Securities premium is not accumulated profits u/s 2(22)(e): ITAT

Brief of the Case

ITAT Bangalore held in the case M/s Jeans Knit Pvt. Ltd. vs. ACIT that it is clear that the balance in the reserve and surplus is only on account of security premium amount after reducing the loss incurred by the assessee for the earlier year as well as during the year under consideration. Therefore, there is no dispute about the fact that the reserve and surplus amount does not show any accumulated profit but the amount shown is only loss as well as premium on securities. Explanation 1 and 2 to sec.2 (22) (e) do not propose to include the premium on securities/shares in the expression ‘accumulated profit’. Hence share premium lying as reserve and surplus of the company is not income of the company and therefore, the provisions of sec.2 (22) (e) cannot be invoked.

Facts of the Case

Addition u/s 2(22) (e) on account of deemed dividend

In this case, AO noticed that the assessee has advanced an amount of Rs.23,08,94,447/- to concern in which the directors are interested and the same amount is shown as due. The AO proposed to consider the advance given to the concern in which the directors are interested as deemed dividend u/s 2(22) (e).

Contention of the Assessee

The ld counsel of the assessee submitted that there was no accumulated profit with the assessee and the amount shown in the reserve and surplus fund pertains to premium on securities. Therefore, in the absence of accumulated profit, provisions of sec.2 (22)(e) cannot be invoked. He has referred to the finding of the CIT (A) and submitted that the CIT (A) has recorded this fact that the assessee is not having any accumulated profit and the amount shown in the reserve and surplus pertains to premium on securities. Thus, the Senior Counsel has submitted that the provisions of sec.2 (22) (e) cannot be invoked when the conditions provided under the said provision, particularly, the existence of the accumulated profit is not satisfied.

He has relied upon the decision of the Hon’ble Punjab & Haryana High Court dated 29/10/2013 in ITA No.225/2013 in case of CIT vs. Radhe Sham Jain and submitted that while considering an identical issue, the Hon’ble High Court has held that in the absence of accumulated profit, share premium amount lying as reserve and surplus of the company is not income of the company and therefore, the provisions of sec2 (22) (e) cannot be invoked.

Contention of the Revenue

The ld counsel of the revenue submitted that the AO has recorded the fact that the assessee has advanced an amount of Rs.23,08,94,447/- to concern in which the directors are interested and the same amount is shown as due. The AO proposed to consider the advance given to the concern in which the directors are interested as deemed dividend u/s 2(22) (e). He further submitted that the AO found that the assessee was having sufficient amount in its reserve and surplus account and therefore, the conditions provided u/s 2(22) (e) are satisfied for treating the said amount as deemed dividend. He has relied upon the orders of the AO.

Held by ITAT

Addition u/s 2(22) (e) on account of deemed dividend

ITAT held that it is clear that the balance in the reserve and surplus is only on account of security premium amount after reducing the loss incurred by the assessee for the earlier year as well as during the year under consideration. Therefore, there is no dispute about the fact that the reserve and surplus amount does not show any accumulated profit but the amount shown is only loss as well as premium on securities. Explanation 1 and 2 to sec.2 (22) (e) do not propose to include the premium on securities/shares in the expression ‘accumulated profit’.

Further Hon’ble Punjab & Haryana High Court dated 29/10/2013 in ITA No.225/2013 in case of CIT vs. Radhe Sham Jain while considering an identical issue, has held that in the absence of accumulated profit, share premium amount lying as reserve and surplus of the company is not income of the company and therefore, the provisions of sec.2 (22) (e) cannot be invoked.

In view of the above facts and circumstances of the case, when there is no accumulated profits in the books of the assessee, then merely because the reserve and surplus having the balance on account of premium on security would not lead to the conclusion that the assessee was having sufficient accumulated profits to invoke the provisions of sec.2 (22) (e).

Accordingly appeal of the revenue dismissed.