The “Security Premium Reserve” cannot be included in the “Accumulated Profit” for the calculation of the declared dividend: ITAT

Contingency Premium Reserve - Accumulated Profit - Calculation of Assumed Dividend - ITAT - Taxscan

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), chaired by Judicial Member Chandra Mohan Garg and Accountant Member Pradeep Kumar Khedla, upheld the decision of the Commissioner of Income Tax (Appeal). [CIT(A)] that the security premium reserve in the decision in the case of Bhagwati Coal Movers (P) Ltd. cannot be considered part of accumulated profits.

The appeal was lodged by the Revenue Commissioner against the order of the CIT(A), Faridabad, which arose from an assessment order issued by the Assessing Officer (AO) for the AY 2013-14.

Ajmala Stationery Pvt. ltd (ASPL) to whom the assessee lent money during the year is one of the few facts that neither the assessee nor the earnings dispute. The sum of Rs. 5,52,50,000 was actually added by the AO as a deemed dividend under Section 2(22)(e) of the Income Tax Act 1961.

As the Complaining Company holds more than 10% of M/s ASPL, the Loan Receipt will be treated by the Complaining Company as a dividend payment under Section 2(22)(e) of the Income Tax Act.

The beneficiary’s representative submitted before the CIT(A) that M/s ASPL did not have sufficient reserves and surpluses and that the addition could only be made to the extent of the reserves and surpluses. The reserves and surplus of M/s ASPL total Rs. 25 million, but only ₹2,86,084 of this amount is general reserve and the remaining amount is share award reserve.

However, according to the AO, the general reserves and surpluses of the M/s ASPL are Rs. 25 million.

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Before the CIT(A), the beneficial owner’s representative argued that not every gain is a commercial gain and that where a gain cannot be distributed as a dividend, the discretionary requirements of Section 2(22)(e) of the Income Tax Act do not apply.

The CIT(A), after analyzing the facts of both parties, found that “the addition under Section 2(22)(e) of the Income Tax Act can only be made up to the amount of the general reserve available at M/s ASPL, which amounts to Rs. 2.86.084/- and therefore the addition is limited to it and the balance addition is deleted. This reasoning of the complainant is thus partially upheld.”

The CIT(A) thus reversed the amendments made by the Assessing Officer and granted relief in respect of the prohibition on interest refusal under Section 36(1)(iii) of the Income Tax Act and the amount of the loan which is deemed to be the beneficiary’s income under Section 2 (22)(e ) of the Income Tax Act. Therefore, the IRS challenged this appeal granted by the CIT(A) to the Assessor before the Tribunal.

The Court of Appeals upheld the CIT(A)’s decision, noting that the CIT(A) limited the addition to the scope of the “General Reserve” after excluding the “Safety Premium Reserve”, which was deemed outside the scope of the term “accumulated profits” under Section 2(22)(e) of the Income Tax Act and determined that the Security Premium Reserve could not be considered part of the accumulated profits.

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Assistant Commissioner of Income Tax Vs Bhagwati Coal Movers (P) Ltd.,

File number: ITA No. 3394/DEL/2017

Judgment date: 02/11/2022

Appellant’s Counsel: Kanav Bali, Sr.DR

Respondent’s Attorney: Alok Gupta, CA