Unaccounted tax liabilities to be deducted from reserves for levy of deemed dividend u/s 2(22)(e). AO should consider the liability while considering the status of the accumulated profit of the assessee
ABCAUS Case Law Citation:
ABCAUS 2911 (2019) (05) ITAT
Important Case Laws Cited/relied upon by the parties
ACIT Vs. Gautam Sarabhai Trust [2375 TTJ 151] (Ahd.)
This appeal WAS filed by the assessee against the order of the Commissioner of Income Tax (Appeals).
During the assessment proceedings the Assessing Officer (AO) noticed that the assessee was holding the position of Joint Managing Director in a company which has advanced loans and advances to the assessee.
As per the return filed by the company, the shareholdings of the assessee was 22.5% of the existing shares of the company. On the date of Balance sheet, the company had enough reserves and profit.
Therefore, the AO was of the view that the provisions of Section 2(22)(e) of the Income Tax Act, 1961 (the Act) were attracted in the case of assessee.
Accordingly, assessment was reopened with a prior approval of the authorities and notices u/s 148 and 142(1) of the Act were issued.
In response, the assessee submitted that there will not be any reserves from the preceding three financial years because of MAT liabilities paid in the subsequent year against the demand raised in the orders passed u/s 154 of the Act.
The assessee requested not to charge any deemed dividend and also further stated that reserves shown in the Balance Sheet of the relevant financial year did not deducted by taxes paid during the year.
However, the AO rejected the contentions and opined that the payment towards MAT liabilities arising in subsequent years and by the time the books of account were already finalised for the three preceding financial years as per the Companies Act.
However, he considered tax deduction paid from reserves which were paid during the year and accordingly, he made the addition as deemed dividend u/s. 2(22)(e) of the Act.
CIT(A) dismissed the appeal of assessee due to non-compliance and non-representation.
Before the Tribunal, the assessee contended that the income tax return of the said company for the last two financial years had been processed u/s 143(1) with higher tax liabilities. It was stated that even though the company was aware of the tax liabilities for the said financial years, it had not brought the above liability on record while completing the Balance Sheet for the relevant assessment year.
The assessee submitted that by bringing on record the established liability of income tax, the reserves declared by the company in the Balance Sheet will be NIL. Therefore, the reserves of the company was NIL.
Thus it was contended that the provisions of Section 2(22)(e) of the Act will not be attracted in the case of assessee. Further, he submitted that the company had also paid the tax liability for the said two FY subsequently.
The Tribunal observed that there was no doubt that the conditions of Section 2(22)(e) of the Act satisfied in the case. However, though the company declared favourable accumulated profit in the Balance Sheet, it had accumulated tax liability as determined by the department u/s. 143(1) of the Act on the Balance Sheet date.
The Tribunal opined that since the said tax liability was an established tax liability and as per the decision relied on by the assessee, the department should consider the above tax liability while considering the status of the accumulated profit of the assessee in order to initiate any proceedings u/s. 2(22)(e) of the Act.
The Tribunal opined that the accumulated profit, which is freely available for distribution of dividend, it does means that the profit after deduction of all liabilities due from the company is still profit which is available for distribution of dividend. The profit which is completely free from liabilities are the profit available for distribution of dividend.
Hence, the Tribunal allowed the appeal and deleted the addition u/s 2(22)(e).