Provisions of Deemed Dividend Applicable only to Extent of Accumulated Profits available at the beginning of the relevant FY: ITAT [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the provisions relating to deemed dividend under section 2(22)(e) of the Income Tax Act is applicable only to the extent of accumulated profits of the company available at the beginning of the relevant financial year.

The Appellant is a substantial shareholder in M/s. Santoshi Chit Fund Pvt Ltd. The company had taken a Keyman Insurance Policy a few years ago in the name of the Appellant. Subsequently, the company took a loan from LIC against the Keyman Insurance Policy to the extent of Rs. 65,29,750/- and this sum was advanced to the Appellant.

During the course of assessment proceedings, the AO noted that the loan was taken on the premium paid for the Keyman Insurance Policy taken on 31.3.2008. The AO was of the opinion that since the nexus between the loan and advance to the assessee is clearly established and there is accumulated profit of the company available to such an extent, the same is taxable as deemed dividend u/s 2(22)(e) of the Act.

The assessee contended that for applying the provisions of section 2(22)(e) of the Act, the basic condition to be fulfilled is that the company must have advanced loans/ advances from its accumulated profits of the relevant financial year. It was submitted that even from the findings of the CIT (A), the accumulated profit of the company is only to an extent of Rs.4,15,830 and as it was not the sum advanced to the assessee for Keyman Insurance Policy, the same cannot be brought to tax u/s 2(22)e of the Act.

The Tribunal held that “there is a nexus between the loan taken from the LIC and the premium paid for the Keyman Insurance Policy. Since the Keyman Insurance Policy is for the benefit to the assessee, it was held that the same is taxable as deemed dividend u/s 2(22)(e) of the Act. However, as rightly pointed out by the learned Counsel for the assessee, the provisions of section 2(22)(e) of the Act would be applicable only to the extent of accumulated profits of the company available at the beginning of the relevant financial year.”