Telangana High Court

Babulal Jain vs The Income Tax Officer, on 14 November, 2024

     THE HON'BLE THE CHIEF JUSTICE ALOK ARADHE
                         AND
       THE HON'BLE SRI JUSTICE J. SREENIVAS RAO

                       I.T.T.A. No. 319 of 2007

JUDGMENT:

(per the Hon'ble the Chief Justice Alok Aradhe)

Mr. Duvva Pavan Kumar, learned counsel appears for

Mr. Y. Ratnakar, learned counsel for the appellant.

Mr. J.V. Prasad, learned Senior Standing Counsel for

Income-tax Department appears for the respondent.

2. This appeal is filed by the assessee under Section 260A

of the Income-tax Act, 1961, pertains to the assessment year

2000-01. The appeal was admitted by a Bench of this Court on

the following substantial questions of law.

"1. Whether on the facts and in the circumstances of the case, for the purpose of arriving at the accumulated profits u/S.2(22)(e) of the Income-tax Act whether deduction of depreciation as provided under the Income-tax Act is necessary or not for taxing any loan borrowed from the company, as deemed dividend?

2. Whether the loan borrowed by the appellant amounting to Rs.14,51,281/- is liable to tax as deemed divided u/S.2(22)(e) of the Income-tax Act on the facts and circumstances of the case?

CJ & JSR, J

The factual backdrop in which the aforesaid substantial

questions of law arise for consideration need mention which is

stated infra.

3. The assessee filed income tax return declaring the total

income of Rs.1,95,880/-. The return was accepted by the

Assessing Officer by an order passed under Section 143(1) of

the Income-tax Act, 1961 (hereinafter referred to as 'the Act').

Subsequently, the assessment was reopened and the notice

dated 27.03.2003 under Section 148 of the Act was issued to

the assessee. In response to the aforesaid notice, the assessee

requested that the return filed on 29.06.2000 be treated as

response to the notice under Section 148 of the Act. The

Assessing Officer inter alia treated the loan taken by the

assessee from M/s.Rajadhani Hotels Private Limited in which

assessee was a shareholder, during the period from 01.04.1999

to 19.12.1999, as deemed dividend under Section 2(22)(e) of

the Act. It was further held that the accumulated profits of

M/s.Rajadhani Hotels Private Limited were more than the

advance given to the appellant. The contention of the assessee

that there are no accumulated profits and if the reworking of CJ & JSR, J

profits is done by deducting the correct amount of

depreciation, there would be a negative figure of

Rs.19,75,068/- as against Rs.35,08,698/-, was rejected. The

Assessing Officer by an order dated 26.03.2004 completed the

assessment and made an addition of Rs.14,51,281/-.

4. Being aggrieved, the assessee filed an appeal before the

Commissioner of Income-tax (Appeals). The Commissioner of

Income-tax (Appeals) inter alia held that profits disclosed are

subject to adjustment and depreciation as granted in

accordance with the rates prescribed under the Act and

therefore, the accumulated profits are to be computed taking

into account the depreciation as per the Income-tax Rules. The

Commissioner of Income-tax (Appeals) placed reliance on the

decisions of Bombay High Court in Navnit Lal C Javeri v.

Commissioner of Income-tax, Bombay City 1 and

Commissioner of Income-tax, Bombay City v. Jamnadas

Khimji Kothari 2 and by an order dated 23.09.2004 allowed the

appeal.

(1971) 80 ITR 582 (Bom)

(1973) 92 ITR 105 (Bom) CJ & JSR, J

5. Being aggrieved, the Revenue filed an appeal before the

Income Tax Appellate Tribunal. The Appellate Tribunal

placed reliance on the decision of the Supreme Court in P.K.

Badiani v. Commissioner of Income tax, Bombay 3 and held

that accumulated profits occurring in Clause (e) of Section

2(22) means profits in the commercial sense and not taxable

profits liable to tax as income under the Act. Accordingly, the

Appellate Tribunal by an order dated 27.07.2007 set aside the

order passed by the Commissioner of Income-tax (Appeals)

and allowed the appeal preferred by the Revenue. Hence, this

appeal.

6. Learned counsel for the assessee submitted that the issue

involved in this appeal is squarely covered by the decisions of

Bombay High Court in Navnit Lal C Javeri and Jamnadas

Khimji Kothari (supra). It is further submitted that the

decision of the Supreme Court in P.K. Badiani (supra) does

not apply to the fact situation of the case and the Appellate

Tribunal grossly erred in reversing the well-reasoned order

passed by the Commissioner of Income-tax (Appeals). It is

(1976) 4 SCC 562 CJ & JSR, J

therefore submitted that the impugned order passed by the

Appellate Tribunal be set aside.

7. On the other hand, learned counsel for the Revenue

submitted that the Appellate Tribunal rightly relied on the

decision of the Supreme Court in P.K. Badiani (supra). It is

further submitted that the accumulated profits under Section

2(22)(e) of the Act means profit in the commercial sense and

are liable to tax as income under the Act. It is contended that

for the purposes of calculating accumulated profits,

depreciation is not required to be calculated in accordance

with the provisions of the Act.

8. We have considered the rival submissions made on both

sides and have perused the record.

9. In Navnit Lal C Javeri (supra), Bombay High Court

dealt with the issue as to what is the correct method for

determination of accumulated profits under Section 2(6A)(e)

of the Income-tax Act, 1922 and if there are any accumulated

profits so determinable, what is the correct amount thereof.

CJ & JSR, J

The aforesaid issue was answered by the Division Bench of

Bombay High Court in the following terms.

"....If the gross profits are treated as profits without provision of any depreciation, at the end of the useful life of the assets they will be lost completely. It is to provide for replacement of the capital assets so lost by reason of normal wear and tear that depreciation is allowed, so that at the end of the useful life of those assets a fund is available to replace those assets. In short, a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. Now, the Income-tax Act does make a provision for allowing depreciation as a deduction, for example, under Section 10(2)(vii). In our opinion, therefore, for the purpose of calculating profits within the meaning of the phrase "accumulated profits"

under section 2(6A)(e), an allowance of depreciation should be made by way of a deduction at the rates provided for by the Income-tax Act itself.........."

10. Another Division Bench of Bombay High Court in

Jamnadas Khimji Kothari (supra) held as follows:

"As regard question No.2, the answer is:

The phrase "accumulated profits" does not mean profits as disclosed by the company's balance-sheet. The profits disclosed would be subject to adjustment and the depreciation as granted in accordance with the rates prescribed by the Income-tax Act would have to be deducted for ascertaining the accumulated profits."

CJ & JSR, J

11. The Supreme Court in P.K. Badiani (supra) dealt with

the following issue.

"The main question for our determination in this appeal is whether the aggregate of the development rebates allowed to the company under Section 10(2)(vi-b) of the 1922 Act could be treated as accumulated profits in the hands of the company under Section 2(6-A)(e)."

12. The Supreme Court while answering the aforesaid issue

neither referred to the decisions of the two Division Benches

of Bombay High Court in Navnit Lal C Javeri and Jamnadas

Khimji Kothari (supra) nor dealt with the issue which is

involved in the present appeal. The issue involved in this

appeal is answered by the two Division Benches of Bombay

High Court and we concur with the view taken by the two

Division Benches of Bombay High Court.

13. For the aforementioned reasons, the substantial

questions of law framed by a Bench of this Court are answered

in favour of the assessee and against the Revenue.

14. In the result, the order dated 27.07.2007 passed by the