The Assessing Officer has included the company's share premium account in accumulated profits to support a s.2(22)(e) addition. Can he?
No. The Tribunal held that share premium is not available for distribution as dividend and is required to be treated as part of the share capital, so it cannot be commercial profits and cannot be included in accumulated profits for s.2(22)(e). The same order confirms, against the assessee, that current year's profits up to the date of each payment must be included, because Explanation 2 defines accumulated profits to include all profits up to the date of payment.
Decided by the ITAT (P.M. Jagtap, Accountant Member and N.V. Vasudevan, Judicial Member (Mumbai 'G' Bench)) on 2011-02-09, reported as I.T.A. Nos. 1939 to 1943/Mum/2010 (assessment years 2002-03 to 2006-07) and I.T.A. No. 1187/Mum/2010 (assessment year 2006-07). It bears on section 2(22)(e), section 2(22)(b), section 2(17), section 143(1), section 143(3), section 147 of the Income Tax Act 1961, in Assessment & Scrutiny matters.
The order draws the two boundaries of the accumulated-profits figure in one place. On the upside for the assessee, share premium comes out — the Tribunal reasoned from s.78 of the Companies Act 1956 that the premium is a capital reserve which cannot be distributed as dividend, and rejected the Departmental Representative's arguments that the reasoning fails because s.2(17) covers foreign bodies corporate, that clause (b) of s.2(22) shows bonus shares from premium are dividend, and that Bharat Fire & General Insurance is to the contrary. On the downside, current-year profits go in: the Tribunal followed NCK Sons Exports in holding that Explanation 2 was introduced in the 1961 Act precisely to neutralise V. Damodaran, so no other meaning of accumulated profits can be inferred and profits up to the date of payment count. The third holding is separately useful in broker and job-work cases: a running account with a share broker recording only purchases and sales of shares, with no entry showing receipt of money in cash or by cheque and a balance that steadily reduced, is a business transaction and not a loan or advance at all.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, an individual trading in shares, held more than 10 per cent of the voting rights in M/s Ruchiraj Shares & Stock Brokers Pvt Ltd. In scrutiny for assessment year 2006-07 the Assessing Officer found several transactions with that company, including loans, and reopened assessments for 2002-03 to 2005-06 to bring the aggregate receipts to tax as deemed dividend under s.2(22)(e), treating the company's share premium as part of its accumulated profits. The CIT(A) held that share premium, not being available for distribution of dividends, could not form part of accumulated profits and directed its exclusion, following the Delhi Bench in DCIT v. Maipo India Ltd; rejected the assessee's contention that current year's profits could not be included, relying on Explanation 2 and on M.B. Stock Holding (P) Ltd and NCK Sons Exports (P) Ltd, and directed the accumulated profits to be recomputed taking in current year's profits up to the dates of the relevant payments; and found from the ledgers that a separate trading account with the company recorded only purchases and sales of shares made by it as broker, with no entry showing receipt of money in cash or by cheque and a balance payable by the assessee that reduced consistently, and directed deletion of the addition on those transactions. The Revenue appealed on the share premium and the trading account; the assessee appealed on current year's profits.
All six appeals were dismissed. Share premium, being a capital reserve which under s.78 of the Companies Act 1956 cannot be distributed as dividend, is not commercial profit and must be excluded in determining accumulated profits for s.2(22)(e). Current year's profits up to the date of payment must be included, Explanation 2 having been introduced to displace the contrary view. Debit balances in a trading account representing purchase and sale of shares carried out by the company as broker on the assessee's behalf are business transactions and not loans or advances within s.2(22)(e).
On share premium the Tribunal followed Maipo India Ltd, which reasoned from s.78 of the Companies Act 1956 that there is not only a prohibition on distributing the share premium account as dividend but a requirement to treat it as part of the share capital, so the premium cannot be commercial profits in the true sense. It rejected the argument that reliance on the Companies Act is misplaced because s.2(17) includes foreign bodies corporate, since both the payer here and in Maipo were incorporated under the Indian Companies Act 1956. It rejected the bonus-share argument because clause (b) of s.2(22) applies only to bonus shares distributed to preference shareholders and cannot be read into clause (e). It distinguished Bharat Fire & General Insurance Ltd, where the premium had been received and dealt with before s.78 came into force, whereas here the premium was received after that enactment, and held that decision if anything supported the assessee by implication. On current year's profits it held that V. Damodaran, decided under the 1922 Act, cannot help because Explanation 2 defines the expression, and following NCK Sons Exports held that once the legislature has defined accumulated profits no other meaning can be inferred. On the trading account it relied on the CIT(A)'s verification of the ledgers, which the Assessing Officer had not disputed as to the nature of the transactions, the Assessing Officer having merely characterised payment for shares by the broker as one way of extending a loan facility.
We, therefore, hold that the decision of the Co-ordinate Bench of the Tribunal in the case of Maipo India Ltd. (supra) is squarely applicable to the issue involved in the present case and respectfully following the same, we uphold the impugned order of the learned CIT(A) directing the A.O. to exclude the share premium amount for determining the accumulated profits for the purpose of application of section 2(22)(e) of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. The Tribunal held that share premium is not available for distribution as dividend and is required to be treated as part of the share capital, so it cannot be commercial profits and cannot be included in accumulated profits for s.2(22)(e). The same order confirms, against the assessee, that current year's profits up to the date of each payment must be included, because Explanation 2 defines accumulated profits to include all profits up to the date of payment. This was decided by the ITAT (P.M. Jagtap, Accountant Member and N.V. Vasudevan, Judicial Member (Mumbai 'G' Bench)) and bears on section 2(22)(e), section 2(22)(b), section 2(17), section 143(1), section 143(3), section 147 of the Income Tax Act 1961. It is reported as I.T.A. Nos. 1939 to 1943/Mum/2010 (assessment years 2002-03 to 2006-07) and I.T.A. No. 1187/Mum/2010 (assessment year 2006-07). The order draws the two boundaries of the accumulated-profits figure in one place. On the upside for the assessee, share premium comes out — the Tribunal reasoned from s.78 of the Companies Act 1956 that the premium is a capital reserve which cannot be distributed as dividend, and rejected the Departmental Representative's arguments that the reasoning fails because s.2(17) covers foreign bodies corporate, that clause (b) of s.2(22) shows bonus shares from premium are dividend, and that Bharat Fire & General Insurance is to the contrary. On the downside, current-year profits go in: the Tribunal followed NCK Sons Exports in holding that Explanation 2 was introduced in the 1961 Act precisely to neutralise V. Damodaran, so no other meaning of accumulated profits can be inferred and profits up to the date of payment count. The third holding is separately useful in broker and job-work cases: a running account with a share broker recording only purchases and sales of shares, with no entry showing receipt of money in cash or by cheque and a balance that steadily reduced, is a business transaction and not a loan or advance at all. If it applies to you, the first step is this: Get the payer company's balance sheet and strike out the share premium account from any accumulated-profits computation, citing s.52 of the Companies Act 2013 (s.78 of the 1956 Act) on the restrictions on its use.
The assessee, an individual trading in shares, held more than 10 per cent of the voting rights in M/s Ruchiraj Shares & Stock Brokers Pvt Ltd. In scrutiny for assessment year 2006-07 the Assessing Officer found several transactions with that company, including loans, and reopened assessments for 2002-03 to 2005-06 to bring the aggregate receipts to tax as deemed dividend under s.2(22)(e), treating the company's share premium as part of its accumulated profits. The CIT(A) held that share premium, not being available for distribution of dividends, could not form part of accumulated profits and directed its exclusion, following the Delhi Bench in DCIT v. Maipo India Ltd; rejected the assessee's contention that current year's profits could not be included, relying on Explanation 2 and on M.B. Stock Holding (P) Ltd and NCK Sons Exports (P) Ltd, and directed the accumulated profits to be recomputed taking in current year's profits up to the dates of the relevant payments; and found from the ledgers that a separate trading account with the company recorded only purchases and sales of shares made by it as broker, with no entry showing receipt of money in cash or by cheque and a balance payable by the assessee that reduced consistently, and directed deletion of the addition on those transactions. The Revenue appealed on the share premium and the trading account; the assessee appealed on current year's profits. The matter was decided on 2011-02-09 by the ITAT (P.M. Jagtap, Accountant Member and N.V. Vasudevan, Judicial Member (Mumbai 'G' Bench)). On those facts the ITAT held as follows. All six appeals were dismissed. Share premium, being a capital reserve which under s.78 of the Companies Act 1956 cannot be distributed as dividend, is not commercial profit and must be excluded in determining accumulated profits for s.2(22)(e). Current year's profits up to the date of payment must be included, Explanation 2 having been introduced to displace the contrary view. Debit balances in a trading account representing purchase and sale of shares carried out by the company as broker on the assessee's behalf are business transactions and not loans or advances within s.2(22)(e).
On share premium the Tribunal followed Maipo India Ltd, which reasoned from s.78 of the Companies Act 1956 that there is not only a prohibition on distributing the share premium account as dividend but a requirement to treat it as part of the share capital, so the premium cannot be commercial profits in the true sense. It rejected the argument that reliance on the Companies Act is misplaced because s.2(17) includes foreign bodies corporate, since both the payer here and in Maipo were incorporated under the Indian Companies Act 1956. It rejected the bonus-share argument because clause (b) of s.2(22) applies only to bonus shares distributed to preference shareholders and cannot be read into clause (e). It distinguished Bharat Fire & General Insurance Ltd, where the premium had been received and dealt with before s.78 came into force, whereas here the premium was received after that enactment, and held that decision if anything supported the assessee by implication. On current year's profits it held that V. Damodaran, decided under the 1922 Act, cannot help because Explanation 2 defines the expression, and following NCK Sons Exports held that once the legislature has defined accumulated profits no other meaning can be inferred. On the trading account it relied on the CIT(A)'s verification of the ledgers, which the Assessing Officer had not disputed as to the nature of the transactions, the Assessing Officer having merely characterised payment for shares by the broker as one way of extending a loan facility. In the words reproduced by the source cited on this page: "We, therefore, hold that the decision of the Co-ordinate Bench of the Tribunal in the case of Maipo India Ltd. (supra) is squarely applicable to the issue involved in the present case and respectfully following the same, we uphold the impugned order of the learned CIT(A) directing the A.O. to exclude the share premium amount for determining the accumulated profits for the purpose of application of section 2(22)(e) of the Act." The decision followed or applied DCIT v. Maipo India Ltd. (2008) 24 SOT 42 (Delhi) — followed on share premium; NCK Sons Exports (P) Ltd. v. ITO (2006) 102 ITD 311 (Bom.) — followed on current year's profits; M.B. Stock Holding (P) Ltd. 84 ITD 542 — relied on by the CIT(A) on current year's profits; V. Damodaran v. CIT (121 ITR 572) — held not to assist, being under the 1922 Act; Bharat Fire & General Insurance Ltd. v. CIT (53 ITR 108) — distinguished.
It was decided by the ITAT on 2011-02-09 and is reported as I.T.A. Nos. 1939 to 1943/Mum/2010 (assessment years 2002-03 to 2006-07) and I.T.A. No. 1187/Mum/2010 (assessment year 2006-07). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 2(22)(e), section 2(22)(b), section 2(17), section 143(1), section 143(3), section 147, 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 cuts both ways and is cited by both sides. All six appeals were dismissed. Share premium, being a capital reserve which under s.78 of the Companies Act 1956 cannot be distributed as dividend, is not commercial profit and must be excluded in determining accumulated profits for s.2(22)(e). Current year's profits up to the date of payment must be included, Explanation 2 having been introduced to displace the contrary view. Debit balances in a trading account representing purchase and sale of shares carried out by the company as broker on the assessee's behalf are business transactions and not loans or advances within s.2(22)(e). It arises in Assessment & Scrutiny matters, on section 2(22)(e), section 2(22)(b), section 2(17), section 143(1), section 143(3), section 147 of the Income Tax Act 1961, and was decided by P.M. Jagtap, Accountant Member and N.V. Vasudevan, Judicial Member (Mumbai 'G' Bench). 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. Do not fight the inclusion of current-year profits on the strength of V. Damodaran; Explanation 2 was enacted to displace it, and the profits up to the date of each payment have to go in. Where there are several payments during the year, insist that accumulated profits be computed separately as at the date of each payment rather than at the year end. Where the account with the payer is a trading or broking account, produce the ledger and show there is no entry of money received in cash or by cheque and that the balance was reducing — that is what carried the day here. Keep separate accounts for trading and for any loan transactions with the same company, as the assessee did, so the two are not merged into one addition.
Validity check could not be completed. Validity check could not be completed — no search for later treatment, or for a contrary line on share premium, was run on this pass. Two updating points. The reasoning rests on s.78 of the Companies Act 1956; the corresponding provision is now s.52 of the Companies Act 2013 and the restrictions on the application of the securities premium account should be read from that section. The current-year-profits holding is consistent with Explanation 2 to s.2(22) as it stands, which includes all profits of the company up to the date of distribution or payment for sub-clauses (a), (b), (d) and (e). 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.
The name of the assessee is printed in the cause title as Shri Ketan Bhanuchandra Mahta while the document is indexed elsewhere as Ketan B. Mehra; the cause title has been preferred. Paragraph 11 contains a slip: it refers to 'the share premium received by the assessee on capital account' when the premium was received by the payer company, not by the assessee individual. Paragraph 12 records the Departmental Representative relying on 'clause (ia) of section 2(22)(e)' — the exclusion at issue is clause (ia) of the long line to s.2(22), which applied only between 1 April 1964 and 31 March 1965. The order disposes of five Revenue appeals and one assessee appeal together; the accumulated-profits and share-premium findings are for assessment years 2002-03 to 2006-07. Paragraph 11 also describes 'the assessee ... in the present case before us' as a company incorporated under the Indian Companies Act 1956, when the assessee here is an individual and it is the payer company that is so incorporated; the reasoning above states the point as it must have been meant. 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.
All six appeals were dismissed. Share premium, being a capital reserve which under s.78 of the Companies Act 1956 cannot be distributed as dividend, is not commercial profit and must be excluded in determining accumulated profits for s.2(22)(e). Current year's profits up to the date of payment must be included, Explanation 2 having been introduced to displace the contrary view. Debit balances in a trading account representing purchase and sale of shares carried out by the company as broker on the assessee's behalf are business transactions and not loans or advances within s.2(22)(e).
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