TMI Blog2022 (12) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2007-08 and observed that the assessee is indeed engaged in the business of real estate and not merely in coal trading. As a consequence, it was observed that the interest expenses incurred on acquisition of real estate has to be treated as ordinary business activity and therefore the interest incurred on acquisition of real estate partakes the character of Revenue expenses and thus cannot be disallowed. We find that the CIT(A) has taken note of the object clause in the MOA as well as past and present state of affairs to come to a conclusion that acquisition of land is ordinary business activity in the business of real estate and therefore attendant interest expenses cannot be disallowed by treating it for non business purposes with reference to Section 36(1)(iii) - We do not see any error committed by the CIT(A) for returning such finding. Hence, we decline to interfere. Addition u/s 2(22)(e) - deemed dividend of income - CIT-A restricted the addition to the extent of General Reserve after excluding the Security Premium Reserve which has been regarded to be outside the ambit of expression accumulated profits under Section 2(22)(e) - HELD THAT:- CIT(A) in essence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. In the course of the scrutiny assessment, the Assessing Officer inter alia observed that the assessee is engaged in the business of trading of coal only and no trade in real estate is substantiated. It was further noticed that the assessee has paid Rs.4,74,00,000/- by way of advance for purchase of land during the year under consideration and incurred interest cost thereon which is claimed as revenue expenditure. The Assessing Officer estimated interest @12% per annum attributable to such investment in land which worked to Rs.56,88,000/-. The Assessing Officer held that the aforesaid amount of interest of Rs.56,88,000/- has been incurred towards purchase of capital asset being advance towards land and therefore the assessee is not entitled to deduction of such interest expenditure under Section 36(1)(iii) of the Act. Thus disallowance under Section 56,88,000/- was carried out under Section 36(1)(iii) of the Act. 4. The Assessing Officer further observed that it has obtained loan amounting to Rs.5,52,50,000/- from M/s. Ajmala Stationery Pvt. Ltd. A part of the loan amounting to Rs.2,57,00,000/- was repaid during the year. It was observed by the Assessing Officer that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in real estate business this addition on the footing of wrong belief of the Ld AO. Thus the investment made by assessee company amounting Rs. 4,74,00,000/- is in the course of the routine business this addition u/s 36(1) iii need to be deleted. 10. I have perused the submissions of the appellant and the order of the AO. I find that the addition has been made by the AO by holding that the appellant is not engaged in the business of real estate. The facts relevant to this ground are that the appellant has made an advance of Rs.4,74,00,000/- during the year for purchase of land. The AO has made disallowance u/s 36(l)(iii) by holding that the appellant is not engaged in real estate business and since this capital asset was not put to use during the year, disallowance @ 12% on Rs.4,74,00,000/- working out to Rs.56,88,000/- has been disallowed from the interest expenses of the appellant. 11. The Ld. 4TR in his written submissions has vehemently objected to these findings. He has contended that the appellant is indeed engaged in the business of real estate and hence the disallowance u/s 36(l)(iii) has been wrongly made by the AO. To establish his case the appellant has furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring nature so as to constitute the expenditure to be capital expenditure. Accordingly, it is held that the loss has been incurred in revenue field in the course of business. Therefore, the same is deductible in computing the total income.... (ii) During the course of appellate proceedings the Memorandum and Article of Association of the appellant company were called for by me to examine whether business of real estate formed a part of the objects of the company. It is seen that it is reflected as one of the objects of the company as per clause 48 of the MOA. Thus in view of these facts, it is clearly established that the appellant is engaged in the business of real estate. Once this fact is established no disallowance u/s 36(l)(iii) is called for. Hence the same is deleted and this Ground of the appellant is allowed. 12. Ground No. 3 deals with the fact that the AO has made an addition of Rs.5,52,50,000/- u/s 2(22)(e) of the Act as evident from para 7 of the assessment order. 13. During the course of appellate proceedings, the Ld. AR of the appellant filed written submissions on this issue, which are reproduced as below: That the LD AO erred in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal and other towards premium. Share premium is not profit: As discussed earlier, share premium is not in nature of 'profit' or 'gain', and therefore it cannot be regarded as accumulated profit. Therefore, irrespective of any restrictions, which the Companies Act may provide on its use or a company may provide through its memorandum of association or articles of association, the share premium cannot be regarded as 'profit' or 'gain' when it is received and as 'accumulated profit' or 'accumulated surplus', subsequently. As per Company Act 1956 S. 78 (2) provides five purposes for which alone the share premium account may be applied without attracting consequence of reduction of the share capital. These are: (i) Issue and pay up fully paid bonus shares to be issued to the members; (ii) to write-off preliminary expenses of the company; (Hi) to write-off expenses of issue of shares or debentures or under-writing commission paid or discount allowed on such issues; (iv) To pay premium on the redemption of redeemable shares or debentures issued by the company; (v) Purchase of its own shares or othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The revenue being aggrieved preferred appeal before the Tribunal. The Tribunal noted and observed as follows: A. There was a sum of Rs. 1,90,00,000 as reserves in account of 'G' Ltd. as on 31-3-1996 which was by way of share premium collected by the said company. B. As per section 78(1) of the Companies Act 1956 Act the premium received shall be transferred to a separate account styled 'the share premium account', and provide that hat the provisions of the 1956 Act relating to the reduction of the share capital of the company shall apply as if the share premium account was paid-up share capital of the company. C. S. 78 (2) provides five purposes for which alone the share premium account may be applied without attracting consequence of reduction of the share capital. These are: (i) Issue and pay up fully paid bonus shares to be issued to the members; (ii) to write-off preliminary expenses of the company; (Hi) to write-off expenses of issue of shares or debentures or under-writing commission paid or discount allowed on such issues; (iv) To pay premium on the redemption of redeemable shares or debentures issued by the company; (v) P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase price. Profits are to be actual profits calculated on commercial principles. Amount taxed u/s 41(2) in the hands of company did not represent accumulated profits for the purpose of section 2(22) of the Act. CIT v. Allahabad Bank Ltd. AIR [1969 SC 1058.= 2008 - TMI - 5136 - SUPREME Court] Share premium account is to be included in the paid-up capital for the purpose of computing rebate if it is maintained as a separate account. The Explanation does not contemplate that the account must be kept apart from the reserves. If within the reserves it is an identifiable separate account, the share premium will qualify for inclusion in the paid-up capital for computing the reduction in rebate fot super-tax. In view of the above facts and settled position of law the addition made by the Ld OA is illegal unjustified and uncalled for and deserve to be deleted and may kindly be deleted. 14. I have perused the submissions of the appellant and the order of the AO. The appellant company has received a loan from Ajmala Stationary Pvt. Ltd. (ASPL) during the year amounting to Rs.5,52,50,000/-. The appellant company owns more than 10% shares in M/ ASPL by virtue of whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act. The copy of the M/s Ajmala Stationery Pvt. Ltd. clearly states that the opening balance of the account is Rs.4,71,908/- and during the year amount Rs.5,52,50,000/- has been received and Rs.2,57,00,000/- has been repaid. The balance amount at the yearend is Rs.3,00,21,908/- only. The total amount in the reserve and surplus in the year ending 2013 in M/s Ajmala Stationery Pvt. Ltd. Balance sheet it Rs.2,44,81,6084/- only and this amount includes the Share premium amount Rs.2,44,530,000/-. Thus Rs.2,86,084/- left being amount of the general reserve. The addition u/s 2(22)e of the act has to be restricted to the Rs.2,86,084/- only. In view of the above facts and settled position of law the addition made by the Ld. AO is illegal, unjustified and uncalled for and deserve to be deleted and may kindly be deleted. 15. I have perused the balance sheet of M/s ASPL for period ending 31.03.2016, 31.03.2011, ITR for A.Y. 2011-12. Perusal of these documents reveal that the general reserves is only for Rs.2,86,084/- and the balance amounting to Rs.24,25,30,000/- is the share premium account received by M/s ASPL As per the appellant there has been a clerical error of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserves and surplus account of Gorgeous Chemical (P) Ltd., Rs. 1,90,00,000 represented share premium and Rs. 1,85,821 was on account of balance in the P L a/c. He accordingly sustained the addition of Rs. 1,85,821 and deleted the balance. 5. It is the aforesaid decision of the CIT(A) that is challenged before us on behalf of the Revenue. The assessee is not in appeal against the addition of Rs. 1,85,821 sustained by the CIT(A). 6. We have heard the rival contentions. The contention of the Revenue is that accumulated profits includes all profits, including capital profits and is not restricted to commercial or revenue profits. Attention was drawn to Expln. 2 to Section 2(22)(e). It was submitted that no exclusion was provided for capital profits expressly. The line of reasoning adopted by the AO that in Clause 3. (e) the expression whether capitalised or not did not find place in contrast with the earlier clauses was also pressed into service. It was contended that the section provided for deemed dividend and such a provision should be given its full play. It was further contended that the judgment of the Supreme Court in P.K. Bodiani v. CIT, which was relied on by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of redeemable shares or debentures issued by the company. (v) Purchase of its own shares or other specified securities in terms of Section 77A. Except in the above 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 v. Allahabad Bank Ltd. In this case, it was held that the share premium account is liable to be included in the paid up capital for the purpose of commuting the rebate allowable under para D, Part 2 of the Finance Act. The object and scope of Section 78 of the Companies Act has been stated as follows at p. 989 of Guide to the Companies Act by A. Ramaiya, Sixteenth edition by Justice Y.V. Chandrachud, former Chief Justice of India: There was no corresponding provision in the previous Act, and in the absence of any statutory prohibition, share premium amounts were being freely distributed as dividends, and the misuse of the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Companies Act which says that any payment out of the share premium account, except for purposes authorised by Sub-section (2), will be treated as reduction of share capital attracting the provisions of the Companies Act in relation thereto. This provision of the Companies Act takes care of the argument of the Revenue that Section 2(22)(e) of the IT Act does not use the expression whether capitalized or not . These words can have application only where the profits are capable of being capitalized. They are not applicable where the receipt in question forms part of the share capital of the company under the provisions of the Companies Act. This position has been recognised by the Supreme Court in CIT v. Urmila Ramesh (supra) where at pp. 434-435 the following observations were made: Section 2(22) of the Act has used the expression 'accumulated profits', 'whether capitalized o. not'. This expression tends to show that under Section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression 'whether capitalized or not' the legislative intent clearly is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to restrict the deemed dividend to the extent of accumulated profit, we feel it appropriate to direct the Assessing Officer to compute the accumulated profit keeping in view our finding above. Needless to mention that the assessee shall be afforded sufficient opportunity of hearing. Accordingly, the ground no. 5 is allowed for statistical purposes. 19. Thus in view of these facts, I find that the addition u/s 2(22)(e) can only be made to the extent of general reserves available with M/s ASPL as on 31.03.2013 which amounts to Rs.2,86,084/- and thus the addition is restricted to this and balance addition is deleted. Thus this Ground of the appellant is partly allowed. 6. The CIT(A) thus reversed the additions made by the Assessing Officer and granted relief on the disallowance of interest under Section 36(1)(iii) as well as the loan amount deemed as income of the assessee under Section 2(22)(e) of the Act. 7. The Revenue has challenged the relief granted by the CIT(A) before the Tribunal. 8. We have carefully considered the rival submissions as well as the material placed and referred to before us in the course of hearing by the respective sides. We have also carefu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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