Case Law Details
Sri Srikanth Marru Hyderabad Vs ITO (ITAT Hyderabad)
There is a nexus between the loan taken from the LIC and the premium paid for the Keyman Insurance Policy. Since the Keyman Insurance Policy is for the benefit to the assessee, it was held that the same is taxable as deemed dividend u/s 2(22)(e) of the Act. However, as rightly pointed out by the learned Counsel for the assessee, the provisions of section 2(22)(e) of the Act would be applicable only to the extent of accumulated profits of the company available at the beginning of the relevant financial year.
FULL TEXT OF THE ITAT JUDGMENT
This Miscellaneous Application is filed by the assessee seeking rectification of alleged mistakes apparent from the order of the Tribunal dated 31.05.2018. The assessee has stated as under:
“Sub:- Miscellaneous Petition u/s 254(2) of the Income Tax Act, 1961 arising out of ITA No.240/Hyd/2017 “B” Bench, AY:2009-10 – order pronounced on 31/05/2018-Rectification regarding.
1. The Appellant Srikant Marru filed an appeal for the Assessment Year 2009-2010 and the appeal was numbered as ITA No. 240/Hyd/2017 before the Income Tax Appellate Tribunal, “B” Bench, Hyderabad.
2. The Hon’ble Income Tax Appellate Tribunal “B” Bench vide its order dated 31/05/2018 allowed the appeal in part. This Miscellaneous Petition is fled to rectify the order passed on 31/05/2018 and in relation to confirmation of sum of Rs. 5,29,750/- as deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961.
3. The Appellant is a substantial shareholder in M/s. Santoshi Chit Fund Pvt Ltd. The company had taken a Keyman Insurance Policy a few years ago in the name of the Appellant. Subsequently, the company took a loan against the Keyman Insurance Policy to the extent of Rs. 65,29,750/- and this sum was advanced to the Appellant.
4. The Appellant submitted, sum of Rs. 5,29,750/- could not be taxed as deemed dividend as no part of the accumulated profits of the company were utilised to advance the sum of Rs. 5,29,750/-. On the contrary, the entire funds flew from a loan taken by the company and therefore the provisions of section 2(22)(e) was not applicable.
5. However, the Hon’ble Income Tax Appellate Tribunal vide para 6 of the order held as under:-
“6. As regards the sum of Rs.5,29, 750, it is seen that the company has received a loan from Lie and has transferred the ITA No 240 of 2017 Srikanth Marru Hyderabad. Page 4 of 4 same to the assessee on 14.8.2008. This loan was taken on the premium paid for the Keyman Insurance Policy taken on 31.3.2008. Since the nexus between the loan and advance to the assessee is clearly established and there is accumulated profit of the company available to such an extent, the same is taxable as deemed dividend u/s 2(22)(e) of the Act. In view of the same, the addition u/s 2(22J(e) is partly deleted.”
6. The Appellant submits that there is a mistake apparent from record as the provisions of section 2(22)(e) were introduced mainly where the accumulated profits of the are lent to the Directors holding substantial interest and thus avoiding declaration of dividends and dividend distribution tax. On the contrary, if no part of the accumulated profits are utilised to advance loans to the Directors, the provisions of section 2(22)(e) of the IT Act, 1961 were inapplicable. On the facts of the Appellant’s case, there is a clear finding that there is a substantial nexus between the loan taken by the company from Lie and the amount advanced to the Appellant, in which case, the transaction would not fall within the meaning of section 2(22)(e) of the Income Tax Act, 1961.
7. The Appellant further submits that but for the loan taken by the company from LIC, no amount of accumulated profits would have been lent by the company to the Appellant. This is just to demonstrate that no part of the accumulated profits were utilised to advance the sum of Rs.s,29,750/-
Without prejudice to any of the aforesaid submissions, the Appellant submits that Commissioner of Income Tax (Appeals)- 3, Hyderabad at last paragraph of her order held that the accumulated profits of the company as on 31.03.2008 stood at Rs.4,15,830j- and therefore, the deemed dividend, if any, is to be restricted to this amount and not Rs.5,29,750j- as held by the Assessing Officer.
Thus, the quantum without prejudice to the submission that the provisions of section 2(22)(e) are inapplicable needs reduction.
- Therefore it is prayed that the Hon’ble Tribunal may be pleased to rectify the order on the facts admitted above and pass order as deem fit”.
2. The learned Counsel for the assessee submitted that for applying the provisions of section 2(22)(e) of the Act, the basic condition to be fulfilled is that the company must have advanced loans/ advances from its accumulated profits of the relevant financial year. He submitted that the Tribunal has clearly held that the assessee was received a loan from LIC which has been transferred towards payment of premium for the Keyman Insurance Policy and therefore, a nexus between the loan and the alleged advance to the assessee is clearly established. He submitted that even from the findings of the CIT (A), the accumulated profit of the company is only to an extent of Rs.4,15,830 and as it was not the sum advanced to the assessee for Keyman Insurance Policy, the same cannot be brought to tax u/s 2(22)e of the Act. Without prejudice to the above argument, he also submitted that if the addition is to be sustained, it can only be sustained to the extent of the accumulated profit available to the assessee and not the whole sum of Rs.5,29,750.
3. The learned DR, however, submitted that there is no mistake in the order of the Tribunal which needs rectification.
4. Having regard to the rival contentions and the material on record, we find that the Tribunal has held that there is a nexus between the loan taken from the LIC and the premium paid for the Keyman Insurance Policy. Since the Keyman Insurance Policy is for the benefit to the assessee, it was held that the same is taxable as deemed dividend u/s 2(22)(e) of the Act. However, as rightly pointed out by the learned Counsel for the assessee, the provisions of section 2(22)(e) of the Act would be applicable only to the extent of accumulated profits of the company available at the beginning of the relevant financial year. Thus, we agree with the contention of the assessee, that there is a mistake apparent from the order of the Tribunal and therefore we rectify the mistake by substituting Paras 6 and 7 as under:
“6. Since there is an accumulated profit of the company available to an extent of Rs. 4,79,063, the the advance to the extent of such profits alone can be brought to tax as deemed dividend u/s 2(22)(e) of the Act. In view of the same, the addition u/s 2(22)(e) of the Act is restricted to Rs.4,79,063/-.”
7. In the result, assessee’s appeal is allowed”.
5. In the result, Miscellaneous Application filed by the assessee is allowed.
Source- Sri Srikanth Marru Vs ITO (ITAT Hyderabad); M.A. No. 68/Hyd/2018; 10/08/2018; 2009/10
