The Assessing Officer has added the current year's profit up to the date of the advance to the opening reserves in working out 'accumulated profits' for s.2(22)(e), which is what pushes the deemed dividend up. Is there any authority against him?
Yes, but it is thin and you must use it with your eyes open. The Gujarat High Court, considering Explanation 2 to s.2(22)(e), confirmed a Tribunal direction to the Assessing Officer not to include the current profit as part of accumulated profits, on the footing accepted by the Tribunal that profit accrues only when the books of account are closed. The Revenue's own argument, recorded in the judgment, was the opposite — that Explanation 2 requires the current year's profit up to the date of distribution to be taken into account.
Decided by the High Court (M.R. Shah J and S.H. Vora J (oral judgment per M.R. Shah J)) on 2015-04-23, reported as Tax Appeal No. 772 of 2007 (High Court of Gujarat at Ahmedabad). It bears on section 2(22)(e), section 154 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
The accumulated-profits ceiling is often the only thing that keeps the addition down, and current-year profit is usually the largest disputed component of it. This is the clearest High Court statement the search located that it is excluded. But three things must be said plainly to anyone relying on it. First, the respondent company was in liquidation and nobody appeared for it or for the Official Liquidator, so the point was decided on the Revenue's submissions alone, in a four-page oral judgment. Second, the judgment records the Revenue's reading of Explanation 2 and then rejects it without setting out the text of the Explanation or explaining why the words do not mean what the Revenue said they mean. Third, it sits uneasily with the principle the Supreme Court adopted in CIT v Mukundray K. Shah, that accumulated profits are to be ascertained at the date of each payment — a rule that presupposes profits accruing between the start of the year and that date. Cite it as a point to be argued, get the arithmetic of your case on record either way, and do not present it to a reader as settled law.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 1990-91 the Assessing Officer, in working out the deemed dividend under s.2(22)(e), included the current year's profit as part of accumulated profits. The assessee applied under s.154 for rectification; the Assessing Officer rejected the application on the ground that there was no mistake apparent from the record. The Income Tax Appellate Tribunal, 'B' Bench, Ahmedabad, by its order dated 20 October 2006 in ITA No. 3229/Ahd/2003, set aside the order of the CIT(A) and directed the Assessing Officer not to include the current profit as part of accumulated profit. The Revenue appealed under s.260A, raising three questions: whether the Tribunal was right in so directing; whether it had erred in not first deciding whether the s.154 application had been rightly rejected; and whether it had transgressed from the main issue. Before the High Court, counsel for the Revenue argued that under Explanation 2 to s.2(22)(e) the current year's profit up to the date of distribution has to be taken into account. The respondent company had gone into liquidation and an Official Liquidator had been appointed; nobody appeared for either.
The appeal was dismissed. Considering s.2(22)(e) and in particular Explanation 2, it could not be said that the Tribunal had committed any error in directing the Assessing Officer not to include the current profit as part of accumulated profit; while determining the amount of deemed dividend under Explanation 2 the current profit was not required to be included as part of accumulated profit. Question 1 was answered in favour of the assessee and against the Revenue.
The Court noted that the respondent was in liquidation and that no one appeared even for the Official Liquidator, and that remitting the matter to the Tribunal or the Assessing Officer would meet the same fate, so it decided the merits itself. Having heard counsel for the Revenue and considered s.2(22)(e) and particularly Explanation 2, it confirmed the Tribunal's view, observing that as the Tribunal had noted the issue was already settled against the Revenue by the Supreme Court in Associated Banking Corporation of India Ltd. v. Commissioner of Income-Tax, Bombay (1965) 56 ITR 1, by which the view taken was that profit accrues when the books of account are closed. Because the merits were decided in the assessee's favour, the questions concerning the s.154 rectification application were not separately dealt with.
While determining the amount of deemed dividend under Explanation 2 to Section 2(22)(e) of the Act, the current profit was not required to be included to be part of accumulated profit.
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Handle my notice → Ask a CA on WhatsAppYes, but it is thin and you must use it with your eyes open. The Gujarat High Court, considering Explanation 2 to s.2(22)(e), confirmed a Tribunal direction to the Assessing Officer not to include the current profit as part of accumulated profits, on the footing accepted by the Tribunal that profit accrues only when the books of account are closed. The Revenue's own argument, recorded in the judgment, was the opposite — that Explanation 2 requires the current year's profit up to the date of distribution to be taken into account. This was decided by the High Court (M.R. Shah J and S.H. Vora J (oral judgment per M.R. Shah J)) and bears on section 2(22)(e), section 154 of the Income Tax Act 1961. It is reported as Tax Appeal No. 772 of 2007 (High Court of Gujarat at Ahmedabad). The accumulated-profits ceiling is often the only thing that keeps the addition down, and current-year profit is usually the largest disputed component of it. This is the clearest High Court statement the search located that it is excluded. But three things must be said plainly to anyone relying on it. First, the respondent company was in liquidation and nobody appeared for it or for the Official Liquidator, so the point was decided on the Revenue's submissions alone, in a four-page oral judgment. Second, the judgment records the Revenue's reading of Explanation 2 and then rejects it without setting out the text of the Explanation or explaining why the words do not mean what the Revenue said they mean. Third, it sits uneasily with the principle the Supreme Court adopted in CIT v Mukundray K. Shah, that accumulated profits are to be ascertained at the date of each payment — a rule that presupposes profits accruing between the start of the year and that date. Cite it as a point to be argued, get the arithmetic of your case on record either way, and do not present it to a reader as settled law. If it applies to you, the first step is this: Work out the addition twice — once with current-year profit up to the date of the advance included, once without — and put both figures on record, so the dispute is reduced to a single quantified issue.
For assessment year 1990-91 the Assessing Officer, in working out the deemed dividend under s.2(22)(e), included the current year's profit as part of accumulated profits. The assessee applied under s.154 for rectification; the Assessing Officer rejected the application on the ground that there was no mistake apparent from the record. The Income Tax Appellate Tribunal, 'B' Bench, Ahmedabad, by its order dated 20 October 2006 in ITA No. 3229/Ahd/2003, set aside the order of the CIT(A) and directed the Assessing Officer not to include the current profit as part of accumulated profit. The Revenue appealed under s.260A, raising three questions: whether the Tribunal was right in so directing; whether it had erred in not first deciding whether the s.154 application had been rightly rejected; and whether it had transgressed from the main issue. Before the High Court, counsel for the Revenue argued that under Explanation 2 to s.2(22)(e) the current year's profit up to the date of distribution has to be taken into account. The respondent company had gone into liquidation and an Official Liquidator had been appointed; nobody appeared for either. The matter was decided on 2015-04-23 by the High Court (M.R. Shah J and S.H. Vora J (oral judgment per M.R. Shah J)). On those facts the High Court held as follows. The appeal was dismissed. Considering s.2(22)(e) and in particular Explanation 2, it could not be said that the Tribunal had committed any error in directing the Assessing Officer not to include the current profit as part of accumulated profit; while determining the amount of deemed dividend under Explanation 2 the current profit was not required to be included as part of accumulated profit. Question 1 was answered in favour of the assessee and against the Revenue.
The Court noted that the respondent was in liquidation and that no one appeared even for the Official Liquidator, and that remitting the matter to the Tribunal or the Assessing Officer would meet the same fate, so it decided the merits itself. Having heard counsel for the Revenue and considered s.2(22)(e) and particularly Explanation 2, it confirmed the Tribunal's view, observing that as the Tribunal had noted the issue was already settled against the Revenue by the Supreme Court in Associated Banking Corporation of India Ltd. v. Commissioner of Income-Tax, Bombay (1965) 56 ITR 1, by which the view taken was that profit accrues when the books of account are closed. Because the merits were decided in the assessee's favour, the questions concerning the s.154 rectification application were not separately dealt with. In the words reproduced by the source cited on this page: "While determining the amount of deemed dividend under Explanation 2 to Section 2(22)(e) of the Act, the current profit was not required to be included to be part of accumulated profit." The decision followed or applied Associated Banking Corporation of India Ltd. v. Commissioner of Income-Tax, Bombay (1965) 56 ITR 1 (SC) — relied on, as recorded by the Tribunal; not separately retrieved on this pass.
It was decided by the High Court on 2015-04-23 and is reported as Tax Appeal No. 772 of 2007 (High Court of Gujarat at Ahmedabad). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 2(22)(e), section 154, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed. Considering s.2(22)(e) and in particular Explanation 2, it could not be said that the Tribunal had committed any error in directing the Assessing Officer not to include the current profit as part of accumulated profit; while determining the amount of deemed dividend under Explanation 2 the current profit was not required to be included as part of accumulated profit. Question 1 was answered in favour of the assessee and against the Revenue. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 2(22)(e), section 154 of the Income Tax Act 1961, and was decided by M.R. Shah J and S.H. Vora J (oral judgment per M.R. Shah J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Cite this decision for the proposition, and cite it accurately: a Gujarat High Court oral judgment for assessment year 1990-91, decided without any appearance for the assessee. Expect the Assessing Officer to answer with the words of Explanation 2, which speak of profits up to the date of distribution or payment. Be ready to meet that argument on its own terms rather than by citation alone. Keep the ceiling argument separate from the characterisation argument. Even if the payment is held to be a loan or advance, the charge is capped by accumulated profits on the date of that payment. Where the reserves include amounts that are not commercial profits at all — a revaluation surplus, a share premium — take that as a distinct point; this decision does not deal with it, and the search on this pass found no High Court decision that does.
Validity check could not be completed. Validity check could not be completed and this entry should be used with the caveats set out in why_it_matters. I did not locate or read any High Court decision expressly disagreeing with it, and I did not check its later treatment or whether the Revenue appealed. But it was decided without any appearance for the assessee, it does not reproduce or construe the words of Explanation 2 that the Revenue relied on, and it is in tension with the passage from the Bombay High Court in P.K. Badiani that the Supreme Court set out and adopted in CIT v. Mukundray K. Shah on 10 April 2007, under which the existence of accumulated profits is to be ascertained at the date of each payment. Do not state the position as settled. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a four-page oral judgment. The respondent company had gone into liquidation and neither it nor the Official Liquidator appeared, which the Court expressly records at paragraphs 3 and 4 before deciding the merits itself rather than remitting. The judgment does not set out the text of Explanation 2 anywhere, although it turns on it. It relies on 'Associated Banking Corporation of Ind. Ltd. v/s. Commissioner of Income-Tax, Bombay reported in (1965) Vol.56 ITR 1(SC)' for the proposition 'that the profit accrues when the books of account are closed'; I did not retrieve or read that decision, and the sentence as printed attributes that reasoning to the Tribunal. Questions (B) and (C), on the rejection of the s.154 rectification application, were not separately answered; the Court held question 1 in favour of the assessee and dismissed the appeal. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed. Considering s.2(22)(e) and in particular Explanation 2, it could not be said that the Tribunal had committed any error in directing the Assessing Officer not to include the current profit as part of accumulated profit; while determining the amount of deemed dividend under Explanation 2 the current profit was not required to be included as part of accumulated profit. Question 1 was answered in favour of the assessee and against the Revenue.
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