“accumulated profits”
The decision most relied on for accumulated profits is CIT v. Ankitech (P) Ltd. (340 ITR 14), cited in 202 judgments on BharatTax.
Leading authorities on accumulated profits
Deemed dividend under section 2(22)(e) cannot be taxed in the hands of a non-shareholder. The Supreme Court confirmed this view, affirming the Delhi High Court's decision in Ankitech.
Genuine trade advances made by a company in the ordinary course of business to a shareholder do not fall within the definition of deemed dividend under Section 2(22)(e) of the Income-tax Act.
Deemed dividend under section 2(22)(e) is assessable only in the hands of the beneficial shareholder who receives the benefit of the loan or advance, and not in the hands of the company receiving the loan.
For Section 2(22)(e) to apply, a payment by a company must be in the nature of a loan or advance, and the company must have accumulated profits. Such payments to a concern in which a shareholder, holding more than 10% voting power, has a substantial interest are deemed dividends if the shareholder ultimately benefits, even if routed through different modes or concerns.
The provisions of Section 2(22)(e) regarding deemed dividends do not apply to transactions between a shareholder and a company that create mutual benefits and obligations, such as trade advances in the nature of commercial transactions.
A loan or advance from a closely held company to a shareholder is a deemed dividend under Section 2(22)(e) upon receipt, unaffected by subsequent repayment or adjustment.
Trade advances arising from genuine commercial transactions are not considered deemed dividends under Section 2(22)(e) of the Income-tax Act. The provision applies only to payments in the nature of dividend, not bona fide business transactions.
The addition of share application money to the income of the assessee under Section 68 is not justified if the assessee has discharged the initial onus by providing complete particulars and documentary evidence of the creditor, and the Revenue has failed to prove otherwise. The Supreme Court has also dismissed the Revenue's SLP in this matter.