Provisions of Deemed Dividend applicable only to extent of ‘Accumulated Profits’ and not to Capital Subsidy/Grant: ITAT [Read Order]

In Vinod Kumar Mittal v. Income Tax Officer (ITO), the Jaipur bench of the Income Tax Appellate Tribunal (ITA) recently held that the provisions of deemed dividend under section 2(22)(e) of the Income Tax Act is applicable only to the extent of accumulated profits and not to a capital subsidy or grant.

Assessee is an individual in the present case duly filed his return of income for the assessment year. During the course of assessment period the Assessing Officer (AO) noticed that during the year the Assessee has received sum of Rs.14.47 crores from M/s Dhanvarsha oils Pvt Ltd in which he was having a substantial interest of shareholding with voting power of more than 24 percent. Therefore, the AO treated the same as deemed dividend under section 2(22)(e) of the Income Tax Act 1961.

Before the AO, the counsel for the Assessee Mahendra Gargieya submitted that it was in regular dealing with Dhanvarsha. Dhanvarsha is engaged in the manufacturing of edible oil whereas the assessee is engaged in the trading or oil, oil cakes etc. Therefore, there are continuous transaction of purchase and sale between the parties, not only in the current year but in the previous year and later year as well. Further he contended that the amount of Rs. 14.47 crores was the credit balance in the regular course of the regular course of the business dealings. But the AO refused to accept the contention of the Assessee and accordingly he made an addition of Rs. 49,74,429 under section 2(22)(e) of the Act in the hands of the Assessee .On appeal the CIT(A) partly confirmed the action of the AO. Thereafter, the Assessee approached the Tribunal on further appeal.

After considering the rival submissions of both the parties, the Tribunal bench comprising of Judicial Member Bhagchand and Accountant Member Vijay Paul Rao observed that “the amount of capital subsidy of Rs. 36.87 lakh could not be considered as an accumulated profit and is out of the preview of the S. 2(22)(e) of the Act and the provisions of the Companies Act read with relevant rules, permits the consideration of the capital subsidy/grant as a part of eligible profit to be declared as a dividend”.

The bench further analyzed that “the amount of capital subsidy was a part of accumulated profited to be considered as deemed dividend under S. 2(22)(e) of the Act. Therefore, for this reason also, the addition made of the deemed dividend to this extent was not justified”. While allowing the appeal filed by the Assessee the bench declared that Provisions of deemed dividend applicable only to extent of ‘Accumulated Profits’ and not to capital subsidy/grant.