TMI Blog2001 (12) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the meaning of section 2(22)(e). The accumulated profits of the company Hynoup Food and Oil Industries Pvt. Ltd. up to 31st March, 1990 were Rs. 2,42,025. However, the profit for the year under appeal of the company was Rs. 1,43,48,256. Therefore, the Assessing Officer recorded a finding that after taking into account the profits of the company up to the date of advancement of the loan, the accumulated profits are more than Rs. 56,65,000. The amount of Rs. 56,65,000 was, accordingly, taxed as deemed dividend. The Assessing Officer, relying upon the decision of the Hon'ble Supreme Court in the case of P.K. Badiani v. CIT [1976] 105 ITR 642, held that the amount of Rs. 1 crore transferred by the assessee in the financial year 1990-91 relevant to the year under appeal to the general reserve account is also to be taken into account in working out the accumulated profit. He has worked out the accumulated profit as on the end of the previous year at Rs. 1,65,52,939. Though the Assessing Officer has worked out the accumulated profits up to the end of the previous year, it is not disputed by the assessee that if the current profits up to the date of payment of loan are taken into acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 991-92 are as under: "1. The learned Commissioner ought to have held that Section 2(22)(e) was not applicable to the assessee in the legal and factual context of the case. 2. The learned Commissioner ought to have held that the ACIT had failed to prove that the various amounts of loans were paid out of the accumulated profits at the time when the loans were given. 3. The learned Commissioner ought to have held that the current year's profits cannot be taken into account because that could be taken only under exceptional circumstances. 4. The learned Commissioner ought to have held that the assessee's case was covered by the exception because lending money was part of the business of the lender company, which was also a ground before him. 5. The Commissioner erred in restoring the matter to the ACIT for verification whether int. on loan could be allowed under section 36(1)(iii) or 57(iii) although he knew that the assessee was an investment company and loan has been used to subscribe for shares of a company. 6. The Commissioner ought to have held that interest levied under section 234B was not recoverable because ACIT had not applied his mind to it." Reliance has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere obtained out of the loans from Hynoup. This is in connection with the additional ground No. 1. 2. Dividend declared by Hynoup Food and Oil Industries Ltd. (called Hynoup) for the Financial Year 1991-92 as shown in audited accounts of Hynoup. 3. Material part of the audited accounts of Hynoup for A.Y. 1991-92 showing the total amount of lending as against total of paid up capital, free reserved and unsecured borrowals. Their admission as additional evidence in necessary in the interest of justice. For which the assessee relies on the following authority." 12. The ld. Departmental Representative strongly objected to the entertainment of additional grounds of appeal. It was contended that the additional grounds cannot be decided without investigation of further facts and, therefore, these are not to be entertained. Reliance in this regard was placed on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. which was also relied upon by the learned counsel for the assessee. The ld. DR also objected to the admission of additional evidence it this stage without there being any satisfactory explanation for non-furnishing of this evidence before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of appeal does not qualify for admission. The same is, accordingly, not entertained. Ground No. 5 is relating to the disallowance of interest of Rs. 2,08,617 the issue which has been set aside by the CIT(A). The assessee had raised a ground of appeal against the disallowance. This ground of appeal is merely an elaboration of the ground of appeal already raised. We have, therefore, no serious objection to the admission of the said ground of appeal. Ground No. 6 is relating to levy of interest under section 234B. This ground of appeal has been raised in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209 (SC). Since the law was not clear on the subject when the assessee filed the appeal, this ground of appeal is also entertained. 16. We now take up the matter relating to admission of additional evidence. The evidence sought to be admitted has been referred to in para 9 above. Sr. No. 1 is not admissible at this stage without there being any explanation as to why such evidence was not produced earlier before the revenue authorities. Sr. No. 2 is relating to the confirmation letter in respect of cash credits. The CIT(A), in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een declared by the assessee-company and the advancement of loan to the appellant is in the normal course of business of the parent company, provisions of section 2(22)(e) are inapplicable, contended the ld. counsel. The learned counsel for the assessee further contended that provisions of section 2(22)(e) have got to be interpreted in such a manner so that its unconstitionality is avoided. Elaborating his contention, it was pointed out that the section, if not properly interpreted, will get attracted in all such cases where the loan is advanced without any intention of withholding the dividend and also in such cases where the loan is advanced in an attempt to withhold the dividend. In other words, according to the learned counsel, where a company has declared dividend at a reasonable rate, provisions of section 2(22)(e) should be held to be not applicable. Section 2(22)(e), according to the learned counsel, would get attracted only in such cases where the advancement of loan to a shareholder deters the payment of dividend. It was further pointed out that the loan advanced to the assessee by the parent company has been utilised for investments which in turn yielded dividend income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account up to the date of loan, but the profits which have not accrued cannot be taken into account in working out the accumulated profits. Reference was made to section 205 of the Companies Act which provides for computation of profits of a year and not profits of part of the year. It was pointed out that accounts can be made up to the middle of the year only in certain circumstances such as in the case of liquidation. In this connection, reliance was placed on the decision of the Hon'ble Supreme Court in the case of First ITO v. Short Bros. (P.) Ltd. [1966] 60 ITR 83. 20. It was also contended by the learned counsel for the assessee that provisions of section 2(22)(e) are not attracted in this case for another reason namely that the parent company is also engaged in financing business are the loan to the shareholder has been advanced in the course of its business. In this connection, reference has been made to section 2(22)(e)(ii) which, according to the learned counsel, is specific in this regard. It was, accordingly, contended that the addition made by the Assessing Officer may be deleted. 21. The ld. Departmental Representative, on the other hand, contended that section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e) (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956) (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.--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 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.--The expression "accumulated profits" in sub-clauses (a), (b), (a) and (e) shall include all profits of the company up to 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, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of Tarulata Shyam v. CIT [1971] 82 ITR 485 is also pertinent. In the aforementioned cases it was held that for purposes of section 2(22)(e), the accumulated profits are to be seen as on the date of payment and any repayment during the same year after the advancement of the loan will not affect the working of the accumulated profits on the date of loan. In other words, the repayment of loan during the year of advancement of loan is not to be deducted from the accumulated profits. 23. Their Lordships of the Hon'ble Supreme Court in the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 held that profits do not accrue from day to day or even from month to month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. Their Lordships further held that the profits do not arise until the contingency, which by operation of law or under a covenant of the partnership deed, gives rise to that right. 24. The intention of the Legislature in incorporating section 2(22)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation has been incorporated when the Hon'ble Supreme Court in the case of Ashokbhai Chimanbhai have held that the profits of business do not accrue from day-to-day or even from month to month. In our considered view, the Legislature has taken into account the fact that whereas the profits from business for the current year may not be determinable in the middle of the year, there are certain sources of income, the income from which is capable of determination which, according to the legislative intent, should also be taken into account while determining the accumulated profits on the day of advancing the loan. The company is a person. It may carry on business and may also derive income from various other sources. For example, the company may sell an asset from which capital gains are derived. If the capital gain is derived before the date of advancement of the loan that profit shall have to be taken into account in determining the accumulated profits notwithstanding the fact that such an event has taken place in the middle of the year. It is so the determination of capital gains is not to wait for the end of the previous year. Similarly, there can be income from other sources also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may also be relevant to refer to the decision of the Madras High Court in the case of CIT v. C. Narasimha" [1979] 118 ITR 60 where this principle has been elaborated. The decision of the Bombay High Court in the case of CIT v. P.K. Badiani [1970] 76 ITR 369, 376/377 is also relevant. 28. The other possible adjustments for purposes of working out the profit up to the date of advancement of loan are that the amount of accumulated profits as on the beginning of the year has got to be reduced by all disbursements legitimately attributable to it by way of expenses, development, dividend and deemed dividend if any. 29. This is how we appreciate the meaning of the Explanation 2 to section 2(22)(e). The decision of the Bombay High Court in the case of Mrs. Maya B. Ramchand is also more or less to the effect that the accumulated profits are to be worked out on each day of loan advanced to the assessee was made. 30. On analysis of the aforementioned discussion, in our view, the following principles emerge:-- (i) That for purposes of section 2(22)(e), the accumulated profits are to be worked out up to the date of each payment/advancement of the loan. (ii) That there is a distinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed dividend is to be reduced from the accumulated profits as pointed out elsewhere in this order. Section 2(22)(e) is attracted only to the extent of accumulated profits as on the date of advancement of loan and once the deemed dividends are reduced from the accumulated profits, the company may not be required to distribute dividend to the extent of the deemed dividend. This we have explained earlier. Now, taking the case of the appellant company into consideration, it is observed that the assessee had not declared any dividend in the preceding year nor up to the date of advancement of the loan. Since the accumulated profits are to be worked out only up to the date of advancement of the loan, therefore, in future possibility of declaration of dividend out of the deemed dividend is ruled out. The assessee had huge accumulated profits at the end of the year under appeal (the Assessing Officer has worked out the accumulated profits of more than Rs. 1.5 crores). Out of that, only Rs. 8 lakhs has been distributed as dividend. Assuming that the company would have declared dividend substantially so as to set off the deemed dividend, the company would be entitled to deduct the deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been made by the Assessing Officer in the subsequent order passed on 31st March, 1997. This ground of appeal has thus become infructuous, more so when the CIT(A) had merely remitted the matter to the Assessing Officer for consideration. The assessee cannot be said to be aggrieved unless some real prejudice is shown to have been caused by the decision of the CIT(A). We generally do not interfere with setting aside of issues for fresh consideration. In this case, subsequent events have established that no prejudice is caused to the assessee. In fact, the addition has been deleted. We, therefore, dismiss this ground of appeal raised by the assessee. 37. For assessment year 1992-93, there are two issues. One of the issues is relating to applicability of section 2(22)(e) in respect of sum of Rs. 10,75,000. Our decision for assessment year 1991-92 on similar issue shall apply mutatis mutandis to the year under appeal. The Assessing Officer shall work out the accumulated profits on the date of advancement of the loan and if the accumulated profits are more than Rs. 10,75,000 then the addition shall stand confirmed. If the accumulated profits are less than Rs. 10,75,000 then the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Similarly, no evidence whatsoever was produced in support of the credit of Rs. 2,80,000 in the name of Mr. Jayesh A. Panchal. Thus, the addition of Rs. 23,03,500 was repeated by the Assessing Officer out of the earlier addition of Rs. 47,01,000. It is wellsettled principle of law that the assessee is duty-bound to establish the identity of the creditor, the creditworthiness of the creditor and genuineness of the deposit. When the assessee has failed to discharge the onus, the Assessing Officer was justified in making the addition under section 68. 41. Regarding the contention advanced on behalf of the assessee that the CIT(A) was not justified not in entertaining fresh evidence in the form of confirmatory letters from some creditors, we find that the assessee had got sufficient opportunity to produce the evidence. Firstly before the Assessing Officer in first assessment. Thereafter, the CIT(A) remanded the matter back to the Assessing Officer for fresh decision. The assessee had another opportunity for production of evidence. In the absence of any satisfactory explanation for non-production of evidence before the Assessing Officer in two proceedings, we find no justification to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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