Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Maipo India Ltd. on 7 March, 2008
Equivalent citations: (2008)116TTJ(DELHI)791
ORDER
R.V. Easwar, Vice President
1. This is an appeal by the Revenue and the only ground raised is as under:
The learned CIT(A) erred in law and on facts in reducing addition on account of deemed dividend under Section 2(22)(e) from Rs. 25,42,772 to Rs. 1,85,821 by holding that reserve on account of share premium should be excluded from the accumulated profits of the assessee, and that the accumulated profits are to be taken as the opening balance and not on the dates when the loan was advanced.
2. The brief facts giving rise to the appeal are these. The assessee respondent is a company engaged in the consultancy business. We are concerned with the asst. yr. 1996-97. While completing the assessment under Section 143(3) of the IT Act the AO included an amount of Rs. 11,11,772 as deemed dividend under Section 2(22)(e) of the Act. The amount was part of an amount of Rs. 25,42,772 advanced during the year to the assessee by another company by name Gorgeous Chemical (P) Ltd., in which the assessee company held 40 per cent of the shares as on 31st March, 1996. The amount was advanced in the nature of loans and advances, pure and simple. Towards the end of the year, the assessee company had repaid Rs. 14,31,000 and the balance was assessed as deemed dividend.
3. Before the AO, the assessee, inter alia, took up the contention that the entire reserves and surplus of Rs. 1,95,42,869 appearing in the books of Gorgeous Chemical (P) Ltd. consisted of "share premium" which was a capital receipt and could not have been distributed as dividend. The AO rejected the contention, stating that in Clause (e) of Sub-section (22) of Section 2 the words "whether capitalised or not" did not appear, in contrast with the earlier clauses of the sub-section where these words found a place and therefore it was immaterial that the reserves and surplus consisted only of capital receipt by way of share premium.
4. On appeal, the CIT(A) accepted the aforesaid contention of the assessee. He however found that out of the reserves and surplus account of Gorgeous Chemical (P) Ltd., Rs. 1,90,00,000 represented share premium and Rs. 1,85,821 was on account of balance in the P&L a/c. He accordingly sustained the addition of Rs. 1,85,821 and deleted the balance.
5. It is the aforesaid decision of the CIT(A) that is challenged before us on behalf of the Revenue. The assessee is not in appeal against the addition of Rs. 1,85,821 sustained by the CIT(A).
6. We have heard the rival contentions. The contention of the Revenue is that "accumulated profits" includes all profits, including capital profits and is not restricted to commercial or revenue profits. Attention was drawn to Expln. 2 to Section 2(22)(e). It was submitted that no exclusion was provided for capital profits expressly. The line of reasoning adopted by the AO that in Clause 3. (e) the expression "whether capitalised or not" did not find place in contrast with the earlier clauses was also pressed into service. It was contended that the section provided for "deemed dividend" and such a provision should be given its full play. It was further contended that the judgment of the Supreme Court in P.K. Bodiani v. CIT , which was relied on by the CIT(A), was distinguishable and was not applicable to the present case.
7. The learned representative for the assessee, on the other hand, submitted that every gain is not commercial profit and that where the profit is not capable of being distributed as dividend the deeming provisions of Section 2(22)(e) are not attracted. It was contended that the deeming provision should be strictly construed. Strong reliance was placed on Section 78(2) of the Companies Act, 1956 which prohibits distribution of dividend out of share premium account. It was submitted that there was a statutory bar which cannot be disregarded while interpreting Section 2(22)(e), especially when the object of the IT Act was to tax amounts distributed by the company to the shareholders ostensibly as loans and advances but actually as dividend. The learned representative for the assessee thus submitted that the profits accumulated by the company should be capable of being distributed as dividend. Reliance in this connection was placed on the judgment of the Supreme Court in CIT v. Urmila Ramesh , especially the observations of the Court at pp. 434-435.
8. We have carefully considered the rival contentions and we are inclined to uphold the decision of the CIT(A). There is no dispute that a sum of Rs. 1,90,00,000 out of the reserves and surplus account of Gorgeous Chemical (P) Ltd. as on 31st March, 1996 represented share premium collected by the said company. Section 78(1) of the Companies Act deals with the application of premium received on issue of shares. It says that the premium received shall be transferred to a separate account styled "the share premium account" and further says that the provisions of the Companies Act relating to the reduction of the share capital of the company shall apply as if the share premium account were paid up share capital of the company. Sub-section (2) mentions five purposes for which alone the share premium account may be applied without attracting the provisions of the Companies Act relating to the reduction of the share capital. These are:
(i) To pay up fully paid bonus shares to be issued to the members.
(ii) To write off preliminary expenses of the company.
(iii) To write off expenses of issue of shares or debentures or under-writing commission paid or discount allowed on such issues.
(iv) To pay premium on the redemption of redeemable shares or debentures issued by the company.
(v) Purchase of its own shares or other specified securities in terms of Section 77A.
Except in the above five cases, any other application of proceeds of the share premium account will be treated as a reduction of the company's share capital and the provisions of the Companies Act dealing with this subject stand attracted. The share premium account cannot be used otherwise than for the specific purposes mentioned above and this position has been recognised by the Supreme Court in CIT v. Allahabad Bank Ltd. . In this case, it was held that the share premium account is liable to be included in the paid up capital for the purpose of commuting the rebate allowable under para D, Part 2 of the Finance Act. The object and scope of Section 78 of the Companies Act has been stated as follows at p. 989 of "Guide to the Companies Act by A. Ramaiya, Sixteenth Edition by Justice Y.V. Chandrachud, former Chief Justice of India:
There was no corresponding provision in the previous Act, and in the absence of any statutory prohibition, share premium amounts were being freely distributed as dividends, and the misuse of the funds collected as premiums was not lacking. The object of the present section is to lay down specifically how the premiums collected on the issue of shares should be utilised.
At p. 990 of the above treatise, the nature of share premium account has been described as follows:
The effect of this section is to create a new class of capital of a company which is not share capital but not distributable as income any more than any other capital asset. On a winding up the surplus monies in the shares (now securities) premium account will be returned to the shareholders as capital and so long as the company is a going concern, the same monies can never be returned to the shareholders except through the medium of a reduction petition or, in other words, except under exactly the same conditions as those under which any other capital asset can reach the shareholder's hands. [Re, Duffs Settlement Trusts, (1951) 1 All ER 869 (following Re, Bates Mountain v. Bates (1928) Ch 682 affirmed in (1951) 2 All ER 534]. See also, Addl. CIT v. Om Oils & Oil Seed Exchange Ltd. (1985) 57 Com Cases 592 (Del), where it has been held that premium on issue of shares is to be regarded as money paid on capital account and not as revenue receipt.
Another effect of the section is that distribution of shares (now securities) premium amount as dividend is not permitted, and it is taken out of the category of divisible profits. But premiums received on the issue of shares, under the 1913 Act, were profits and so could be distributed as dividends. [Bharat Fire & General Insurance Ltd. v. CIT (1964) 34 Com Cases (SC)]. Any distribution of the amount among shareholders except in any of the modes specified in Sub-section (2) can only be by way of reduction of capital and this will require the sanction of the Court and the procedure laid down in Section 100.
The above view based on the interpretation of Section 78 of the Companies Act settles the dispute before us in favour of the assessee. When there is a statutory bar on the share premium account being used for distribution of dividend, the deeming provision of Section 2(22)(e) cannot apply. Not only is there a prohibition on the distribution of the share premium account as dividend under the Companies Act, the same is obliged to be treated as part of the share capital of the company and this is made clear in Section 78(1) of the Companies Act which says that any payment out of the share premium account, except for purposes authorised by Sub-section (2), will be treated as reduction of share capital attracting the provisions of the Companies Act in relation thereto. This provision of the Companies Act takes care of the argument of the Revenue that Section 2(22)(e) of the IT Act does not use the expression "whether capitalized or not". These words can have application only where the profits are capable of being capitalized. They are not applicable where the receipt in question forms part of the share capital of the company under the provisions of the Companies Act. This position has been recognised by the Supreme Court in CIT v. Urmila Ramesh (supra) where at pp. 434-435 the following observations were made:
Section 2(22) of the Act has used the expression 'accumulated profits', 'whether capitalized or not'. This expression tends to show that under Section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression 'whether capitalized or not' the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalized. The amounts should, in other words, be in the nature of profits which the company would have distributed to its shareholders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalized, the return being of capital itself.
9. In P.K. Badiani v. CIT (supra), it was held by the Supreme Court that the /term "profits" occurring in Section 2(6A)(e) of the 1922 Act means profits in the commercial sense, that is to say, the profits made by the company in the real and true sense of the term. The share premium account cannot be stated to be commercial profits in the true sense of the term, having regard to the provisions of the Companies Act referred to above. Applying the judgment in Badiani's case (supra), it was held in Urmila Ramesh (supra) that where assets of the company were sold at a price less than the purchase price, the amount so received, apart from being in the nature of return of capital, cannot represent profits of the company.
10. For the above reasons, we are in agreement with the decision of the CIT(A) that the amount of Rs. 1,85,821 alone out of the amount of Rs. 25,42,772 can be assessed as deemed dividend under Section 2(22)(e) of the IT Act. We affirm his order on this point and dismiss the appeal filed by the Revenue with no order as to costs.