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TMI Blog2022 (12) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... ot allowable. (ii) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in the deleting the addition of Rs.5,49,63,916/- out of addition of Rs.5,52,50,000/- made by the A.O on account of deemed dividend of income as per the provisions of section 2(22)(e) of the Act, disregarding the incontrovertible evidence with regard to loan taken by the assessee from M/s Ajmala Stationery (P) Ltd." 3. Briefly stated, the assessee is stated to be engaged in the business of supply of coal and real estate business. The assessee filed return of income declaring total income of Rs.1,20,11,130/-. A survey was conducted under Section 133A of the Act on 29.11.2012 at the business premises of the assessee. Consequently, the return of the assessee was subjected to scrutiny assessment. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e documents for the shortage of time, by the time the details of the documents in corroborating the claim had been submitted, the assessment was concluded. * The established facts is, company also deals in real estate business and this had been ratified in his case even from LD AO & Hon, ITAT in the AY 2007-08, since this addition made grossly ignoring the facts of the case a'nd ON WRONG BELEIF THAT COMPANY DOES NOT DEAL IN REAL ESTATE BUSINESS. The copy of respective order establishing that the company also deal in the real estate business are being enclosed in the paper index book. * The Ld AO never verified this fact before going to such assessment. There is no change of company business for the during year. * Since it has been established that the company also deal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvanced to the Municipal Corporation for purchase of land on which shops were proposed to be construction. After making the initial advance, the assessee was not able to make payments of subsequent installments. Therefore, the Corporation forfeited the amount. From the aforesaid, it is clear that the advance was made for the purpose of acquisition of stock-in-trade. It was not for the purpose of acquiring any fixed asset for running the business, rather it was for acquiring the stock-in- trade. Therefore, the advance made to the Corporation was in the course of Carrying on the business of real estate. Accordingly, the loss on forfeiture of the advance is in the revenue field. The assessee has not acquired any capital asset. It has also not obtained any advantage of 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;Reserves and Surplus" in the balance sheet of the company as per provisions of the Companies Act. Share premium can be utilized only for purposes which are permitted under the Companies Act, 1956. Any other use is considered as reduction of capital which can be made only with approval of court. The provisions of Companies Act prohibit use of share premium account for declaration of dividend. * Share premium is a capital receipt and it is contributed by shareholders while subscribing or applying for shares to be issued by the company. Therefore, when a company issues shares at a premium, it receive share application money, allotment money and call money etc. from shareholders which consists some portion towards share capital 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 ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k view that in sub¬clause (e) of clause (22) of section 2. the words 'whether capitalised or not' did not appear, in contrast with the earlier clauses of the section where these words found a place and, therefore, it was immaterial that the reserve and surplus consisted only of capital receipt by way of share premium. * The Commissioner (Appeals) however, accepted the claim of the assessee. He, however, found that out of the reserve and surplus account of 'G' Ltd., Rs. 190 lakhs represented share premium and Rs. 1,85,821 was on account of balance in the profit and loss account. Accordingly, he sustained the addition of Rs.1,85,821 only and deleted the balance. 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 red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .K. Badiani v. CIT [1976] 105 ITR 642 (SC) ), The term "accumulated profits" should be construed in the commercial sense and not assessable or taxable profits liable to tax under 1922 Act. Development rebate debited to profit and loss account and taken to reserve would amount to accumulated profits. * CIT v. Urmila Ramesh [1998] 230 ITR 422 ITO held that the amount distributed on liquidation of company was the accumulated profits of the Company and assessable as "deemed dividend" u/s. 2(22) of Income-tax Act, 1961. * Court held that the amount received was not assessable because the Liquidator sold assets for less than their purchase 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -12. Later on by mistake the share premium amount had been shown infthe sub head: General Reserve under the main head: RESERVE AND SURPLUS which in the year 2016 has been rectified and shown as sub head: securities premium account correctly. However the facts remain the same that the amount Rs.2,44,530,000/- is of share premium account, and ultimately it has to be shown under the head RESERVE AND SURPLUS with sub head securities premium account and this amount is not available to distribute any dividend and further the amount of the share premium amount cannot be deemed as dividend u/s 2(22)e of the 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsisted of "share premium" which was a capital receipt and could not have been distributed as dividend. The AO rejected the contention, stating that in Clause (e) of Sub-section (22) of Section 2 the words "whether capitalised or not" did not appear, in contrast with the earlier clauses of the sub-section where these words found a place and therefore it was immaterial that the reserves and surplus consisted only of capital receipt by way of share premium. 4. On appeal, the CIT(A) accepted the aforesaid contention of the assessee. He however found that out of the reserves 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 reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid up share capital of the company. Sub-section (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. These are: (i) To pay up fully paid bonus shares to be issued to the members. (ii) To write off preliminary expenses of the company. (iii) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above view based on the interpretation of Section 78 of the Companies Act settles the dispute before us in favour of the assessee. When there is a statutory.bar on the share premium account being used for distribution of dividend, the deeming provision of Section 2(22)(e) cannot apply. Not only is there a prohibition on the distribution of the share premium account as dividend under the Companies Act, the same is obliged to be treated as part of the share capital of the company and this is made clear in Section 78(1) of 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e premium account cannot partake the nature of commercial profit and, therefore, it cannot be called as accumulated profits. Respectfully following the above decision of the Tribunal, we uphold that the share premium amount appearing in the financial statement of the assessee cannot be included while computing the accumulated profit of the assessee company as on the date of loan or advance to the concerned firm. Since the learned Commissioner of Income Tax (Appeals) has already directed the Assessing Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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