AO not permitted to make additions beyond revision order issued u/s 263: ITAT
Citation of the Case: Sri Manoj Murarka vs. ACIT (Kolkata ITAT), Income Tax Appeal No. 1703 of 2014 and 2015 of 2014, Date of Judgment: 20/11/2015
Brief of the Case
Kolkata ITAT held In the case of Sri Manoj Murarka vs. ACIT that the AO had travelled beyond the jurisdiction vested on him by the order of the CIT u/s 263 by treating the amounts overdrawn by the son and daughter of the assessee thereby bringing the same to tax as deemed dividend. The order of CIT was restricted to the addition in hand of assessee only. Moreover both the son and daughter of the assessee are not shareholders in the lending company (BKFCPL) and hence the deemed dividend u/s 2(22) (e), if any, could be assessed only in the hands of the shareholders and not otherwise.
Facts of the Case
The assessee is an individual having investment in shares of M/s Bathilivala and Karani Financial Consultants Pvt. Ltd (BKFCPL). The assessee is a substantial shareholder in the said company holding 41.84% of shares. A total of Rs. 1,86,62,169 were advanced by the BKFCPL to the assessee and his family members. The BKFCPL is not engaged in the business of money lending and is actually engaged in the business of dealing in shares, securities and other investments.
The original assessment was completed u/s 143(3) on 10.11.2009. Later this assessment was sought to be revised by the CIT u/s 263 in order to examine the aspect of deemed dividend in respect of amounts overdrawn by the assessee from BKFCPL to the tune of Rs. 49,12,000/- during the assessment year under appeal. The show cause notice was issued by the CIT was issued to bring to tax only a sum of Rs. 49,12,000/- . Later an order u/s 263 was also passed stating the order passed by the Learned AO as erroneous and prejudicial to the interests of the revenue to the extent of Rs. 49,12,000/- towards deemed dividend in respect of amounts overdrawn by Mr.Manoj Murarka only.
The AO while giving effect to the order u/s 263 passed the impugned assessment order u/s 143(3) read with section 263 wherein the amounts overdrawn by the following persons were added as deemed dividend:- Manoj Murarka (Assessee) – 49,12,000, Nishita Murarka (Daughter) – 25,90,000 and Saahil Murarka (Son) – 70,07,000, a total of Rs.1,45,09,000.
Contention of the Assessee
The ld counsel of the assessee argued that the Learned AO while passing the order giving effect to section 263 directions, sought to bring to tax as deemed dividend in respect of amounts overdrawn by Nishita Murarka (daughter) to the tune of Rs. 25,90,000/- and by Saahil Murarka (Son) to the tune of Rs. 70,07,000/- which were not the subject matter of revision proceedings u/s 263 . In other words, he argued that the Learned CIT directed the Learned AO to examine the aspect of deemed dividend only in respect of amounts overdrawn by the assessee and not in respect of other family members. he placed reliance on the following decisions :- CIT vs Hindustan Coconut Oil Mill reported in (2002) 255 ITR 428 (Cal) and CIT vs Howrah Flour Mills Ltd reported in (1999) 236 ITR 156 (Cal).
He further stated that both the son and daughter are not shareholders in the lending company and in any case, the provisions of section 2(22) (e) could not be invoked in the facts and circumstances of the case. He further submitted that the provisions of section 2(22)(e) creates a deeming fiction and hence has to be construed strictly. In this regard, he placed reliance on the decision of the Hon’ble Apex Court in the case of CIT vs C.P.Sarathy Mudaliar reported in (1972) 83 ITR 170 (SC).
With regard to the appeal of the assessee, the Learned AR argued that the accumulated profits figure as on 31.3.2007 of Rs. 128.21 lacs admittedly includes exempted long term capital gains to the tune of Rs. 197.20 lacs and hence if the same is reduced then there will be only negative accumulated profits and accordingly the provisions of section 2(22)(e) could not be invoked. He further argued that the exempted capital gains does not get into the stream of accumulated profits and even as per Explanation 1 to section 2(22)(e). He argued that the expression accumulated profits would include capital gains only if it is chargeable to tax u/s 45 and not otherwise. He placed reliance on the following decisions
in support of his contentions:- CIT vs Mangesh J Sanzgiri reported in 119 ITR 962 (Bom) and ACIT vs Gautam Sarabhai Trust No. 23 reported in (2202) 81 ITD 677 (AHD ITAT).The Learned AR also stated that he could not find any contrary decisions from the Supreme Court or any other High Court on this issue and accordingly prayed for exclusion of exempted long term capital gains from accumulated profits and consequently there would be no positive profits to invite the provisions of section 2(22)(e).
Contention of Revenue
The ld counsel of the revenue contended that the clubbing provisions contemplated under section 64 does not bifurcate clubbing of regular income and clubbing of deemed income. It only states that income of minor should be clubbed with the parent whose total income is greater. That obviously would include deemed dividend income also. He placed reliance on the decision of the Hon’ble Apex Court in the case of L. Alagusundaram Chettiar vs. CIT reported in (2001) 252 ITR 893 (SC) in support of his arguments.
With regard to appeal of the assessee, the Learned DR argued that the expression accumulated profits did not include capital gains only upto 1.4.1956 and not thereafter and hence there is no scope for reducing the exempted long term capital gains from accumulated profits and hence pleaded for confirmation of the order of the lower authorities.
Held by CIT (A)
The CIT (A) deleted the addition made towards deemed dividend in respect of sums overdrawn by Nishita Murarka (daughter) to the tune of Rs. 25,90,000/- and by Saahil Murarka (Son) to the tune of Rs. 70,07,000/- as they are not shareholders of BKFCPL and held that the deemed dividend could be taxed only in the hands of shareholder holding more than 10% voting power in the company from which monies were drawn.
However CIT (A) confirmed the addition made towards deemed dividend in respect of amount overdrawn by Mr. Manoj Murarka during the assessment year under appeal to the tune of Rs. 49,12,000/- by ignoring the contentions of the assessee that there is only negative accumulated profits if the longterm capital gains which is exempt from tax is excluded from accumulated profits.
Held by ITAT
ITAT held that the AO had travelled beyond the jurisdiction vested on him by the order of the CIT u/s 263 by treating the amounts overdrawn by the son and daughter of the assessee thereby bringing the same to tax as deemed dividend. In this regard, the decisions relied upon by the Learned AR are well placed.
With regard to the decision relied upon by the Learned DR in the case of L. Alagusundaram Chettiar vs CIT reported in (2001) 252 ITR 893 (SC), ITAT stated that the facts in the said case are totally different and distinguishable to the facts of the instant case. In the case before the Supreme Court, the monies were advanced by the company to one employee K who in turn transferred the monies to the shareholder of the company and this fact was proved by the fact by shareholder admitting that he has been obtaining loan through K in this manner. Hence in these circumstances, the Hon’ble Supreme Court held that the monies were advanced by the company for the benefit of the managing director / shareholder and hence the same has to be treated as deemed dividend. Whereas in the instant case, the monies were advanced directly by the company to the son and daughter of the assessee and it is not the case of the revenue that the monies were subsequently transferred by son and daughter to the assessee and the children merely acted as a conduit to draw monies from the company for onward transmission to the assessee. We hold that the provisions of section 2(22) (e) creates a deeming fiction and hence needs to be viewed strictly. Reliance in this regard is placed on the decision of CIT vs C.P.Sarathy Mudaliar reported in (1972) 83 ITR 170 (SC).
ITAT also observed that both the son and daughter of the assessee are not shareholders in the lending company (i.e BKFCPL) and hence the deemed dividend, if any, could be assessed only in the hands of the shareholders and not otherwise. This argument was taken by the assessee even before the lower authorities and the revenue had not brought on record any contrary evidence to this fact. Hence we hold that the provisions of section 2(22)(e) could not be invoked in respect of amounts paid to Nishita Murarka (daughter) to the tune of Rs. 25,90,000/- and by Saahil Murarka (Son) to the tune of Rs. 70,07,000/- and accordingly, the grounds raised by the revenue in this regard are dismissed.
With regard to appeal of the assessee, ITAT held that for the purposes of artificial categories of dividends which are created by the provisions contained in section 2(22), accumulated profits do not include any capital gains, except those which are taxable as such. Thus, accumulated profits would not include capital gains made during a period when they were not taxable under the Act, nor capital gains which are not chargeable even during the period the capital gain tax is in force. Consequently, any payment made to a shareholder of a company of non-taxable capital gains of the company would not be dividend.We place reliance on the following decisions in this regard:- CIT vs Mangesh J Sanzgiri reported in 119 ITR 962 (Bom), Smt.Chechamma Thomas vs CIT reported in (1986) 161 ITR 718 (Ker) and ACIT vs Gautam Sarabhai Trust No. 23 reported in (2202) 81 ITD 677 (AHD ITAT).
ITAT further held that the legal fiction created in the Explanation 2 to section 2(22) that ‘accumulated profits’ shall include all profits of the company upto the date of distribution or payment should be understood to include the current year profits of the company and not otherwise. In other words, for reckoning the accumulated profits, apart from the opening balance of accumulated profits, the profits earned in the current year also are to be added and then the total accumulated profits should be considered for the purpose of calculation of dividend out of accumulated profits, if any. The said Explanation nowhere contemplates to bring within the ambit of expression ‘accumulated profits’, any capital profits which are not liable to capital gains tax. Accordingly, even going by the provisions of the statute, it can safely be concluded that the capital gains could be included for reckoning the accumulated profits only when the said capital gains has been duly subjected to tax. In the instant case, the capital gains derived by the company to the tune of Rs. 197.20 lacs is exempt and hence the same should not be included in accumulated profits and if the same is excluded, then there is only negative accumulated profits available with the company. Admittedly, the provisions of section 2(22)(e) could be invoked only to the extent of the company possessing accumulated profits. In the absence of accumulated profits, there is no scope for making any addition towards deemed dividend.
