ACIT, TRIVANDRUM vs. SRI.BABY MATHEW, TRIVANDRUM

Per CHANDRA POOJARI, AM:

This appeal filed by the Revenue is directed against the order of the CIT(A),

Trivandrum dated 03/04/2018 and pertains to the assessment year 2008-09.

the decision of ITAT, Visakhapatnam in the case of P. Satya Prasad vs. ITO (141

ITD 403) as the facts of the said case are different from the instant case with

regard to deduction of deemed dividend.

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the assessee submitted that all the four companies, where money was given to

the Director Mr. Baby Mathew, there was no question of deemed dividend as the

amounts advanced was in the normal course of the business and to promote the

activities of the company and hence there was no loan advanced and hence

cannot be taxed. The Assessing Officer observed from the ledger account of the

companies that the following amounts were advanced during F.Y. 2007-08.

(1) Manaltheeram Beach Resorts Ltd. Advanced during the year Rs.54,59, 395/- - 15,30,395 ( opening balance) = Rs,39,29,000/-. Against this salary credit to be deducted Rs.6,00,000/-. The actual advance is Rs.33,29,000/- during the year. (2) Somatheeram Resorts Institute and Ayurvedic Hospital Pt. Ltd. Advance during the year. Rs. 32,25,547 - 5,26,750 (Opening balance) = Rs.26,98,797/-. Against this, business expenses and salary are credited to the tune of Rs.21,10,460/-. Balance of Rs.5,88,337/-. Is the actual advance given during the year.

(3) Manaltheeram Ayurvedic Hospital and Research Centre Pvt. Ltd.,, Advance given during the year. Rs. 62,38,482 - 23,72,375 (Opening balance) + Rs.38,66,107/-. Against this the expenses debited is Rs.46,05,794/-. So as per the accounts no loan is advanced during the year.

(4) Somatheeram Ayurvedic Beach Resorts Pvt. Ltd.. Advance given during the year Rs. 2,29,82,817 - 102,11, 164/- ( opening balance) = Rs.1,27,71,203/-. The actual expenses debited is Rs.30,62,697/-. The balance of Rs. 97,08, 506/- is the advance given during the year.

Thus, the Assessing Officer observed that the assessee reduced the deemed

dividend of the earlier years in order to arrive at the actual loan/advances given

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to the director during the year. The actual expenses incurred was never taken

into account. According to the Assessing Officer, the assesses has also not

taken into account, the expenses incurred during the year in order to arrive at

the net figure. Hence the following is considered to be deemed dividend

u/s.2(22)(e) and brought to tax. The Assessing Officer observed that the

amounts mentioned were the actual amounts given by the companies during the

year and hence, treated as deemed dividend as accumulated profits were there

in earlier years.

accumulated profit and deemed dividend, based on the decision of the ITAT,

Visakhapatnam Bench in the case of P. Satya Prasad vs. ITO (141 ITD 403)

which followed the decision of the ITAT, Cochin Bench in the case of ITO vs.

Gordhandas Khimji (11 ITD 158) which in turn again considered the decision of

the Supreme Court in the case of Smt. Tarulata Shyam vs. CIT (108 ITR 345),

the deemed dividend which can be considered for taxation u/s. 2(22)(e) as

ordered by the Tribunal can be worked out only in the case of Manaltheeram

Beach Resorts (P) Ltd. to a sum of Rs.26,49,634/- but not in the case of other

companies. Hence, the additional income which was brought to tax in

accordance with section 2(22)(e) was restricted to Rs.26,49,634/- as a result of

which the excess addition made of Rs.1,09,76,209/- was deleted. According to

the CIT(A), deemed dividend of earlier years have not been taken into account

because of the reason that the books of accounts of earlier years were not

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available with him. The CIT(A) observed that this is to be accepted and

considered further since the opening balance of the first year which consisted of

reserve and surplus and accumulated profit, takes care of the net brought

forward accumulated profit and even the Assessing Officer who worked out the

accumulated profit subsequent to receiving direction from the Tribunal has

considered only the opening balance and advance made during the year under

consideration. According to the CIT(A) , the deemed dividend assessable in any

of the earlier years as per the above mentioned decision has also to be reduced

from the accumulated profits even if it was not assessed to tax in that year. In

view of the specific provisions of the Act and also as per the Tribunal’s decisions,

the accumulated profit alone has to be treated as deemed dividend and

accumulated profits do not include current years business profits since it accrues

only at the end of the year and the deemed dividend assessable in any of the

earlier years has to be reduced from accumulated profits even if it was not

assessed to tax in that year. Thus, the additional income which was brought to

tax in accordance with section 2(2209e) was restricted to Rs.26,49,634/- as a

result of which the excess addition made of Rs.1,09,76,209/- was deleted.

the dividend amount was adjusted against the loan amount and the Tribunal

found that "the dividend amount so set off shall have to be deducted from the

deemed dividend computed. According to the Ld. DR, no such adjustment is

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seen made and in that case the matter was set aside to the Assessing Officer for

due verification.

5.1 The Ld. DR submitted that in the assessee's case, as in the case of P. Satya

Prasad, this Tribunal had in ITA No.205/COCH/2013 dated 25-10-2013, found

that "The Assessing Officer, without computing the accumulated profit has

treated the amount of advance by the respective companies as deemed dividend

in the hands of the assessee. This Tribunal is of the considered opinion that in

view of the specific provisions, only to the extent of accumulated profit has to be

treated as deemed dividend... Therefore, this Tribunal is of the considered

opinion that the Assessing Officer needs to reconsider the issue after considering

the contention of the assessee and the available accumulated profit'. As such, it

was submitted that in this case also the Tribunal had set aside the assessment to

the Assessing Officer for ascertaining the computation of deemed dividend based

on the calculation of Accumulated Profits.

5.2 However, it was submitted that the Assessing Officer, in the order giving

effect to the Tribunal order, had worked out the deemed dividend by taking the

entire advance, net of expenses in the current account of the assessee, without

considering the existence of Accumulated profits.

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5.3 The Ld. DR submitted that computation of Accumulated Profit has been

elaborately considered in the decision of P. Satya Prasad Vs. ITO and which has

been followed by many Tribunals. The Ld. DR also referred to the decision of the

Chennai Bench of the ITAT in the case of Bharat Bir Mohindra Vs. ACIT, Chennai

as reported in 2018 ITL 17. According to the Ld. DR, in all these decisions it

stands confirmed that the Accumulated Profit has to be first arrived at, which will

not include current year's profits and "the dividend amount" of prior years has to

be deducted from the deemed dividend computed, irrespective of whether such

amounts were assessed as deemed dividend or not in those years.

5.4. The Ld. DR submitted that the finding of the CIT(A) that the Accumulated

Profit does not include current year profit is against the explanation to section

2(22)(e) of the Income Tax Act 1961, is also not sustainable since it was found

in the decisions referred to above, that Accumulated Profits cannot include

current year profits since it accrues only at the end of the year and hence

Accumulated Profits is to be worked out excluding current year's profits.

5.5 The Ld. DR submitted that the Department disputed the deduction of the

deemed dividend of earlier years from the Accumulated Profit. It was submitted

that this issue was also squarely covered in the decisions referred to above. It

was submitted that the said issue was also covered by this Tribunal in the case

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of ITO Vs. Gordhandas Khimji which is reported in 11 1TD 158 and followed in

the above cited Tribunal orders.

5.6 The Ld. DR submitted that the CIT(A) considered the ratio of the decisions,

in arriving at the Accumulated Profit of each of the companies in which the

assessee is a shareholder, for the purpose of ascertaining the deemed dividend

and extracted the working of the deemed dividend which is by.

(a) By working out the Accumulated Profit after reducing the current

year profit and

(b) By reducing from the Accumulated Profit, the deemed dividends of

earlier years.

Thus, it was submitted that the grounds raised by the department are entirely on

the interpretation of section 2(22)(e) and the explanation thereto and there is no

dispute on the correctness of the computation in arriving at the taxable deemed

dividend.

Visakhapatnam in the case of P. Satya Prasad vs. ITO (141 ITD 403)

summarized the principles of Section 2(22) (e) as under:

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 loan.

ii. That there is a distinction between the 'accumulated profits' of business and the current year's profits of business.

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iii. That profit of business accrues 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. 6.1 Thus, it was submitted that as per this decision the method of working

stands confirmed that the accumulated profit for the year has to be first arrived

at, which shall not include current year's profit and the 'deemed dividend' of the

prior year's. It was submitted that deemed dividend of current year will be to the

extent of such accumulated profit. The ratio of the decision is clear and there is

no ambiguity. The Ld. AR relied on the decision in the case of Bharat Bir

Mohindra Vs. ACIT (supra). In other words, it was submitted that only those net

amounts which reflects the debit side of the books of accounts of the assessee

falling under the definition of the loans and advances in the relevant assessment

years will be entitled to be taken as a deemed dividend. Thus, the deemed

dividend that can be taken is the net of closing and opening balances of debit

side of Loans and Advances account of the assessee. The Ld. AR filed the

deemed dividend for the financial year 2007-08, as per the above decision, of

the Manaltheeram Beach Resorts Pvt. Ltd., Somatheeram Research Institute and

Ayurvedic Hospital (P) Ltd. and Somatheeram Ayurvedic Beach Resorts (P) Ltd. -

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carefully gone through the decision of the ITAT, Visakhapatnam in the case of

P.Satya Prasad vs. ITO (141 ITD 403)wherein it was held as under:

“18. As per clause(iii) of sec. 2(22)9e), the dividend does not include any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as dividend within the meaning of sec. 2(22)(e) of the Act. The Ld. CIT(A) has observed that the assessee had stated that no such set off was made in the books of accounts. However, we notice that the assessee has furnished a copy of the Loan account of the assessee as available in the books of the company in Page 8 of the paper book. On the perusal of the said account, we notice that the dividend amount of Rs.31,25,100/- was adjusted by the company against the said loan amount. Thus, the observation made by Ld. CIT(A) appears to be against the facts available on record. There cannot be any dispute that the dividend amount so set off shall have to be deducted from the deemed dividend amount computed above. However, the observations made by ld. CIT(A) show that the tax authorities have not examined this aspect properly. Hence, the factual aspect on this matter, in our view, requires verification preferably at the end of the assessing officer.”

7.1 However, the CIT(A) while deciding the issue, considered the amount of

deemed dividend which should have been assessed in any of the earlier years

and reduced it from accumulated profits, though there was no assessment of

deemed dividend in the earlier year. Hence, this is wrong application of the

judgment of the ITAT, Visakhapatnam in the case of P. Satya Prasad vs. ITO

cited supra by the CIT(A) to the facts of the present case. Hence, we vacate the

findings of the CIT(A) and restore that of the Assessing Officer which is in

conformity of the decision if the ITAT, Visakhapatnam, cited supra.

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sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 8th February, 2019 GJ

Copy to: 1. Shri Baby Mathew, Somatheeram Ayurvedic Beach Resorts (P) Ltd., Balaramapuram, Chowara P.O., Trivandrum- 2 The ACIT, Circle-1(1), Trivandrum 3. The CIT(A), Trivandum. 4. The Pr. Commissioner of Income-tax, Trivandrum. 5.I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin