RAMESH PREMJI SHAH,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX , MUMBAI

This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi dated 15.07.2022 for the assessment year 2012-13.

The grounds of appeal

At the outset, the Ld. AR of the assessee Shri Subhas Bains submitted that he is not pressing ground nos. 4 & 5; and since the 4 A.Y. 2012-13 Ramesh Premji Shah ground nos. 6 & 7 being consequential in nature, we are of the opinion that no adjudication is required. So, ground no. 4, 5, 6 & 7 are dismissed.

Ground no. 3 is against the merit of the action of the Ld. CIT(A)/NFAC in upholding the action of the AO making an addition of Rs.3,46,93,780/- u/s 2(22)(e) of the Income Tax Act, 1961 (hereinafter “the Act”) when the accumulative profits as on 31.03.2011 was minus/loss of Rs.74,80,633/-.

Brief facts the AO noted in this regard are that the assessee had filed return of income for AY. 2012-13 on 28.07.2012 declaring total income of Rs.1,85,690/- and current years loss of Rs.12,92,885/-. Later on, the case of the assessee was re-opened for the reason which has been reproduced by the AO at page no. 1 & 2 of the re-assessment order u/s 147/143(3) of the Act dated 09.12.2019. The AO noted in the re-assessment order that the assessee has received an amount of Rs.16.19 crores from M/s. Sony Mony Developers Pvt. Ltd. in which the assessee is director and 50% shareholder of the said company. According to the AO, the loan taken by the assessee from M/s. Sony Mony Developers Pvt. Ltd. would attract Section 2(22)(e) of the Act (deemed dividend). After considering the submission of assessee, the AO did not accept the same and was of the opinion that the transaction of the assessee with M/s. Sony Mony Developers Pvt. Ltd. would fall in the ken of Section 2(22)(e) of the Act (deemed dividend). And 5 A.Y. 2012-13 Ramesh Premji Shah taking note from the balance-sheet of M/s. Sony Mony Developers Pvt. Ltd. as on 31.03.2012 of the current year [AY 2012-13], which was showing reserves and surplus to the tune of Rs.3,41,96,270/- (accumulative profits), the AO treated the same as deemed dividend and added it to the total income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the same. Aggrieved, the assessee is before us.

We have heard both the parties and perused the records. The main plea of the Ld. AR of the assessee Shri Subhas Bains is that the authorities below failed to appreciate that the accumulated profit of M/s. Sony Mony Developers Pvt. Ltd. as on 31.03.2011 (relevant previous assessment year 2011-12) was (-) Rs.74,80,633/- which means the opening balance as on 01.04.2011 was loss of Rs.74,80,633/-. And therefore, according to Ld. AR, M/s. Sony Mony Developers Pvt. Ltd. could not have given any dividend to the assessee/shareholder. Therefore, according to the Ld. AR, the AO/Ld. CIT(A) erred in adopting the accumulated profit as on 31.03.2012 (current year) accumulated profit at Rs.3,46,93,780/-. For buttressing this submission that the current year balance-sheet should not be looked into for looking into the accumulated profit and that only previous year as on 31.03.2011 should be only looked into, the Ld AR relied on the decision of the Tribunal (Delhi) in the case of ACIT Vs. Sanjay Passi in for AY 2012-13 dated 11.07.2018 and the Hon’ble Supreme Court decision in the case of CIT 6 A.Y. 2012-13 Ramesh Premji Shah Vs. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC) wherein the Hon’ble Supreme Court has held as under: - "6. In the gross receipts of a business day after day or from transaction to transaction lies embedded or dormant profit or loss; on such dormant profit or loss undoubtedly taxable profits, if any, of the business will be computed. But dormant profits cannot be equated with profits charged to tax under ss. 3 and 4 of the IT Act. The concept of accrual of profits of a business involves the determination by the method of accounting at the end of the accounting year or any shorter period determined by law. If profits accrue to the assessee directly from the business the question whether they accrue de die, in diem or at the close of the year of account has at best an academic significance, but when upon ascertainment of profits the right of a person to a share therein is determined, the question assumes practical importance, for it is only on the right to receive profits or income, profits accrue to that person. If there is no right, no profits will be deemed to have accrued ..... "

And the Ld. AR relied on the decision in CIT vs. M. B. Stockholding Pvt. Ltd., wherein the Hon’ble Gujarat High Court observed as under: - “CIT vs. M. B. Stockholding Pvt. Ltd., 2015-TIOL1139-HC-AHM ++ while determining the amount of deemed dividend under Explanation 2 to Section 2(22)(e) of the Act, the current profit was not required to be included to be part of accumulated profit. As such, as observed by the Tribunal, the issue is already settled by the Supreme Court against the Revenue in the case of Associated Banking Corporation of Ind. Ltd. V Is. Commissioner of Income-Tax, Bombay reported in (1965) Vo1.56 ITR 1 (SC) by which, the view taken that the profit accrues when the books of account are closed."

According to the Ld. AR, it is well-settled that the profit will accrue only when there is a right to receive the same. And since in this case, the right to receive the profits didn’t accrue on 31.03.2012 when M/s. Sony Mony Developers Pvt. Ltd. determined the share of profit as on 31.03.2012, therefore, only after the 31.03.2012 the assessee/shareholder had a right to receive a profit accrued to M/s. Sony Mony Developers Pvt. Ltd. as on 31.03.2012. And therefore, the AO/Ld. CIT erred in looking into the balance-sheet of the assessee as 7 A.Y. 2012-13 Ramesh Premji Shah on 31.03.2012 whereas the right to receive dividend in (AY. 2012- 13/FY. 2011-12), the accumulated profit as on 31.03.2011 should only be looked into; and if the same was taken into consideration, then the assessee was having (-) Rs.74,80,633/-. (as on 31.03.2011). And since M/s. Sony Money Developers have loss in AY. 2011-12 i.e. as on 31.03.2011, there would be no accumulated profit for making any addition for the current/relevant AY. 2012-13. Therefore, no addition u/s 2(22) (e)/deemed dividend was warranted. Therefore, the Ld. AR pleads that the addition confirmed by the Ld. CIT(A) to the tune of Rs.3.46 crores should be deleted.

Per contra, the Ld. DR of the revenue contended that the AO/Ld. CIT(A) have rightly adopted the accumulated profit as on 31.03.2012 (Rs.3,46 crores). And therefore, there was no infirmity in the action of the AO/Ld. CIT(A) and she does not want us to interfere with the order of the Ld. CIT(A). According to Ld. DR, the assessee maintains savings account with HDFC Bank, JVPD Branch, Mumbai when the assessee’s account were analyzed for the period Nov, 2011 to April 2012 reveals fund transfer credits totaling Rs. 21.60 crores out of which funds amounting to Rs. 16.19 crores was received from the account of M/s Sony Mony Developers Pvt Ltd; and that fund was immediately transferred to the account of M/s Sony Mony Electronics Ltd. And since assessee is a director in both the entities (i.e. M/s. Sony Money Developers Ltd. & M/s. Sony Mony Electronics Ltd.), when asked by the AO, he admitted that he has taken unsecured loan from 8 A.Y. 2012-13 Ramesh Premji Shah one company for the purpose of investment in another group company. According to Ld. DR, this sort of circulation of funds within the group companies with no business rationality was suspicious. It was pointed out by the Ld. DR that M/s Sony Mony Developers Pvt Ltd has transferred funds of Rs. 16.19 crores to the account of Assessee; and M/s Sony Mony Electronics Ltd has received fund transfers of Rs. 19.08 crores from Mr. Ramesh P Shah (Assessee). And that M/s. Sony Mony Developers Pvt. Ltd. from which the assessee took loan of Rs.16.19 crores, had accumulated profit of Rs.3.41 crores as on 31.03.2012. Therefore, in the facts of the case, sec 2(22)(e) are applicable and after issuance of Show cause notice and finding no response from the assessee, and taking note of the fact that in M/s. Sony Mony Developers Ltd, the assessee/ Ramesh P Shah had 50% shareholding and was Director of it, the AO in his order added the Deemed income u/s 2(22)(e) of Rs. 3,41,96,270/- as per balance sheet dated 31.03.2012. According to Ld. DR “Accumulated profits” mean commercial profits and not profits as assessed for income-tax purposes. From accumulated profits all “disbursements legitimately attributable to it by way of expenses, development, dividends and deemed dividends” must be reduced. And she relied upon the following case laws: - Hon’ble Supreme Court in the case of P.K. Badiani vs CIT 105 ITR 642 (SC) has held that the term profits appearing in Section 2(6a)(e) of Indian Income Tax Act, 1922 which corresponds to Section 2(22)(e) of the 1961 Act, means profits in the commercial sense, i.e. profits made by 9 A.Y. 2012-13 Ramesh Premji Shah the company in the usual and true sense of the term. It has also been held that development rebate reserves created out of the company’s profits constitute a part of the accumulated profits of the company. (Copy enclosed) Hon’ble Supreme Court in CIT Vs Damodaran & CIT Vs Ashokbhai Chimanbhai held that “accumulated profits” cannot include current profits. However, Explanation 2 to Section 2(22) provides that the expression accumulated profits’shall include all profits of the company up to the date of distribution or payment of liquidation. These would include development rebate & investment allowance reserve. P.K. Badiani vs CIT 105 ITR 642 (SC). It will even include income which is exempt from tax. Tea Estate v CIT 103 ITR 785 (SC) The Revenue also relies upon the order of THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI, in (Assessment Year: 2012-13) Sanjay Subhashchand Gupta 3rd Floor, Atul Baug Near Saraswat Co-operative Bank Syndicate, Kalyan (West) PAN — AAXPG1576G. ................ Appellant v/s Asstt. Commissioner of Income Tax Circle-2, Kalyan……….RESPONDENT, Where the addition made under section 2(22)(e) is confirmed. The facts of the case are similar and the accumulated profits as on 31st March’2012 are considered for the purpose of addition of deemed dividend. In this case also there were no accumulated profits as on 31st March’2011.

In the light of the aforesaid, the Ld. DR, does not want us to interfere with the order of Ld. CIT(A).

After hearing both parties, and facts not disputed are not repeated for the sake of brevity. We note that the bone of contention raised in ground no. 3 by the assessee is against the action of AO/Ld CIT(A) in adopting the accumulated profit of M/s Sony Mony Developers Pvt Ltd as on 31.03.2012 (Rs.3.46 crores) and treated the same as deemed dividend, whereas according to the Ld. AR, the AO/Ld. CIT(A) ought to have adopted the accumulated profit as on 31.03.2011 i.e. [(-) Rs.74,80,633/-] and in such an event, there would have been no occasion for making any addition u/s 2(22)(e) of the Act.

The Ahmedabad bench of Tribunal in the case of M/s M.B. Stock Holdings (P) Ltd Vs ACIT (2003) 84 ITD 542] took note of the Hon’ble Supreme Court decision in the case of CIT Vs. Asokbhai Chimanbhai (1965)(56 ITR 42) wherein it was held that the 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. It was further held that 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. Then the Tribunal went on to explain the purpose of Explanation 2 to sec. 2(22)(e) as under in para 24 of the order:- “Keeping in view the above interpretation of law, it cannot be said that Expln.2 to sec. 2(22)(e) is redundant. It is bound to be for a specific 11 A.Y. 2012-13 Ramesh Premji Shah purpose. The question for determination is as to what is the purpose for which this Explanation has been incorporated when the Hon’ble Supreme Court in the case of CIT Vs. Ashokbhai Chimanbhai (supra) 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 in 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 such as receipt of dividend income or interest which may not have to wait for determination at the end of the year. Similarly, some subsidy may be received from the Government which may be taxable on receipt basis. Such income shall also have to be taken into account in determining the accumulated profits as it has not to wait for determination of income at the close of the year”.

The Tribunal has expressed the above said view, when it was pointed out to it by the counsel for the assessee that the Hon’ble Supreme Court in the case of CIT Vs. V.Damodaran (1980)(121 ITR 12 A.Y. 2012-13 Ramesh Premji Shah 572) has held that the accumulated profits shall not include current year’s profit. Finally the Tribunal summarized the principles of sec. 2(22)(e) as under:- (i) That for purposes of s. 2(22)(e), the accumulated profits are to be worked out upto the date of each payment/advancement of loan. (ii)That there is a distinction between the “accumulated profits” of business and the current year’s profits of business. (iii) That profits of business accrue at the end of the previous year. (iv) That loan or advance treated as deemed income up to the date of fresh loan is to be reduced from accumulated profits. (v) That the repayment of loan during the same year is not to be deducted from the accumulated profits. Thus, it has been held that the accumulated profits do not include current year’s business profit, since it accrues only at the end of the year.

We note that the Revenue has challenged the aforesaid Tribunal order before the Hon’ble High Court of Gujarat (CIT Vs. M. B. Stockholding (P) Ltd. Tax Appeal No. 772 of 2007) by order dated 23.04.2015 reported in (2015) 64 taxmann.com 138 the Hon’ble High Court considered the following substantial question of law and as under: - “(A) Whether the Appellate Tribunal is right in law and on facts in setting aside the order of the CIT(A) and directing the Assessing Officer not to include the current profit to be part of accumulated profit while determining the amount of deemed dividend u/s 2(22)(e) of the Act?

And the Hon’ble High Court answered the aforesaid question of law in favour of assessee by upholding the Tribunal order (supra) and while doing so, especially took note of Explanation-2 to Section (2(22)(e) of the Act (which defines the accumulated profit) as under;- ‘2. Mrs. Bhatt, learned advocate appearing on behalf of the appellant-Revenue has vehemently submitted that as such, the Tribunal had materially erred in entering into the merits of the case without deciding the issue whether the Assessing Officer was justified in rejecting the rectification application submitted by the assessee which was submitted under Section 154 of the Income Tax Act (hereinafter referred to as the 'Act'). Mrs. Bhatt, learned advocate appearing on behalf of the Revenue has even made the submissions on merits and submitted that the learned Tribunal has materially erred in not properly interpreting and/or considering the Explanation 2 to Section 2(22)(e) of the Act. It is submitted that as per Explanation 2 to Section 2(22)(e) of the Act, for the purposes of 'accumulated profit', the current year profit upto the date of distribution has to be taken into account. It is submitted that, therefore, the learned Tribunal has materially erred in deciding the issue on merits, in favour of the assessee and against the Revenue and in allowing the appeal. 3. Though served, nobody appears on behalf of the respondent. 4. It is to be noted that as such, the respondent-company has gone into liquidation and the Official Liquidator has been appointed. However, nobody has appeared on behalf of the Official Liquidator. The same would be the fate even if the matter is remitted either to the learned Tribunal or to the Assessing Officer to consider the issue on 14 A.Y. 2012-13 Ramesh Premji Shah merits afresh. Therefore, we ourselves have considered the issue with respect to the main issue on merits whether the Assessing Officer was justified in including the current profit to be part of accumulated profit while determining the amount of deemed dividend under Section 2(22)

Thus, we note that the Hon’ble High Court has upheld the action of the Tribunal directing the Assessing Officer not to include the current year profit to be part of accumulated profit while determining the amount of deemed dividend under Section 2(22)(e) of the Act after considering Explanation-2 to Section (2(22)(e) of the Act (which defines the accumulated profit). And the Hon’ble High Court specifically observed that while determining the amount of deemed dividend under Explanation 2 to Section 2(22)(e) of the Act, the current profit was not required to be included to be part of accumulated profit. And their Lordship also took note that the issue 15 A.Y. 2012-13 Ramesh Premji Shah was already settled by the Hon’ble Supreme Court against the revenue in the case of Associated Banking Corporation of India Ltd. Vs. CIT (1965) 56 ITR 1, wherein the view was taken that the profit accrues when the books of account are closed. In the light of the judicial precedent laid by Hon’ble Gujarat High Court in CIT Vs. M. B. Stockholding (P) Ltd.(supra), and since no decision of jurisdictional High Court was cited in support of impugned action of Ld CIT(A), we are of the considered opinion that in the present case, while determining the deemed dividend, the AO/Ld. CIT(A) ought to have taken into consideration the accumulated profit as on 31.03.2011 i.e loss/(-) of Rs.74,80,633/- and not accumulated profit adopted as on 31.03.2012 (Rs.3.46 crores). Therefore, no addition was possible u/s 2(22)(e) of the Act in the facts of the case and thus the assessee succeeds. And consequently, we direct the deletion of Rs.3,41,96,270/.

Before we part, it is noted that the Revenue’s reliance on the judgment of P.K. Badiani Vs. CIT (supra) was misplaced because the Hon’ble Apex Court was answering the question as to whether the development rebate reserve created by the company by duly charging the amount in profit & loss account, although liable as a deduction under the Income Tax Act, 1922, constituted accumulated profit of the company within the meaning of Section 2(6A)(e) of the Act, 1922. In this judgment, we couldn’t even find an obiter-dicta which could support the contention of the revenue. So the same cannot be of any help to the revenue. Therefore, by applying the ratio of Hon’ble 16 A.Y. 2012-13 Ramesh Premji Shah Supreme Court in CIT Vs. Damodran as well as CIT Vs. Ashokbhai Chamanbhai and Associated Banking Corporation Vs. CIT (supra) and as held by the Hon’ble Gujarat High Court in CIT Vs. M. B. Stockholding (supra), we uphold the contention of the Ld AR of the assessee as discussed supra and allow the appeal.