‘Security Premium Reserve’ cannot be Included in ‘Accumulated Profit’ for Computing Deemed Dividend: ITAT
– On 14 December 2022 20:01
The Delhi bench of the Income Tax Appellate Tribunal (ITAT), presided over by Justice Member Chandra Mohan Garg and and Accountant Member Pradeep Kumar Khedla upheld the decision of the Commissioner of Income Tax (Appeals). [CIT(A)] that the security premium reserve cannot be considered as part of accumulated profits whereas the case of Bhagwati Coal Movers (P) Ltd.
The appeal was filed by the Revenue against the order of the CIT(A), which obtained Faridabad from an assessment order passed by the Assessing Officer (AO) for the AY 2013-14.
Ajmala Stationery Pvt. Ltd. (ASPL) who lent money to the assessee during the year is one of the few facts which neither the assessee nor the revenue disputes. The sum of Rs. 5,52,50,000 was indeed added by the AO as the deemed dividend in accordance with Section 2(22)(e) of Income-tax Act, 1961.
Due to the appellant company’s ownership of more than 10% of M/s ASPL, the loan receipt is treated by the appellant company as a dividend receipt in terms of Section 2(22)(e) of the Income Tax Act.
The assessee’s representative contended before the CIT(A) that M/s ASPL does not have sufficient reserves and surpluses and that the addition can be made only to the extent of reserves and surpluses. The reserves and surplus of M/s ASPL amounts to 25 crores rupees, but only ₹ 2,86,084 of that amount is general reserve, and the remaining amount is share premium reserve.
However, according to AO, the general reserves and surplus of M/s ASPL is Rs. 25 million.
Before the CIT(A), the representative for the assessee argued that not every profit constitutes a commercial profit and that the judgment requirements of Section 2(22)(e) of the Income Tax Act do not apply where a profit cannot be distributed is not considered a dividend.
The CIT(A) after analyzing the facts of both parties said that “the addition under Section 2(22)(e) of Income-tax Act can be made only to the extent of general reserves available with M/s ASPL amounting to Rs.2,86,084/- and hence the addition is restricted to this and balance accrual is deleted. This Land of the appellant is therefore partially allowed.”
The CIT(A) therefore reversed the additions made by the Assessing Officer and granted relief on the disallowance of interest under Section 36(1)(iii) of the Income Tax Act as well as the loan amount deemed to be income of the assessee under Section 2 (22)(e) of the Income Tax Act. The Revenue therefore challenged this relief granted to the assessee by the CIT(A) before the Tribunal.
The Appellate Tribunal upheld the decision of the CIT(A) and observed that the CIT(A) limited the addition to the extent of ‘General Reserve’ after excluding the ‘Security Premium Reserve’ which is held to be outside the scope of expression ‘accumulated profits ‘ under Section 2(22)(e) of the Income Tax Act and held that the security premium reserve cannot be considered as a part of accumulated profits.
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