 12 of the Income-tax Act. As we have already pointed out, capital gains under Section 12B ate chargeable in respect of any profits arising from transfer of 'capital assets', and 'capital assets' do not include lands from which the income derived is agricultural income. Profits derived by transfer of lands from which the income derived is agricultural income would not, therefore, be chargeable on a combined reading of Section 12B with Section .....

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he business. Unless, therefore, appreciation in the value of capital assets is included in the capital gains, distribution by the liquidator of the rise in the capital value will not be deemed dividend for the purpose of the Income-tax Act. Counsel for the Department contended, relying upon Mrs. Bacha F. Guzdar v. CIT [1955J 27 ITR I (SC), that since dividend received by a shareholder of a company out of the profits earned from agricultural income is not exempt from liability to tax under Sectio .....

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ication to this case." Capital gain, in fact, is made taxable by Section 45 of the Income-tax Act, 1961, as such a special deeming provision was felt necessary because capital gains would not otherwise come within the ordinary commercial concept of profit. By virtue of the definition of "Capital asset", inSection 2(14), agricultural land is excluded ; hence capital gain on agricultural land is neither part of normal commercial profit nor taxable capital gains. • ACIT vs Gauta .....

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dividend tax by distributing the profits of the company to its shareholders under the guise of loan, reduction of capital, etc. In so far as profits of capital nature are concerned arising from the sale of capital assets, such profits are to be excluded for the purpose of ascertaining the accumulated profits u/s 2(22) unless such capital profits have been subjected to capital gains u/s 45. In first ITO vs Short Bros (P) Ltd reported in (1966) 60 ITR 83 (SC), it has been held that capital appreci .....

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ed profits for the purpose of determination of dividend u/s 2(22). In view of specific provision in the constitution of Alkapuri Investment Pvt Ltd (AIPL) capital profits of the company could not be distributed and, therefore, such profit, unless charged to capital gains tax, would not form part of accumulated profits . We hold that the legal fiction created in the Explanation 2 to section 2(22) of the Act that accumulated profits shall include all profits of the company upto the date of distrib .....

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