Ita/57/2017 Of The Principal Commissioner Of Income Tax I v. Arun Kumar Goyal

1 HIGH COURT OF MADHYA PRADESH : BENCH AT INDOREI.T.A. No.57 of 2017 -Indore, Dated: 3/07/2018 Ms. Veena Mandlik, learned Counsel for theappellant. Heard on the question of admission. There has not been liquidation of the company and distribution of accumulative profits to theshareholders. The re-designation of accumulativeprofits to the shareholders. The re-designation ofservers and surpluses to the current account of LLPmembers in its books is not hit by Section 2(22)(c) ofthe Income Tax Act, 1961. This question has beenconsidered by the Commissioner of Income Tax(Appeals)-II, Indore in para 3 by its order and learnedTribunal also considered the same in para 6 of theimpugned order. It has also come on record that the officers onbehalf of revenue during the time of arguments verycategorically admitted that the case would not comewithin the purview of Section 2(22)(c) of Income TaxAct, 1961. The findings recorded by the AppellateAuthority as well as by Appellate Tribunal in paras 3and 6 are relevant which reads as under:- “3.All the grounds of appeal have been raised againstthe addition of Rs.68,92,189/- u/s 2(22)(c) of I.T. Act,1961 treating the same as deemed dividend. The AO hasdiscussed the issue at para 3 to 5.1 of the assessment order. HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE The facts of the case are detailed in the assessment orderand written submissions of the appellant. The appellanthas been found to be the share holder of M/s Suraj GangaDevelopers Pvt. Ltd. which was found to have beenconverted into Limited Liability Partnership Firm in thename & style of M/s Suraj Ganga Developers Pvt. Ltd. On23.2.2011 which falls under the relevant assessment year.The result and surpluses amounting to Rs.4.59 crores ason the date of conversion in the books of above mentionedcompany were transferred to the current account ofpartners of M/s Suraj Ganga Developers Pvt. Ltd. LLP.Therefore, the AO has considered the amount of credit inthe partners account as distribution of suprlus onliquidation of company and proceeded to invoke provisionof u/s 2(22)(c) of I.T. Act, 1961. The appellant has filed thewritten submissions which are reproduced above. I haveconsidered the reasons brought out by the AO in theassessment order for treating the amount as distribution ofsurplus in liquidation. I have also considered thesubmissions of the appellant, existing provisions andrelevant case laws on the issue. After considering thetotality of the facts and circumstances of the case, the AOhas not been found justified in treating the impugnedamount as deemed dividend within the meaning of u/s2(22)(c) of I.T. Act, 1961. The AO has not appreciated thefact that there has not been liquidation of the companyand distribution of accumulative profits to the shareholders. The re-designation of serves and surpluses to thecurrent account of LLP members in its books is not hit buu/s 2(22)(c) of I.T. Act, 1961. Moreover, such re-designation of reserves and surpluses cannot beconsidered as distribution of the same to the share holders.Therefore, the AO has not been found justified in makingthe addition which has not been found on sound footing.Therefore, the AO is directed to delete the addition. All thegrounds of appeal are allowed. 6.We have perused the orders of lower authorities andmaterial available on record. Before coming to anyconclusion, we are reproducing the provisions of Section2(22)(c) of the I.T. Act: “Any distribution made to the shareholders ofa company on its liquidation, to the extent to which thedistribution is attributable to the accumulated profitsof the company immediately before its liquidation,whether capitalized or not” 6.We have perused the orders of lower authorities andmaterial available on record. Before coming to anyconclusion, we are reproducing the provisions of Section2(22)(c) of the I.T. Act: “Any distribution made to the shareholders ofa company on its liquidation, to the extent to which thedistribution is attributable to the accumulated profitsof the company immediately before its liquidation,whether capitalized or not” Considering the provisions of Section 2(22)(c), we areof the view that in law, liquidation is the process by whicha co. is brought to an end, and the assets and property f theco. are distributed. Liquidation is also sometimes referredto as winding up. The meaning of the conversion is theprocess of changing or causing sometimes to change fromone to another. Thus, the liquidation and conversion pp/ HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE altogether denote different meaning and purpose. In thepresent case, the private limited co. was converted to LLPand this is not the case of the liquidation within themeaning of Section 56 r.w.s. Schedule III. The conversionhas been defined to mean “convert, in relation to a privatelimited co. converting into a limited liability partnership,means a transfer of the property, assets, interests, rights,privileges, liabilities, obligations and the undertaking ofthe private co. to the limited liability partnership inaccordance with this schedule.” Thus, we are of the viewthat in the present case, the provisions of Section 2(22)(c)of the I. T. Act are not applicable. Before us, the ld. DRcould not controvert the finding of the ld. CIT(A) bybringing any contrary material on record. Onconsideration of above, we hold that the ld. CIT (A) wasright in reaching the conclusion that the re-designation ofthe reserves and surpluses to the current account of theLLP members in its books of account is not hit by theprovisions of the Section 2(22)(c) of the I.T. Act and alsosuch re-designation of reserves and surpluses cannot beconsidered as distribution of the same to the shareholders.We confirm the order of the ld. CIT (A). Accordingly, theground raised by the Revenue stands dismissed.” On due consideration of the aforesaid so also the provisions of Section 2(22)(c) of the Income Tax Act,1961, the Appellate Tribunal has not committed anylegal error in upholding the finding recorded by theCommissioner by which order passed by the AssessingOfficer has been set aside. No substantial question oflaw arises in this appeal. Accordingly, I.T.A. No.57 of 2017 is dismissed. (P. K. Jaiswal)Judge (S. K. Awasthi) Judge