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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri Rajesh Kumar & Shri Sonjoy Sarma]
ORDER / आदेश Per Rajesh Kumar, AM:
This is the appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-4, Kolkata (hereinafter referred to as the Ld. CIT(A)”] dated 19.08.2019 for the AY 2012-13.
The only issue raised by the assessee in the various grounds of appeal is against the part confirmation of disallowance to the extent of Rs. 4,55,83131/- as made by the AO u/s 2(22)(e) of the Act.
Facts in brief are that the assessee filed return of income on 27.09.2012 declaring total income of Nil. The case of the assessee was selected for scrutiny and Assessment Year: 2012-13 M/s XL Enterprises. Ltd. statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the AO noted that the assessee has received advance of Rs. 8,58,26,789/- from P N Memorial Neurocentre & Research Institute Ltd. against which no interest was paid or provided. The AO also observed that on the basis of reply received in response to notice u/s 133(6) from P N Memorial Neurocentre & Research Institute Ltd. that assessee company was holding 17.94% equity shares and the said company had accumulated profit of Rs. 12,42,02,096/- as on 31.03.2012. Accordingly a show cause notice was issued to the assessee as to why the advance received from the P N Memorial Neurocentre & Research Institute Ltd. should not be treated as deemed dividend u/s 2(22)(e) of the Act. The assessee did not reply before the AO and the amount was treated as deemed income u/s 2(22)(e) of the Act and added to the income of the assessee.
4. In the appellate proceedings, the Ld. CIT(A) partly allowed the appeal of the assessee by observing and holding as under:
6.1. This issue has been discussed by the AO in para 6 page 2 of the assessment order. On this issue, the fact is that the assessee company is holding 17.94% shares in P N Memorial Neurocentre & Research Institute Ltd.(PNMNRIL) and the payment made by PNMNRIL is within the provision of section 2(22)(e) of the Act. During the course of appellate proceedings at no point of time A/R could establish that these transactions were part of business dealings of assessee company and P N Memorial Neurocentre & Research Institute Ltd. The transactions are unilateral, one sided and are invariably covered by the provision of Section 2(22)(e) of the Act. However, it is noted from the ledger account there is an opening balance of Rs. 4,02,43,658/- which is not been paid during the year and therefore, AO is directed to delete the opening balance of Rs. 4,02,43,658/- and consider only payments made by P N Memorial Neurocentre & Research Institute Ltd. to the assessee company during the year under consideration. This ground is, therefore, partly allowed.”
5. The Ld. A.R vehemently submitted before the Bench that the order passed by the Ld. CIT(A) partly confirming the addition in respect of advance received from P N Memorial Neurocentre & Research Institute Ltd. in which the assessee has 17.94% equity shares is patently wrong and against the facts on record. The Ld. A.R submitted that the accumulated profit as noted by the AO of Rs. 12,42,02,096/- as on 31.03.2012 were in fact as per the provisions of Companies Act before making any adjustment to the depreciation as per the Income Tax Act and therefore the said amount of Assessment Year: 2012-13 M/s XL Enterprises. Ltd. accumulated profit is not the correct amount of accumulated profit for the purpose of section 2(22)(e) of the Act. The Ld. A.R submitted that the accumulated profit means the profit as accumulated as per Companies Act and as adjusted by the amount of depreciation as per the Act. The Ld. A.R., in defense of arguments, relied on the following decisions:
i) Navnitlal C. Jhaveri vs. CIT in [1971] 80 ITR 582 (Bom) ii) CIT vs. Jamnadas Khimji in [1973] 92 ITR 105 (Bom) iii) ACIT vs. Yasin Hotels Pvt. Ltd. in for AY 2004-05 / [2009] 121 TTJ 713 (Chennai) iv) CIT vs. Pushparthy Packs P Ltd. [2014] 221 TAXMAN 403 (Bom)
The Ld. A.R submitted that in all the above decisions it has been held that the accumulated profit has been ascertained after allowing depreciation as per Income Tax Act and therefore the appeal of the assessee may kindly be allowed by reversing the order of Ld. CIT(A).
6. The Ld. D.R. on the other hand relied on the order of authorities below. The ld DR contended that the accumulated profits were not defined in the Act and therefore the meaning has to be drawn and interpreted as per Companies Act. The ld DR argued that if this argument of the ld is accepted , the provisions of deemed dividend would become otiose and redundant.
We have heard the rival contentions and perused the material on record, the undisputed facts are that the assessee has taken advance of Rs. 8,58,26,789/- from P N Memorial Neurocentre & Research Institute Ltd. in which it was holding 17.94% of equity shares. Out of said amount of total advance , a sum of Rs. 4,02,43,658/- was coming from earlier year as opening balance whereas Rs. 4,55,83,131/- was received during the year. The assessee has accumulated profit as per the books of account maintained in consonance with Companies Act as on 31.03.2012 of Rs.
Assessment Year: 2012-13 M/s XL Enterprises. Ltd.
12,42,02,096/-. We note that the Ld. CIT(A) partly allowed the appeal of the assessee by deleting the addition to the extent of Rs. 4,02,43,658/- which represented the opening balance received in earlier year however sustained the addition partly in respect of that amount received during the year of Rs. 4,55,83,131/-. Now the assessee has taken an argument before us that the accumulated profits as per the Companies Act are not the correct accumulated profits to be considered for the purpose of Section 2(22)(e) of the Act. The Ld. A.R. submitted that the correct accumulated profits have to be ascertained after making necessary adjustments towards depreciation as per Income Tax Act. The said arguments of the assessee find support from several decisions cited before us supra. In the case of CIT vs. Pushparthy Packs P Ltd. (supra) it was held as under:
“The Appeal is admitted on the following two substantial questions of law : "(A) Whether on the facts and in the circumstances of the case, the ITAT as also the CIT(A) have erred in holding that accumulated profits is required to be determined after considering depreciation under the Income Tax Act and not under the Companies Act, 1956 ? (B) Whether on the facts and in the circumstances of the case, the ITAT erred in not applying the ratio of the Judgment in the case of CIT v. P.K. Badiani [1976] 105 ITR 642 (SC), holding that accumulated profits means profits in the commercial sense and not assessible or taxable profit liable to be taxed as income under Income Tax Act ?"
2. Smt. Desai, learned Counsel appearing for the Appellant, submits that the learned CIT Appeals as well as the learned Tribunal have failed to take into consideration that while computing the taxable income, the authorities have taken into consideration the depreciation as provided under the Companies Act and not as per the Income Tax Act. Learned Counsel further submits that the profits and losses of an Assessee are determined by the accounts maintained by the Assessee which is a Company in the present case. She further submits that while arriving at a taxable income, the authorities ought to have taken into consideration the percentage of depreciation as provided under the Companies Act. Learned Counsel further submits that the Apex Court in the Judgment in the case P.K. Badiani v.CIT[1976] 105 ITR 642, has laid down a distinction between "profits in the commercial sense" and "profits as under the provisions of the Income Tax Act". The learned Counsel therefore submits that the impugned Orders deserve to be set aside and the Order passed by the Assessing Officer needs to be reviewed.
3. The CIT(A) while considering the submissions on behalf of the Revenue, has found that while considering a taxable income of an Assessee, the Assessee is entitled to the depreciation as provided under the Income Tax Act. It has been found that while considering a case of an Assessee for assessment, it will be governed by the provisions as contained under the Income Tax Act. In so far as the Judgment in the case of P. K. Badiani (supra), is concerned, the question before the Apex Court was as to what would amount to accumulated profits. In the said case, the question that arose for consideration was as to whether the development rebate reserve created by the Company by charging the amount to the profit and loss account would
Assessment Year: 2012-13 M/s XL Enterprises. Ltd. be entitled to a deduction under the provisions of Section 2(6A) of the Income Tax Act. The Apex Court held that unless the accumulated profit is capitalised in some form or the other, mere transfer of the profits to any reserve account will not take away the character of such an amount from the ambit of accumulated profits. It has been held that profits carried to reserve do not cease to be profits unless and until they are effectually capitalised. In the facts of the said case, the Apex Court found that though the part of the profit was transferred to the development rebate reserve account, the same was not capitalised by the Company and, as such, could not be taken away from the ambit of the definition "accumulated profits".
The question that arises for consideration before this Court is somewhat different. The question that arises for consideration is as to whether the Assessee is entitled to claim depreciation while computing its taxable income as provided under the Income Tax Act or as provided under the Companies Act.
The law is no more res-integra. Various Judgments including the ones in the case of Star Chemicals (P.) Ltd. v.CIT[1993] 203 ITR 11/[1994] 72 Taxman 279 (Bom) and CITv. Jamnadas Khimji Kothari [1973] 92 ITR 105 (Bom), have held that the depreciation arising from the wear and tear of the business assets is a first charge on profits, without deducting which it is not possible to arrive at a profit in a year. It was held that the normal depreciation as provided under the Income Tax Act and not as per the one provided in the books of account, has to be taken into consideration while computing the Income Tax of an Assessee. In that view of the matter, it is a settled law that while assessing income, the Assessing Authority is required to take into consideration the depreciation as provided under the Income Tax Act and not as provided under the Companies Act.
In that view of the matter, we hold that the ratio of the Judgment in the case of P.K. Badiani (supra), will not be applicable to the facts of the present case. The Appeal is, therefore, dismissed with no further orders as to costs.” Similarly the Co-ordinate Bench of the tribunal in the case of ACIT vs. Yasin Hotels Pvt. Ltd.(supra) has also taken a view in favour of the assessee. The operative part is extracted below:
7. Having observed for the purpose of section 2(22)(e) that the accumulated profits would mean commercial profits, but then question arises what is meaning "commercial profits". Whether commercial profits should include charge of normal depreciation as per Income-tax Act or depreciation as per Companies Act or no depreciation at all. After careful perusal of the decision of Hon'ble Madras High Court in the case of G.R. Govindarajulu Naidu (supra), we find that the decision related to reduction of initial depreciation from the profits, the Hon'ble High Court was of the opinion that such initial depreciation is required to be reduced for calculating the accumulated profits for determining the deemed dividend. However, this position seems to have been overruled by the Hon'ble Supreme Court in the case of P.K. Badiani (supra). However, before us, the question is not of reduction of initial depreciation. But question is whether depreciation should be allowed to be reduced from commercial profits to determine accumulated profits for the purpose of section 2(22)(e). Hon'ble Bombay High Court in the case of Navnitlal C. Jhaveri (supra) has very clearly held as under : "For the purpose of calculating profits within the meaning of the phrase 'accumulated profits' under section 2(6A)(e), an allowance for depreciation should be made by way of a deduction at the rates provided for by the Income-tax Act itself."
Assessment Year: 2012-13 M/s XL Enterprises. Ltd.
8. From the above, it becomes clear that normal charge of depreciation as per Income-tax Act is required to be considered for calculating accumulated profits for the purpose of determination of deemed dividend. Similar view was taken by Hon'ble Bombay High Court in the case of Jamnadas Khimji Kothari (supra) where it was held as follows : "'The phrase 'accumulated profits' in section 2(6A)( e) of the Act does not mean profits as disclosed by the company's balance sheet. The profits disclosed would be subject to adjustment and depreciation as granted in accordance with the rates prescribed by the Income-tax Act would have to be deducted for ascertaining the accumulated profits."
We further find that these two decisions cannot be said to have been overruled by the Hon'ble Supreme Court. This becomes clear from the observation of Hon'ble Court at p. 649 of 105 ITR which is as under : "'The Gujarat High Court in the case of CIT v. Viramgam Mills Co. Ltd. [1961] 43 ITR 270 (Guj.) was concerned with the question as to whether the normal depreciation reserve of the company could be taken to be the accumulations of past profits within the meaning of the proviso to section 23A of the 1922 Act as it stood at the relevant time. It held that it could not form part of the accumulated past profits as in the words of Wixon (vide Wixon's Accounts Hand Book), it was 'the estimated expiration of asset value' or as observed by Paton in his Accountants' Hand Book, Third Edition, it is an out-of-pocket cost as any other costs. Says the learned author in the above book, at p. 746, thus: 'There is still widespread misapprehension as to the precise significance of the depreciation charge. It is often deemed a more or less imaginary and hypothetical element, and is sharply contrasted with the regular 'out-of-pocket' operating costs. As a matter of fact there is nothing at all imaginary about depreciation as a cost of business operation and at bottom it is just as much an out-of-pocket cost as any other. The depreciation charge is merely the periodic operating aspect of fixed asset costs, and there is no doubt as to the reality of such costs. Far from being a non-out-of- pocket charge depreciation represents the extreme example of pre-payment.' Mr. S.T. Desai, the learned counsel for the revenue, drew our attention to the decision of the Calcutta High Court in CIT v. Bibhuti Bhusan Dutt and submitted that it has taken a view different from the one taken by the Gujarat High Court even in regard to the nature of normal depreciation allowance. The Calcutta case seems to be one of a property holding company, the profits of which were assessable under section 9 wherein the question of depreciation was not relevant. It is not necessary for as to examine in this case the exact nature of the normal depreciation allowance and whether it is deductible from the profits of a person while determining his commercial profits. The view expressed by the Gujarat High Court seems to be reasonable, plausible and correct and for the purposes of this case we shall assume it to be so. Yet, we do not feel persuaded to accept the argument of the assessee and equate the initial depreciation or the development rebate with the normal depreciation. In our opinion, such an allowance is in no sense a deductible item of cost or expenditure in the process of settlement of the commercial profits. Although it does not form part of the assessable profits, undoubtedly it does form part of the commercial profits."
Assessment Year: 2012-13 M/s XL Enterprises. Ltd.
From the highlighted portion in the above para, though it becomes clear that Hon'ble Court has not decided this issue, but it has indirectly approved the observation of the Hon'ble Gujarat High Court in the case of CIT v. Viramgam Mills Co. Ltd. [1961] 43 ITR 270 (Guj.) that depreciation is a normal charge. As we observed above, for determining the commercial profits, what is required to be considered is whether depreciation charge is to be reduced or not. In our view, depreciation is definitely charged on the assets of the company in the sense that it represents wear and tear of various assets which are used for the purpose of business. Such wear and tear leads to the reduction in the values of assets and after useful life of such assets, the same are required to be replaced. Depreciation is thus recognised under Companies Act as well as Income-tax Act as a charge towards profits. Since Income-tax Act has prescribed particular rates of depreciation, in our view, such depreciation has to be reduced from the commercial profits for the purpose of section 2(22)(e). This position has been indirectly recognized by Hon'ble Supreme Court. Further, Hon'ble Bombay High Court in the case of Navnitlal C. Jhaveri (supra) and in the case of Jamnadas Khimji Kothari (supra) has taken this stand and it cannot be said that this position has been overruled by Hon'ble Supreme Court. In these circumstances, we find nothing wrong with the order of the CIT(A) and confirm the same.” In the instant case before us, we observe that in case the depreciation as per Income Tax Act is taken into account then the accumulated profits of the assessee would be working out to be in negative meaning thereby that there are no accumulated profits for the purpose of Section 2(22)(e) of the Act. In the aforesaid decisions it has been held that the accumulated profits have to be arrived at after allowing depreciation as per the Act and not as per Companies Act. Accordingly, respectfully following the above decisions, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition of disallowance.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 23rd March, 2023