TaxTMI 
TaxTMI 
2018 (2) TMI 182
X X X X Extracts X X X X
X X X X Extracts X X X X
.... deemed dividend u/s. 2(22)(e) of the Act stating that assessee's HUF had obtained the said loan from Natco Laboratories Limited through Pennar Patterson Securities Limited and brought to tax the said amount. 2.2. On appeal, the CIT(A) by his order dt. 26-03-2002 held that the AO is correct in treating the loan of Rs. 40,00,000/- taken by the assessee's HUF from Pennar Patterson Securities Limited as deemed dividend u/s. 2(22)(e) of the Act. However, the CIT(A) restricted the deemed dividend to the extent of profits of Rs. 24,73,352/- derived by the company during the AY. 1994-95. The CIT(A) did not consider assessee's submission that depreciation as per Income Tax Rules is to be allowed as deduction instead of depreciation as per Companies Act, while computing the 'accumulated profits' for arriving at the deemed dividend. 2.3. Assessee's HUF aggrieved of the said appellate order, preferred an appeal before the ITAT contending that profits of Rs. 24,73,352/- derived by Natco Laboratories Limited during the AY. 1994-95 cannot be treated as deemed dividend u/s. 2(22)(e) of the Act since the provisions of Section 2(22)(e) are not applicable to the loan taken by assessee's HUF from P....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a) Decision of the Hon'ble Supreme Court in the case of CIT, Kerala Vs. V. Damodaran [121 ITR 572] wherein their lordships held that the word 'accumulated profits' in Section 2(6A) of the Income Tax Act, 1922 cannot include current profits and therefore the profits earned by the company during the year in which loans are advanced to a shareholder cannot be considered for the purposes of section 2(6A)(e) of the Act. b) Decision of Hon'ble Bombay High Court in the case of Navnitlal C. Jhaveri Vs. CIT [80 ITR 582] for the purpose of calculating profits within the meaning of the phrase 'accumulated profits' u/s. 2(6A)(e) [corresponding to Section 2(22)(e) of the Income Tax Act, 1961], depreciation should be allowed by way of a deduction at the rates provided for under the Income Tax Act. c) Decision of Hon'ble Bombay High Court in another case viz., CIT, Bombay City-II, Vs. Jamnadas Khimji Kothari [92 ITR 105] for the same proposition. d) Decision of ITAT, Chennai Bench in the case of ACIT Vs. Yasin Hotels (P) Ltd., [19 DTR 306 (Trib)] that depreciation as computed under Income Tax Act should be allowed from commercial profits to determine accumulated profits for the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case, I do not find any infirmity in the order of the Assessing Officer and therefore, the order of the Assessing Officer is hereby upheld". 4. It was the submission of Ld. Counsel that the loan transaction cannot be considered as a deemed dividend; that the assessee is not a shareholder in the said company nor the said company is a shareholder in Natco and; that there are no accumulated profits. He relied on the following case law: i. Bhoumik Colour Pvt. Ltd., [313 ITR (AT) 146 - Mumbai Special Bench]; ii. CIT Vs. Universal Medical Pvt. Ltd. [324 ITR 263 (Bom)]; iii. ACIT Vs. Yasin Hotels (P) Ltd., [19 DTR 306 (Trib)]; 5. Ld.DR, however, submitted that the indirect transfer through the other company has been examined and since both companies are not companies in which public are interested, the indirect transfer is considered as deemed dividend by the AO/CIT(A). He supported the orders of AO/CIT(A). 6. I have considered the rival contentions. As seen from the order of ITAT, the entire issue of considering the transaction u/s. 2(22)(e) is restored to AO. The provisions of Section 2(22)(e) are as under: "Section 2(22)(e) (e) any payment by a company, not being a comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r has to be a direct payment. Since Pennar Patterson Securities Limited is not a shareholder in Natco Laboratories Ltd., the transactions between them may or may not relate to the loan obtained from the company, Pennar Patterson Securities Limited. The reasons for adjusting in their account, the amount received are not on record, but it is the contention of assessee that assessee is not a shareholder in Pennar Patterson Securities Limited nor Pennar Patterson Securities Limited in Natco Laboratories Ltd. Therefore, the provisions of Section 2(22)(e) are not attracted. It is trite law that only the payments received by a shareholder can be considered u/s. 2(22)(e). This principle was established in various cases as relied on by assessee, more so with the decision of Special Bench of ITAT in the case of Bhoumik Colour Pvt. Ltd., [313 ITR (AT) 146 - Mumbai Special Bench] as approved by the Hon'ble High Court of Bombay in the case of CIT Vs. Universal Medical Pvt. Ltd. [324 ITR 263 (Bom)]; Therefore, the said payments from Pennar Patterson Securities Limited in my view does not attract the provisions of Section 2(22)(e) of the Act. 6.4. Even if it is considered as for the individu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cisions rendered under the old Act are relevant. It is further clear in the decision of Hon'ble Supreme Court in the case of P.K. Badiani vs. CIT (supra) the expression "accumulated profits" occurring in cl. (e) of s. 2(6A) would mean profits in the commercial sense. In fact, Hon'ble Supreme Court observed as under : "The expression 'accumulated profits' occurring in cl. (e) of s. 2(6A) or for the matter of that in any other clause, means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 Act. The term 'profits' occurring in s. 2(6A)(e) means profits in the commercial sense, that is to say, the profits made by the company in the usual and true sense of the term." 7. Having observed for the purpose of s. 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 IT 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 & Anr. vs. CIT (supra), we find ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ountants' 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-outof- 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 vs. 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 ....