1. This appeal filed by revenue is directed against the order of learned Commissioner (Appeals)-XXI, New Delhi dated 31-1-2003 for assessment year 1998-99. The revenue has raised following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the ld. Commissioner (Appeals) has erred in deleting the addition of Rs. 5,01,251 made by the assessing officer as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 by holding that the amount of reserve and surplus shown in the balance sheet of the concerned company cannot be treated as 'accumulated profits' as stipulated in Section 2(22)(e).
2. In granting the relief of Rs. 5,01,251 the ld. Commissioner (Appeals) has ignored the fact that even the assessee himself in para 3.13 of his submission made before the Commissioner (Appeals) has stated that provisions of Section 2(22)(e) can be invoked to the extent of Rs. 3,77,250 instead of Rs. 5,01,251.
3. On the facts and in the circumstances of the case and in law, the ld. CIT has erred in deleting the interest of Rs. 43,134 and Rs. 55,660 charged under Sections 234A and 234B respectively of the Income Tax Act, 1961 ignoring the fact that assessment order clearly mentions, 'Charge interest as per law' and that the interest was accordingly charged under Sections 234A and 234B in ITNS 150 which has also been signed by the assessing officer and forms a part of the assessment order.
2. The assessee, an individual is a Director in M/s. Kalon Engineers (P.) Ltd. He holds 83,350 equity shares of Rs. 10 each fully paid up in the said company out of the total capital of 2,50,240 equity shares of Rs. 10. The assessee is also a proprietor of a concern, namely, M/s.
Suri Associates. The assessing officer treated the sum of Rs. 5,01,251 as deemed dividend under Section 2(22)(e) of the Act. The same was accordingly added to the income. The learned Commissioner (Appeals) held that the assessee is a substantial shareholder in the company M/s.
Kalon Engineers (P.) Ltd. He has received the amount by way of advance or loan. Such amount can be considered as deemed dividend under Section 2(22)(e) of the Act to the extent the company possess accumulated profit. He went on to notice that the assessing officer has not made any enquiry as to what is the amount of accumulated profits of the company when the loans were given. The learned Commissioner (Appeals) held that the term 'accumulated profits' should be computed in the commercial sense and not the assessable income. Since there are several liabilities in respect of income-tax, sales-tax and excise duty etc.
which are not accounted for by the company but are payable by the assessee as per the orders of assessment. After taking such liability into consideration, there are no accumulated profits in the hands of M/s. Kalon Engineers (P.) Ltd. He accordingly deleted the addition. He also held that since the assessing officer has not mentioned about the chargeability of interest in the body of assessment order, charging of interest under Sections 234A and 234B is not sustainable. The revenue is in further appeal before us.
3. The learned Dr Shri David Z. Chawngthu submitted that before learned Commissioner (Appeals), the assessee by his letter dated 25-9-2002 has submitted that out of the amount received by assessee from the company, the net amount received after reducing the amount receivable by the director is only Rs. 3,77,251. Thus, the addition could have been made to the extent of Rs. 3,77,251, being the amount of advance paid by the company to the assessee. The learned Commissioner (Appeals) was not correct in taking cognizance of various liabilities under Income Tax Act, Sales-tax Act and Excise duty as such liabilities are not recognized by the company. The company do not acknowledge such amount as liability accruing prior to giving the advance. Even for the year ending 31-3-1998, the amount payable in this regard has been accepted as liability by the company. The shareholder being substantial shareholder has not objected to not taking cognizance of such liability. The accumulated profits as appearing in the profit and loss account for the year ending 31-3-1997 is Rs. 7,57,800 and that for the year ending 31-3-1998 is Rs. 7,58,533. Thus on the date of giving the advance, the credit balance in the profit and loss account which is shown as reserves and surplus in the books of the company should be treated as accumulated profits and since the loan is much less than the accumulated profits, the entire amount of loan should be treated as deemed dividend under Section 2(22)(e) of the Act.
4. The learned Counsel for assessee, on the other hand, sought to justify the order of learned Commissioner (Appeals). He submitted that the condition that the assessee is a substantial shareholder in the company and that he has received the amount by way of loan or advance from the company is satisfied. However, whether the company possess accumulated profits or not needs to be examined. He submitted that the clause "accumulated profits" means profits in the commercial sense and not the assessable profits or taxable profits liable to income-tax.
This was so held in the case of P.K. Badiani v. CIT .
In CIT v. Gangadhar Banerjee & Co. (P.) Ltd. , Hon?ble Supreme Court held that the words "smallness of profits" in Section 23A of Indian Income-tax Act, 1922 which is akin to Section 104 of the Income Tax Act, 1961 refers to actual accounting profit and not assessable profits in the year. Thus, while deciding the issue in relation to accumulated profits as occurring in Section 2(22)(e) of the Act, the provision must be worked out from the standpoint of businessman as to what amount will be taken into account for distributing dividend. While so deciding the previous losses, the present profits and availability of surplus money and reasonable requirement of figure shall also be considered. Judging from the same point of view, short provision of income-tax for earlier years, the liability under the Sales-tax Act, under the Excise laws shall also be provided. Similarly, the depreciation to be adopted should be as per the Income-tax law and not as per the Companies Act. If all these facts are considered and appropriate amount is provided there will not be any accumulated profit as a liability for income-tax is more than Rs. 4,70,000, for sales-tax is over Rs. 42 lakhs and for excise duty is more than Rs. 7,60,000. Since learned Commissioner (Appeals) has appropriately taken this figure into account, the order of learned Commissioner (Appeals) needs to be upheld.5. The counsel for assessee also submitted that the amount of accumulated profits must be ascertained every time when a loan is advanced. Thus, when the assessee received the initial sum of Rs. 2 lakhs, it was received by way of refund of dues payable to the assessee and not by way of loan. Thus, even if it is held that the accumulated profits are to be taken as shown in the profit and loss account, to the extent of repayment of liability by the company cannot be considered as loan to the assessee. In such circumstances, at best only a sum of Rs. 3,77,251 can be considered as deemed dividend under the Act. As regards charging of interest, learned Counsel for assessee agreed that in view of the later decision of the Special Bench of Tribunal in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (Delhi) (SB) (Mag.), the interest will be consequential in nature and may be charged as per law.
6. We have considered relevant facts, arguments advanced and the case laws cited. The clause "accumulated profits" as occurring in Section 2(22)(e) is not defined specifically. However, as per Explanation 2 to Section 2(22), the expression "accumulated profits" shall include all profits of the company upto the date of the distribution or payment referred to in those sub-clauses; of Section 2(22). Under Section 205 of the Companies Act, 1956, no dividend shall be declared or paid by a company except out of the profits of the company for that year or out of the profits of the company for any previous financial years. It also provides that such profit has to be arrived at after providing for depreciation to the extent specified in Section 350 of the Act. Section 211 of the Companies Act provides that the balance sheet of company shall give a true and fair view of the state of affairs of the company as at the end of the financial year. It also provides that the profit and loss of a company shall give a true and fair view of the profit or loss of the company for the financial year. The audit report of the company obtained under Section 224 of the Companies Act certifies that the account of the company has maintained by it are depicting the true and fair state of affairs of the company as on 31-3-1997 as well as 31-3-1998. Thus, the accounts which do not account for the liabilities in respect of income-tax, sales-tax and excise laws are not acknowledged as liability by the company and still the accounts are stated to be presenting a true and fair view of the affairs as well as profits of the company. The assessee as a shareholder as well as Managing Director thereof has not objected to the accounts which do not take into consideration the liabilities not provided for. This, in other words, confirms that the liabilities are not accrued or ascertained liabilities and are not acknowledged as such. Thus, the profit as declared in the accounts are available to the company for distribution of dividend therefrom. The assessee in his personal capacity as shareholder cannot challenge the correctness of the accounts which he himself has certified to be true and fair as Managing Director of such company. Thus, the profit as appearing in the accounts of the company will form part of accumulated profits of the company and needs no further adjustment.
7. In the present case, it is seen that the assessee in his individual capacity as well as proprietor of Suri Associates received a sum by way of loan amounting to Rs. 6,08,000. After reducing the balance due to him by the company of Rs. 2,30,749 the loan received were to the extent of Rs. 3,77,251. Since the accumulated profits of the company on the date of advancing such loan is more than Rs. 7,50,000, a sum of Rs. 3,77,251 received by way of loan shall be deemed to be dividend received by assessee under Section 2(22)(e) of the Act and is, therefore, to be charged to tax. To this extent, the order of learned Commissioner (Appeals) is reversed.
8. As regards charging of interest under Sections 234A and 234B, it is admitted fact that the assessee filed his return of income beyond the clue date prescribed under Section 139(1) of the Act. Thus, he is liable to pay interest under Section 234A of the Act. It is also admitted fact that the advance tax paid is less than 9096 of the assessed tax. Accordingly, interest under Section 234B is also chargeable. Since the order of assessing officermentions about charging of interest as per law and since computation worked out in ITNS 150 also mentions the working of such interest, in view of the decision of the Special Bench of the ITAT in the case of Motorola Inc. (supra) as well as the decision of Hon?ble Supreme Court in the case of Kalyan Kumar Ray, interest is chargeable. The assessing officer shall charge interest on the basis of assessed income.