Babulal Jain V. The Income Tax Officer,

ITTA/319/2007

AI Insights

The case revolves around the taxation of a loan taken by the assessee, Babulal Jain, from M/s. Rajadhani Hotels Private Limited, where he was a shareholder. The loan was treated as a deemed dividend under Section 2(22)(e) of the Income-tax Act by the Assessing Officer, leading to a tax liability. The Commissioner of Income-tax (Appeals) later adjusted the profits by considering depreciation, contrary to the Assessing Officer's decision. However, the Income-tax Appellate Tribunal reversed this decision, leading to the present appeal. The High Court's decision favored the assessee, aligning with precedents that allow depreciation in such calculations.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 752742 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 14-11-2024
• Assessment Year: misc
• Other Referred Cases: Navnit Lal C Javeri v. Commissioner of Income-tax, Bombay City, Commissioner of Income-tax, Bombay City v. Jamnadas Khimji Kothari, P.K. Badiani v. Commissioner of Income tax, Bombay
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: DUVVA KUMAR
• Keywords: Accumulated profits; Commissioner of Income Tax (Appeals); Deemed dividend; Income tax appellate tribunal; Loan; Tax
• Section: 148; 143(1); 2(22)(e); 260A; 151 CPC

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD THURSDAY,THE FOURTEENTH DAY OF NOVEMBER TWO THOUSAND AND TWENTY FOUR PRESENT THE HON'BLE THE CHIEF JUSTICE ALOK ARADHE ANI) THE HON'BLE SRIJUSTICE J. SREENIVAS RAO INCOME TAX TRIBUNAL APPEAL NO: 319 OF 2OOT lncome tax Tribunal Appeal under Section 260-4 of the lncome tax Act, 1961, against the order of the lncome Tax Appellate Tribunal, Hyderabad B-Bench, Hyderabad in ITA No. 11561Hyd12004 for Assessment Year 2000-01 dated 27-7- 2007 pretened against the order of the Commissioner of lncome Tax (Appeals),Vl 12th Floor, Gagan Vihar, M.J. Road, Hyderabad dated 23-09-2004 in Appeal No. O102Ml-7(3)lClT (A)-VI 12004-05 preferred against the order of the lncome Tax Officer Ward-7 (3), Hyderabad dated 26-03-2004 in PAN /GlR No. ABZPJ3405C|B-740. Between: Babulal Jain, C/o Rajadhani Hotel Pvt. Ltd., 15-1-503/8/19, Siddiamber Bazar, ...APPELLANT AND The lncome Tax Officer, Ward-7[3], Hyderabad ...RESPONDENT l.A. NO: 1 OF 2007(ITTAM P. NO: 295 OF 2007) Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased stay the recovery of tax of Rs. 7,78,1491- due from the petitioner for the assessment year 2000-Oi bearing PA.No. ABZ PJ 3405 CtB-740 pending disposal of ITTA of 2007 Counsel for the Appellant SRI DUWA PAVAN KUMAR, FOR SRI Y.RATNAKAR Counsel forthe Respondent: SRI J. V. PRASAD (Sr. SC FOR INCOME TAX) The Court made the following ORDER: ::::r-:--ii--E::- ,/ THE HON'BLE THE CHIEFJUSTICE ALOKARADHE AND THE HON'BLE SRI JUSTTCE J. SREENIVAS RAO I.T.T.A. No.3 19 of 2007 JUDGMENT:1per the l,{on,ble the Chief Justice Alok Aradhe) Mr. Duvva pavan Kumar, learned counsel appe,lrs for Mr. Y. Ratnakar, learned counsel for the appellant. Mr. J.V\" Prasad, learned Senior Standing Counsel for Income-tax Department appears for the respondent. 2. This appeal which is filed by the assessee under Section 260A of the Income-tax Act, 1961, pertains to the assessment year 2000-0 l. 'lhe appeal was admitted by a Bench of this Court on the foltowing substantial questions of law. ' l. Wherlrer on the lacts and in the circ_umstances of the casc. lor the purpose ofarriving at the accumulated profits L/S.2(22)(e) of rhe Income_tax Act whether deduction of depreciation as provided under the Income_tax Act is necessan or uot for taxing any loan borrowed from the company. as deemed d ividend? 2. Whether the loan borrowed by the appellant amounting to Rs. l4,il,28ll- is liable to tax as deemed divided u/S.2(22)(e) of the Income-tax Act on the facts and circutrslances of the case? CJ & JSR, J ITTA No.3l9 ot 2007 The factual backdrop in which the aforesaid substantial questions of law arise for consideration need mention which is stated infra. 3. The assessee filed income tax return declaring the total tncome of Rs.1,95,880/-. The retum was accepted by the Assessing Officer by an order passed under Section 1a3(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). Subsequently, the assessment was reopened and the notice dated 27.03.2003 under Section 148 of the Act was issued to the assessee. In response to the aforesaid notice, the assessee requested that the retum filed on 29.06.2000 be treated as response to the notice under Section 148 of the Act. The Assessing Officer inter alia treated the loan taken by the assessee from IWs.Rajadhani Hotels Private Limited in which assessee was a shareholder, during the period from 0l -04.1999 to 19.12.1999, as deemed dividend under Section2(22)(e) of the Act. It was further held that the accumulated profits of M/s.Rajadhani Hotels Private Limited were more than the advance given to the appellant. The contention ofthe assessee 2 that there are no accumulated profits and if the reworking of 3 (li ti JSR. J ITTA 1o.319 of 2007 profits is done by deducting the correct amounl of depreciation. there would be a negative figr-rre of Rs.19,75,068/- AS against Rs.35,08,698/-, rejected. The was Assessing Officer by an order dated26.03.2004 completed the assessment and made an addition of Rs. l4,5l,2gll_. 4. Being aggrieved, the assessee filed an appeal before the Commissioner ol Incorre-tax (Appeals). The Commissi,tner of Income-tax (Appeals) inter alia held that profits disclosed are subject to adjustment and depreciation as granted in accordance ',vith the rates prescribed under the Act and therefore, the accumulated profits are to be computed taking into account the depreciation as per the Income_tax Rules. The Commissioner of Income-tax (Appeals). placed reliance rtn the decisions of Bombay High Court in Navnit Lal C Jareri v. Commissioner of [ncome-tax, Bombay City, and Com missioner of Income-tax, Bombay City v. Jamnadas Khimji Kothari2 and by an order dated23.09.2004 ailowed the appeal. ./ I ' ( t97 I ) 80 ITR 582 (Bom r ' 1t9't31 ez ITR lo5 iBornj CJ &.JSR, J IT'[A No 319 of 2007 5. Being aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal placed reliance on the decision of the Supreme Court in P.K. Badiani v. Commissioner of Income tax, Bombayr and held that accumulated profits occurring in Clause (e) of Section 2(22) means profits in the commercial sense and not taxable profits liable to tax as income under the Act. Accordingly, the Appellate Tribunal by an order dated27.07.2007 set aside the order passed by the Commissioner of Income-tax (Appeals) and allowed the appeal preferred by the Revenue. Hence, this appeal. 6. Learned counsel for the assessee submitted that the issue involved in this appeal is squarely covered by the decisions of Bombay High Court in Navnit Lal C Javeri and Jamnadas Khimji Kothari (supra). It is further submitted that the decision of the Supreme Court in P.K. Badiani (supra) does not apply to the fact situation of the case and the Appellate Tribunal grossly erred in reversing the well-reasoned order 4 passed by the Commission& of Income-tax (Appeals). It is r ( t976) 4 scc 562 5 CJ 3 JSR, J ITTA o 319 of 2007 therefore submitted that the impugned order passed by the Appellate Tribunal be set aside. 1. On the other hand, learned counsel for the I{evenue submitted tl-rat rhe Appellate Tribunal rightly relied on the decision of the Supreme Court in p.K. Badiani (supra). It is further submitted that the accumulated profits under Section 2(22)(e) of the Act means profit in the commercial sense and are liable to tax as income under the Act. It is conten