TMI Blog2018 (2) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... dend u/s. 2(22)(e) of the Income Tax Act [Act]. 2. The facts leading to present appeal are as follows: 2.1. Assessee is a HUF. It filed its return of income for the AY. 1994-95 originally declaring loss of ₹ 5,62,110/- which was subsequently revised to loss of ₹ 6,09,964/- and agricultural income of ₹ 24,12,774/- against which the Asst. Commissioner of Income Tax, Circle-3(1), Hyderabad completed the assessment u/s. 143(3) of the Act on 21-03-1997 determining the total income of assessee at ₹ 68,55,770/-. While completing the assessment, AO made certain additions/disallowances and treated loan of ₹ 40,00,000/- taken from Pennar Patterson Securities Limited as 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 ₹ 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, assessee contended as to why the loan taken from Pennar Patterson Securities Limited should not be treated as deemed dividend u/s. 2(22)(e) of the Act. 2.5. AO however completed the assessment u/s. 143(3) r.w.s. 254 of the Act, treating the above said loan of ₹ 40 Lakhs as deemed dividend u/s. 2(22)(e) of the Act. However, such deemed dividend is restricted to accumulated profits of Natco Laboratories Limited of ₹ 24,73,352/- as on 31-03- 1994, after allowing depreciation as per Companies Act, as was done by the then CIT(A) in his order dt. 26-03-2002. 2.6. Before the Ld. CIT(A), assessee relied on the following cases on various propositions as why the amount cannot be considered as deemed dividend. 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 Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Smt. U Rajani held more that 20% of share holding. Therefore, the Hon'ble ITAT, Hyderabad held that since MIs Siddeswari Power Generation Pvt. Ltd is not a share holder of MIs APL and the share holders are Sri Kanta Rao and Smt. U Rajani, the advances were not treated as deemed dividend in the hands of the assessee who is not a share holder of MIs APL. However, in the instant case, the assessee, Sri V.C. Nannapaneni is a share holder in M/s Natco Laboratories Ltd. with a share holding of 10%. As such the case law relied upon by the assessee is distinguishable on facts and hence cannot come to the rescue of the assessee. Since the assessee Sri V.C. Nannapaneni (HUF) has taken a loan from u/s PPSL who inturn has taken loan from MIs Natco Laboratories on the same date, this transaction definitely partakes the character of deemed dividend in terms of the provisions of Sec. 2(22)(e) of the I.T. Act. Therefore, in view of the above mentioned facts and the circumstances of 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older of Pennar Patterson Securities Limited. Neither the Pennar Patterson Securities Limited is a shareholder in Natco Laboratories Ltd., I am informed that neither company is a company in which the public are substantially interested. It is to be noted that the said Natco Laboratories Ltd., started its operations only during the year. Assessee s contentions all along was that it was a direct loan from Pennar Patterson Securities Limited and it was interest bearing. Assessee also contended that assessee paid interest on which there is no dispute. AO s contention is that assessee obtained the money by way of loans indirectly through the medium of Pennar Patterson Securities Limited, from Natco Laboratories Ltd., so the payment by such company is for the individual benefit of its shareholder. Therefore, the provisions of Section 2(22)(e) are attracted. 6.3. As seen from the provisions of Section 2(22)(e), any payment by such company or on behalf or for the individual benefit of any such shareholder 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 . 6.5. This issue was also decided by the Co-ordinate Bench in the case of ACIT Vs. Yasin Hotels (P) Ltd., [19 DTR 306], wherein after considering the existing case law on the subject, the Co-ordinate Bench has held that accumulated profits would mean commercial profits which are to be calculated after allowing the depreciation as per the IT Act. The decision of the Co-ordinate Bench is as under: 6. We have considered rival submissions carefully in the light of available material on record as well as decisions cited by the parties. Admittedly, the provisions of s. 2(22)(e) are similar to the provisions regarding deemed dividend in the old Act, 1922 under s. 2(6A)(e). Therefore, even the decisions 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 acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 IT Act would have to be deducted for ascertaining the accumulated profits. 9. 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 vs. 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 s. 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 IT Act as a charge towards profits. Since IT Act has prescribed particular rates of depreciation, in our view, such depreciation has to be reduced from the commercial profits for the purpose of s. 2(22)(e). This position has been indirectly recognised by Hon ble Supreme Court. Further, Hon ble Bombay High Court in the case of Navnitlal C. Jhaveri vs. CIT (supra) and in the case of CIT vs. 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. 6.6. No other contrary decision has been brought to my notice. Respectfully following the same, I am of the opinion that the accumulated profits in the case of the company are to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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