Deemed Dividend Taxation U/s 2(22)(e): Accumulated profit will include current year profit as well?

Here is an interesting case before Mumbai ITAT on the taxation of deemed dividend vis a vis current year profit, as under:

Sanjay Subhashchand Gupta

[2022] 141 , 369 (Mumbai – Trib.)

Let us have a short overview of the case:

The first issue involved was with regard to the deemed dividend taxation under section 2(22) of the Income-tax Act, 1961. The issue was pertaining to the Assessment year 2012-13.

Assessee had taken loans from two companies.

The Assessing Officer treated said loan amount as deemed dividend under section 2(22)(e) in hands of assessee.

Assessee contended that deemed dividend would be attracted where profit was accumulated in immediately preceding year and current year profit accumulation would not attract deemed dividend and since there was no profit accumulation in case of both entities for preceding year, provision of deemed dividend was not applicable.

It was noted that both companies were not companies in which the public was substantially interested.

Further, assessee was holding more than 10 per cent shares in both companies.

Thus, basic conditions of section 2(22)(e) were satisfied.

The issue finally before ITAT was whether payment for purpose of section 2(22)(e) should be made to extent to which company possesses accumulated profits and as per provision of Explanation 2 all profits of company upto date of distribution or payment under section 2(22)(e) were to be considered as accumulated profits?

ITAT answered it in affirmative with a big yes. ITAT held that the Assessing Officer was justified in treating loan amount received by assessee as deemed dividend.

The second issue was with regard to the disallowance of the depreciation on the car which might have been used for personal purpose as well. The element of personal usage cannot be overruled in case the businesses, firm or a company owned a car. During assessment, often this is a matter of disallowance to some extent.

Related provisions were Section 38, read with section 32, of the Income-tax Act, 1961. The issue framed before ITAT was whether where assessee claimed depreciation on a motor car but had not maintained any log book for usage of said vehicle by proprietor and their family, 20 percent of depreciation on motor car was to be disallowed as being attributable to personal usage of asset in terms of provision of section 38(2)? ITAT has again answered in affirmative in favour of the Revenue.

Conclusion:

1. Where assessee claimed to have received loan from two companies in which it was a shareholder holding more than 10 percent of shares and public was not substantially interested in these two companies and loan amount was given out of accumulated profits of companies upto date of payments, basic conditions for attracting provisions of section 2(22)(e) were satisfied and, thus, Assessing Officer was justified in treating impugned amount received by assessee as deemed dividend

2. Where assessee claimed depreciation on a motor car but had not maintained any log book for usage of said vehicle by proprietor and their family, 20 percent of depreciation on motor car was to be disallowed as being attributable to personal usage of asset in terms of provision of section 38(2)