AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (3) TMI 1109
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.... 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 proceeding....
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....reted 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. 7. 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. 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 conside....
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....t. 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 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 fr....
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....his 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." 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 bal....
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....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." 10. 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, depre....