The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has recently held that the business profits of a financial year gets accrued only at the end of the year, deleting the addition under Section 2(22)(e) of the Income Tax Act, 1961.
The Assessing Officer noted in this regard 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 year’s loss of Rs.12,92,885/-. Later on, the case of the assessee was reopened.
The Assessing Officer had noted in the reassessment 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). The rejection of the same
The appellant counsel Subhas Bains submitted 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 him, M/s. Sony Mony Developers Pvt. Ltd. could not have given any dividend to the assessee/shareholder.
On the other hand, Mahita Nair, senior counsel for the revenue submitted that, this sort of circulation of funds within the group companies with no business rationality was suspicious.
It was pointed out by the revenue representative 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.
Taking note of the reasoning in CIT Vs. M. B. Stockholding (P) Ltd., the Tribunal Bench of Judicial Member Aby T Varkey and Accountant Member Amarjit Singh observed 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.”
It was thus held that no addition was possible under Section 2(22)(e) of the Income Tax Act in the facts of the case and thus the assessee succeeds.
Consequently, the addition of Rs.3,41,96,270/ was directed to be deleted.
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