The Principal Commissioner Of Income Tax I vs. Arun Kumar Goyal

1 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE I.T.A. No.57 of 2017

Indore, Dated:- 3

/07/2018 Ms. Veena Mandlik, learned Counsel for the appellant. Heard on the question of admission. There has not been liquidation of the company and distribution of accumulative profits to the shareholders. The re-designation of accumulative profits to the shareholders. The re-designation of servers and surpluses to the current account of LLP members in its books is not hit by Section 2(22)(c) of the Income Tax Act, 1961. This question has been considered by the Commissioner of Income Tax (Appeals)-II, Indore in para 3 by its order and learned Tribunal also considered the same in para 6 of the impugned order. It has also come on record that the officers on behalf of revenue during the time of arguments very categorically admitted that the case would not come within the purview of Section 2(22)(c) of Income Tax Act, 1961. The findings recorded by the Appellate Authority as well as by Appellate Tribunal in paras 3 and 6 are relevant which reads as under:- “3. All the grounds of appeal have been raised against the addition of Rs.68,92,189/- u/s 2(22)(c) of I.T. Act, 1961 treating the same as deemed dividend. The AO has discussed the issue at para 3 to 5.1 of the assessment order. 2 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE The facts of the case are detailed in the assessment order and written submissions of the appellant. The appellant has been found to be the share holder of M/s Suraj Ganga Developers Pvt. Ltd. which was found to have been converted into Limited Liability Partnership Firm in the name & style of M/s Suraj Ganga Developers Pvt. Ltd. On 23.2.2011 which falls under the relevant assessment year. The result and surpluses amounting to Rs.4.59 crores as on the date of conversion in the books of above mentioned company were transferred to the current account of partners of M/s Suraj Ganga Developers Pvt. Ltd. LLP. Therefore, the AO has considered the amount of credit in the partners account as distribution of suprlus on liquidation of company and proceeded to invoke provision of u/s 2(22)(c) of I.T. Act, 1961. The appellant has filed the written submissions which are reproduced above. I have considered the reasons brought out by the AO in the assessment order for treating the amount as distribution of surplus in liquidation. I have also considered the submissions of the appellant, existing provisions and relevant case laws on the issue. After considering the totality of the facts and circumstances of the case, the AO has not been found justified in treating the impugned amount as deemed dividend within the meaning of u/s 2(22)(c) of I.T. Act, 1961. The AO has not appreciated the fact that there has not been liquidation of the company and distribution of accumulative profits to the share holders. The re-designation of serves and surpluses to the current account of LLP members in its books is not hit bu u/s 2(22)(c) of I.T. Act, 1961. Moreover, such re- designation of reserves and surpluses cannot be considered as distribution of the same to the share holders. Therefore, the AO has not been found justified in making the addition which has not been found on sound footing. Therefore, the AO is directed to delete the addition. All the grounds of appeal are allowed. 6. We have perused the orders of lower authorities and material available on record. Before coming to any conclusion, we are reproducing the provisions of Section 2(22)(c) of the I.T. Act: “Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not” Considering the provisions of Section 2(22)(c), we are of the view that in law, liquidation is the process by which a co. is brought to an end, and the assets and property f the co. are distributed. Liquidation is also sometimes referred to as winding up. The meaning of the conversion is the process of changing or causing sometimes to change from one to another. Thus, the liquidation and conversion 3 HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE altogether denote different meaning and purpose. In the present case, the private limited co. was converted to LLP and this is not the case of the liquidation within the meaning of Section 56 r.w.s. Schedule III. The conversion has been defined to mean “convert, in relation to a private limited co. converting into a limited liability partnership, means a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the private co. to the limited liability partnership in accordance with this schedule.” Thus, we are of the view that in the present case, the provisions of Section 2(22)(c) of the I. T. Act are not applicable. Before us, the ld. DR could not controvert the finding of the ld. CIT(A) by bringing any contrary material on record. On consideration of above, we hold that the ld. CIT (A) was right in reaching the conclusion that the re-designation of the reserves and surpluses to the current account of the LLP members in its books of account is not hit by the provisions of the Section 2(22)(c) of the I.T. Act and also such re-designation of reserves and surpluses cannot be considered as distribution of the same to the shareholders. We confirm the order of the ld. CIT (A). Accordingly, the ground raised by the Revenue stands dismissed.” On due consideration of the aforesaid so also the provisions of Section 2(22)(c) of the Income Tax Act, 1961, the Appellate Tribunal has not committed any legal error in upholding the finding recorded by the Commissioner by which order passed by the Assessing Officer has been set aside. No substantial question of law arises in this appeal. Accordingly, I.T.A. No.57 of 2017 is dismissed. (P. K. Jaiswal) (S. K. Awasthi) Judge Judge

pp/ Digitally signed by Pankaj Pandey Date: 2018.07.04 10:20:22 +05'30'