Advance received can’t be termed as a dividend U/s. 2(22)(e) when there was no accumulated profits available

Advance received can’t be termed as a dividend under section 2(22)(e) when there was no accumulated profits available with company through which advance is alleged to be taken

Facts of the Case

Briefly stated, assessee is an individual and was covered in the search and seizure operations u/s 132 of the Act conducted on Vishnu Chemicals Group. Assessment for A.Y 2002-03 was completed u/s 143(3) r.w.s. 153A on 31.12.2009. Later the CIT (Central) Hyderabad treated the assessment order as erroneous and prejudicial to the interests of the Revenue and has ordered for re-assessment u/s 263 of the I.T.Act, 1961 and directed the AO to invoke provisions of section 2(22)(e) in the case of journal entries debiting the assessee in the books of M/s Vishnu Chemicals Private Ltd, in which company assessee is holding more than 10% of the share capital.

Question of Law

Whether the advance can be termed as a dividend u/s 2(22)(e)? If, yes whether assessment Order passed could be termed as erronous when two views were possible under this section?

Contention of the Assessee

The company through which advance is alleged to be taken was not having any accumulated profits. Therefore, the advance could not be termed as a dividend. Also, where the views were different in nature of different authorities of Revenue, the order passed under section 263 could not be upheld.

Contention of the Revenue

Learned CIT has accepted the fact that in reality no money was advanced by the company to assessee, but, according to him, by virtue of such a transaction assessee and his family members have become owner of shares worth Rs. 4 crores in the newly formed company. Company i.e. VCPL was not having accumulated profits at the time of such payment. Though, learned CIT has accepted the fact that in reality no money was advanced by the company to assessee, but, according to him, by virtue of such a transaction assessee and his family members have become owner of shares worth Rs. 4 crores in the newly formed company. According to him, in these circumstances, journal entries passed in the books of account by converting the outstanding liability of the newly formed company as advance given to assessee will attract provisions of section 2(22)(e).

Held by the Tribunal

The Hon’ble Tribunal while relying on the Judgment of co-ordinate Bench in the Assessee’s own case which was having similar facts in which it was observed that the advance was treated as deemed dividend u/s 2(22)(e) because it was converted as advance in the name of assessee merely through book entries and actually no money was advanced to assessee and secondly the company i.e. VCPL was not having accumulated profits at the time of such payment. From the aforesaid discussions of learned CIT, it was apparent and obvious that the issue whether the advance can be treated as deemed dividend u/s 2(22)(e) at the hands of assessee is a debatable issue on which more than one view was possible. Therefore, when the view taken by Addl. CIT and Assessing Officer can be considered as one of the possible views, assessment order cannot be treated as erroneous. Learned CIT failed to examine whether M/s VCPL at the time of alleged payment was having accumulated profits or not. When learned CIT is aware of the fact that Addl. CIT while disapproving the addition proposed to be made u/s 2(22)(e) has observed that M/s VCPL did not have accumulated profits, which is one of the conditions for invoking section 2(22)(e), it was incumbent upon him to examine that aspect before directing for addition of Rs. 4,27,36,648 u/s 2(22)(e). Therefore, considered in the aforesaid perspective when it is a fact on record that both the addl. CIT as well as Assessing Officer in course of assessment proceeding have examined the issue of deemed dividend u/s 2(22)(e) of the Act at the hands of assessee and the view taken by Assessing Officer as well as addl. CIT can be considered as one of the possible views, assessment order cannot be treated as erroneous. In these circumstances, as one of the conditions of section 263 is not satisfied, the impugned order passed u/s 263 is not valid. Accordingly, the Appeal of Assessee was allowed.