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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI PAWAN SINGH
आयकर अपील�य अ�धकरण, मुंबई �यायपीठ , मुंबई । IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER आयकर अपील सं/ I.TA No.6171/Mum/2012 (�नधा�रण वष� / Assessment Year: 2008-09 बनाम/ The ACIT-19(3), Vasanji A Mamania, Mumbai 301, Mangal Swagat, Vs. Of Turner Road, Bandra (W), Mumbai-400 050 C.O. No. 134/Mum/2014 (Arising out of I.TA No.6171/Mum/2012) (�नधा�रण वष� / Assessment Year: 2008-09 बनाम/ Vasanji A Mamania, The ACIT-19(3), 301, Mangal Swagat, Mumbai Vs. Of Turner Road, Bandra (W), Mumbai-400 050 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. AAMPM 4503C (अपीलाथ� /Appellant) (��यथ� / Respondent) .. अपीलाथ� ओर से/ Department by: Shri Shridhar E ��यथ� क� ओर से/ Assessee by: None सुनवाई क� तार�ख / Date of Hearing :15.12.2015 घोषणा क� तार�ख /Date of Pronouncement :23.12.2015 आदेश / O R D E R PER N.K. BILLAIYA, AM: This appeal by the Revenue and the cross objection by the assesee are directed against the very same order of the Ld. CIT(A)- 30, Mumbai dated 6.7.2012 pertaining to assessment year 2008-09.
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The sole grievance of the Revenue is that the Ld. CIT(A) erred in restricting the addition to Rs. 13,71,908/- as against to Rs. 23,25,000/- made u/s. 2(22)(e) of the Act. The Revenue is further aggrieved by the fact that the Ld. CIT(A) has failed to appreciate the judicial pronouncement of the Hon’ble Apex Court in the case of P.K. Badiani Vs CIT 105 ITR 642.
Briefly stated the facts of the case are that the assesee is a resident individual. While scrutinizing the return of income, the Assessing Officer found that the assesee has received loan amounting to Rs. 23,75,000/- from Adlabs Shringar Multiplex Cinemas Pvt. Ltd (ASMCPL). The AO further came to know that the assessee is substantially interested in the said company. The AO noticed that the said company was having substantial accumulated profits and therefore was of the strong belief that amount of loan of Rs. 23,75,000/- received by the assessee from the said company has to be taxed as deemed dividend u/s. 2(22)(e) of the Act. The assessee was asked to give reasons why the loan be not treated as deemed dividend.
3.1. The assessee filed a detailed reply vide letter dated 3.11.2010 in which it was strongly contended that although the matter is covered u/s. 2(22)(e), there is no accumulated profit, therefore no addition can be made.
3.2. It was further contended that the accumulated profit as per books of account of ASMCPL as on 31.3.2008 is Rs. 22,37,068/-. It was claimed that accumulated profit would mean commercial profit and since the said company has charged depreciation as per
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Companies Act, the same has to be claimed as per the Income-tax Act. Accordingly, the assessee furnished a working as under:
Particulars As on 31.3.2008 General Reserve 18,57,949/- Profit & Loss 3,79,119/- Total 22,37,068/- Add: Depreciation as per Books 28,01,689/- 50,38,757/- Less: Depreciation as per IT Act 63,47,396/- Balance accumulated profit (13,08,639)
3.3. It was claimed that as the accumulated profit was in negative, there was no question of making addition u/s. 2(22)(e) of the Act. Alternatively it was contended that if the accumulated profit as on 31.3.2007 is taken at Rs. 9,29,783/-, accumulated profit for 3 days i.e. upto the date of taking the loan from the said company can be added which comes to Rs. 4,42,125/- based on the total profit for the year ending March, 2008. Thus, in alternative the assesee agreed for the addition of Rs. 13,71,908/-.
3.4. The AO rubbished the claim of the assessee by strongly relying upon the decision of the Hon’ble Supreme Court in the case of P.K. Badiani 105 ITR 642 and treated the entire loan of Rs. 23,75,000/- as deemed dividend and made the addition accordingly.
Aggrieved by this, the assesee carried the matter before the Ld. CIT(A) and reiterated what has been stated during the course of the assessment proceedings.
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4.1. Although the Ld. CIT(A) was convinced with the contentions of the assessee, however finding that since the assessee himself has offered Rs. 13,71,908/- as deemed dividend, the Ld. CIT(A) confirmed the addition to the extent of Rs. 13,71,098/-.
Aggrieved by this, the Revenue is in appeal and the assessee preferred cross objection.
No one appeared on behalf of the assessee though the assessee was well aware of the date of hearing nor any application has been filed seeking adjournment, we decided to proceed ex-parte.
The Ld. Departmental Representative strongly supported the findings of the AO. It is the say of the Ld. DR that the First Appellate authority has not considered the decision of the Hon’ble Supreme Court in the case of P.K. Badiani (supra), therefore the order of the Ld. CIT(A) is erroneous and bad in law.
We have given a thoughtful consideration to the orders of the authorities below. We have also gone through the judicial decision relied upon by the assessee at the time of assessment proceedings and also the decision of the Hon’ble Supreme Court heavily relied upon by the AO.
8.1. Let us first understand the decision of the Hon’ble Supreme Court in the case of P.K. Badiani (supra). In this case, the Hon’ble Supreme Court has affirmed the decision of the Hon’ble Bombay High Court in 76 ITR 369. The issue before the Hon’ble Court was whether the development rebate was deductible from the assessable profit of the company while ascertaining the profit of the company in the commercial sense. The main contention before the Hon’ble Court was
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that the development rebate was in the nature of a depreciation allowance and is identical with initial l depreciation therefore should be deducted from the commercial profits. The Hon’ble Court were not convinced with this contention and observed that “ we do not find any warrant for accepting the contentions of Shri Rajgopal that the initial depreciation or the development rebate was allowed as an extra deductible allowance of business expenses in the year of installation of new machinery for meeting the ever increasing costs of its replacement in future years. In our opinion, it was meant merely to reduce the tax liability of the assesee in order to give him an incentive to install new machineries or plants”.
8.2. The Hon’ble Court was of the opinion that initial depreciation or the development rebate cannot be considered to be akin to normal depreciation since these are not reckoning allowance for the subsequent years like the allowance of the normal depreciation. The Hon’ble Court was further seized with the issue whether debit to the profit and loss account would amount to the capitalization of the profits. The Hon’ble Court was of the view that mere transferring the sum by debiting it to the profit and loss account to the development reserve account did not amount to capitalization of profits.
8.3. A perusal of the decision of the Hon’ble Supreme Court would suggest that it was altogether on different set of facts and is clearly distinguishable from the facts of the present case.
8.4. The Hon’ble High Court of Bombay in the case of Navnitlal C. Jhaveri 80 ITR 582 had the occasion to consider the following facts:
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“After the enactment of the Electricity Supply Act, 1948, for the purpose of making certain calculations under the Electricity Supply Act the Malegaon Electricity Company was allowed depreciation on its capital assets at a certain rate which was lower than the rate for depreciation allowed to it under the Income-tax Act. The Malegaon Electricity Companys' balance- sheet had all along been prepared on the basis of the depreciation allowance as calculated under the Electricity Supply Act, 1948, with the result that the provision in the said balance-sheets for general reserve fund and the amount shown as profit in the profit and loss appropriation account did not correctly represent the position of the Malegaon Electricity Company, in so far as the amount for depreciation as calculated under the Income-tax Act was not reflected therein. Balance-sheet of the company prepared in accordance with the depreciation allowed under the Electricity Act showed a general reserve fund of Rs. 80,000 and a profit of Rs. 2,91,000, when a loan of Rs. 4,00,000 was advanced to the assessee who was a shareholder. The income-tax authorities treated this loan as a dividend to the extent of the accumulated profit shown in the balance-sheet under section 2(6A)(e) of the Indian Income- tax Act, 1922: Held, 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.” 8.5. The Hon’ble High Court in another case of CIT Vs Jamnadas Khimji Kothari 92 ITR 105 on identical set of facts the Hon’ble High Court held as under:
“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”.
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8.6. The Hon’ble High Court dismissing the following observation of the Tribunal observed as under:
“The company is normally the best judge of what it should deduct for depreciation. If it did not think it necessary to provide more for depreciation it cannot ask for adjustments now at this stage . . . . There appears to be no room on the language of the provision to make the adjustment required by the assessee. " Now this finding of the Income-tax Tribunal is contrary to the findings and observations of this court in Navnitlal C. Jhaveri v. Commissioner of Income-tax and Commissioner of Income-tax v. P. K. Badiani. In the above first case the assessee had admitted that in the accounts maintained by the company having regard to certain provisions of the Electricity Supply Act the depreciation was calculated and stated at much lower rate than allowed to it under the Income-tax Act with the result that in the balance-sheets of the company the general reserve fund was shown at a larger figure than the income resulted having regard to the rate of depreciation granted under the Income-tax Act and in the previous assessment orders. The submission was that as regards the question that had arisen under section 12(1B) read with section 2(6A)(e) the true amount of the accumulated profits was liable to be ascertained on the footing of the depreciation calculated at the rates permitted under the Income-tax Act and accordingly granted in the previous assessment orders. The submissions of the assessee were accepted by this court. The finding of the court was that for the purpose of calculating the 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. The contrary contention made to the effect that the accumulated profits were liable to be ascertained on the basis of the depreciation calculated in the balance-sheets of the assessee- company was rejected by the court. The observation of the court in that connection at page 587 was as follows : " Unless such depreciation is set apart, the gross profits will contain an element within them which is really of a capital nature . . . 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. " In the case of P. K. Badiani , the finding of the court was :
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" . . . . when arriving at the profits for that period the amount of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first as otherwise the initial capital would, to that extent, incorrectly and falsely be converted into and treated as profits. " We are bound to follow the findings made by this court in the above two decisions as regards the true meaning and construction of the phrase " accumulated profits " in section 2(6A)(e). We are, therefore, bound to hold that the Income-tax Tribunal in this case was entirely wrong in rejecting the contention made by the assessee that from the figure of reserve fund mentioned in the balance-sheet the true amount of depreciation allowed in accordance with the rates prescribed under the Income-tax Act and accordingly by the assessment orders previously made was liable to be deducted. There is no dispute in this case that if the depreciation thus granted in accordance with the income-tax rates was deducted from the figure of reserve fund arrived at after deducting the above sum of Rs. 1,35,330 there would be left nothing by way of reserve fund. Under the circumstances the true position in the present case was that in respect of the loans of Rs. 2,55,135 advanced by the company to the assessee which could be considered as dividend under section 2(6A)(e) there was no accumulated profits with the company and the same could, therefore, not be considered dividend and income of the assessee. 8.7. Once again the Hon’ble High Court of Bombay had the occasion to consider a similar issue in the case of Pushparthy Packs (P) Ltd 221 Taxman 403 wherein the High Court has followed the decision in the case of Jamnadas Khimji Kothari (supra) by distinguishing the decision of the Hon’ble Supreme Court in the case of P.K. Badiani (supra). The Hon’ble Court inter alia held as under:
“ 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”. 8.8. Considering the judicial decisions discussed hereinabove in the light of the facts of the case, in our understanding of the law, the depreciation as per the Income-tax Act has to be allowed for
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determining the accumulated profits of the company. We, therefore, restore this issue to the file of the AO. The AO is directed to decide the issue afresh after deducting the depreciation allowable as per the provisions of the Income-tax Act after giving reasonable and fair opportunity of being heard to the assessee. 9. In the result, the appeal filed by the Revenue is treated as allowed for statistical purpose and the cross objection filed by the assesee become otiose. Order pronounced in the open court on 23rd December, 2015. Sd/- Sd/- (PAWAN SINGH) (N.K. BILLAIYA) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated :23rd December, 2015 व.�न.स./ Rj , Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent. 2. आयकर आयु�त(अपील) / The CIT(A)- 3. आयकर आयु�त / CIT 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, 5. मुंबई / DR, ITAT, Mumbai गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai FIT FOR PUBLICATION JM AM