V.C. Nannapaneni (HUF), Hyd, Hyderabad V. ITO, Ward-6(3), Hyderabad, Hyderabad

ITA 1112/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2548 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 1994-1995
• Appeal Filed On: 22-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D PRASAD RAO
• Assessee Lawyers: A V RAGHURAM
• Keywords: Depreciation; Opportunity of being heard; Deemed dividend
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 1112/HYD/2016 ASSESSMENT YEAR: 1994-95 V.C. NANNAPANENI, (HUF), HYDERABAD [PAN: AABHN7619B] VS THE INCOME TAX OFFICER, WARD-6(3), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI A.V. RAGHU RAM, AR FOR REVENUE : SHRI D. PRASAD RAO, DR DATE OF HEARING : 18-01-2018 DATE OF PRONOUNCEMENT : 31-01-2018 O R D E R THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-9, HYDERABAD, DATED 14-03-2016 FOR THE AY. 1994-95 ON THE ISSUE OF DEEME D DIVIDEND U/S. 2(22)(E) OF THE INCOME TAX ACT [ACT]. 2. THE FACTS LEADING TO PRESENT APPEAL ARE AS FOLLOW S: 2.1. ASSESSEE IS A HUF. IT FILED ITS RETURN OF INCOME FOR THE AY. 1994-95 ORIGINALLY DECLARING LOSS OF RS. 5,6 2,110/- WHICH WAS SUBSEQUENTLY REVISED TO LOSS OF RS. 6,09,96 4/- AND AGRICULTURAL INCOME OF RS.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 RS. 68,55,7 70/-. I.T.A. NO. 1112/HYD/2016 :- 2 -: WHILE COMPLETING THE ASSESSMENT, AO MADE CERTAIN ADDITIONS/DISALLOWANCES AND TREATED LOAN OF RS. 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 LIMI TED THROUGH PENNAR PATTERSON SECURITIES LIMITED AND BROUGHT T O TAX THE SAID AMOUNT. 2.2. ON APPEAL, THE CIT(A) BY HIS ORDER DT. 26-03-20 02 HELD THAT THE AO IS CORRECT IN TREATING THE LOAN OF RS. 40,00,000/- TAKEN BY THE ASSESSEES 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 VIDEND TO THE EXTENT OF PROFITS OF RS. 24,73,352/- DERIVED BY THE COMPANY DURING THE AY. 1994-95. THE CIT(A) DID NOT C ONSIDER ASSESSEES SUBMISSION THAT DEPRECIATION AS PER INCOME TAX RULES IS TO BE ALLOWED AS DEDUCTION INSTEAD OF DEPRECI ATION AS PER COMPANIES ACT, WHILE COMPUTING THE ACCUMULATED PRO FITS FOR ARRIVING AT THE DEEMED DIVIDEND. 2.3. ASSESSEES HUF AGGRIEVED OF THE SAID APPELLATE ORDER, PREFERRED AN APPEAL BEFORE THE ITAT CONTENDIN G THAT PROFITS OF RS. 24,73,352/- DERIVED BY NATCO LABORATORI ES LIMITED DURING THE AY. 1994-95 CANNOT BE TREATED AS D EEMED DIVIDEND U/S. 2(22)(E) OF THE ACT SINCE THE PROVISION S OF SECTION 2(22)(E) ARE NOT APPLICABLE TO THE LOAN TAKEN BY ASSESS EES HUF FROM PENNAR PATTERSON SECURITIES LIMITED. THE TRIBUNAL GAVE ITS FINDING ON THE ISSUE IN PARA 42 OF THE ORDER AS UNDE R: I.T.A. NO. 1112/HYD/2016 :- 3 -: 42. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD. ADMITTEDLY, IT IS A LOAN TRANSACTION. IF IT IS A LOAN TRANSACTION, THEN OBVIOUSLY, CLAUSE (A) CANNOT APPLY AS IT VERY CATEG ORICALLY SPEAKS ABOUT DISTRIBUTION WHICH ENTAILS THE RELEASE OF ASSETS BY THE COMPANY TO ITS SHAREHOLDERS. THE LD.DR SAYS THAT IT IS A MISTAKE ON THE PART OF THE REVENUE AUTHORITIES TO HAVE INVOKED CLAUSE (A) IN PLACE OF CLAUSE (E) IF THE IN TENTION OF THE REVENUE IS TO TAX THE IMPUGNED AMOUNT UNDER CLAUSE (E), THEN, CLAUSE (E) DOES NOT APPLY TO A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED. IN T HAT CASE, IT HAS NOT BEEN EXAMINED BY ANY OF THE AUTHORITIES BELOW WHETHER TH E COMPANIES INVOLVED IN THE TRANSACTION ARE SUCH IN WHICH PUBLIC ARE SUBSTANTIA LLY INTERESTED OR NOT. THE LD. COUNSEL SAYS THAT CLAUSE (A) IS CONSCIOUSLY APPLIED . THE MENTIONING OF CLAUSE (A) BY THE CIT(A) AT SEVEN PLACES IN HIS ORDER MAY LEND SO ME CREDENCE TO THE PLEA OF THE LD. COUNSEL. AT THE SAME TIME, THE PLEA OF THE LD.D R THAT IT COULD BE A GENUINE MISTAKE IS NOT WHOLLY DEVOID OF MERIT. UNDER THE CI RCUMSTANCES, WE ARE OF THE VIEW THAT SINCE CORRECT INCOME HAS TO BE DETERMINED , THE BENEFIT OF DOUBT, IF IT CAN BE SO CALLED, SHOULD BE GIVEN TO THE REVENUE. ACCOR DINGLY, WE RESTORE THIS ISSUE TO THE FILE OF THE AO TO DETERMINE IT AFRESH IN THE LI GHT OF THE CORRECT PROVISION OF LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE.' 2.4. CONSEQUENT TO THE ORDER OF THE ITAT, AO HAD TAKEN UP THE ASSESSMENT AND DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE CONTENDED AS TO WHY THE LOAN TAK EN FROM PENNAR PATTERSON SECURITIES LIMITED SHOULD NOT BE TREATE D 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 RS. 40 LAKHS AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT. H OWEVER, SUCH DEEMED DIVIDEND IS RESTRICTED TO ACCUMULATED PROF ITS OF NATCO LABORATORIES LIMITED OF RS. 24,73,352/- AS ON 3 1-03- 1994, AFTER ALLOWING DEPRECIATION AS PER COMPANIES AC T, AS WAS DONE BY THE THEN CIT(A) IN HIS ORDER DT. 26-03-2002. I.T.A. NO. 1112/HYD/2016 :- 4 -: 2.6. BEFORE THE LD. CIT(A), ASSESSEE RELIED ON THE FOLLOWING CASES ON VARIOUS PROPOSITIONS AS WHY THE A MOUNT 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 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 I.T.A. NO. 1112/HYD/2016 :- 5 -: SHOULD BE ALLOWED FROM COMMERCIAL PROFITS TO DETERMINE ACCUMULATED PROFITS FOR THE PURPOSE. E) DECISION OF ITAT HYD IN THE CASE OF ITO VS. SIDDHESWARI POWER GENERATION P LTD. 2.7. IT WAS CONTENDED THAT DEPRECIATION OF RS. 4,04,00,000/- ALLOWABLE AS PER INCOME TAX RULES IS TO BE CONSIDERED FOR THE PURPOSE OF CALCULATING ACCUMULATED PROFITS OF NATCO LABORATORIES LTD., FROM WHOM LOAN IS SAID TO HAVE BEEN TAKEN. ASSESSEE WORKED OUT THE LOSS OF RS. 3,35, 59,784/- AS DETAILED HERE UNDER: RS. NET PROFITS AS PER BOOKS 24,73,352 ADD: DEPRECIATION DEBITED IN PROFIT AND LOSS ACCOUNT 43,67,164 68,40,516 LESS: DEPRECIATION ALLOWABLE UNDER INCOME TAX RULES 4,04,00,300 NET LOSS FOR INCOME TAX PURPOSE AFTER DEPRECIATION AS PER INCOME TAX RULES 3,35,59,784 3. LD.CIT(A), HOWEVER, HAS NOT ACCEPTED THE CONTENTIONS AND STATED AS UNDER, WHILE REJECTING THE SUBMISSIONS: 3. I HAVE ALSO PERUSED THE CASE LAWS RELIED UPON B Y THE ASSESSEE AND THE FACTS ARE DIFFERENT FROM THE FACTS OF THE ASSESSEE. THE ASSESSEE RELIED ON THE CASE OF M/S SIDDESWARI P OWER GENERATION LTD., WHEREIN THE JURISDICTIONAL ITAT AND HIGH COUR T HAVE HELD IN FAVOUR OF THE ASSESSEE. HOWEVER, THE FACTS OF THAT CASE ARE DIFFERENT FROM THE INSTANT CASE. IT IS SEEN THAT IN THE CASE OF M/S SIDDESWARI I.T.A. NO. 1112/HYD/2016 :- 6 -: POWER GENERATION PVT. LTD. THE SHARE HOLDERS NAMELY SRI. U KANTA RAO AND SMT. U. RAJANI ARE HOLDING 50% SHARE HOLDING, W HO HAVE INTURN TAKEN ADVANCES FROM MIS APL IN WHICH SRI KANTA RAO AND SMT. U RAJANI HELD MORE THAT 20% OF SHARE HOLDING. THEREFO RE, THE HON'BLE ITAT, HYDERABAD HELD THAT SINCE MIS SIDDESWARI POWE R GENERATION PVT. LTD IS NOT A SHARE HOLDER OF MIS APL AND THE S HARE 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, TH E ASSESSEE, SRI V.C. NANNAPANENI IS A SHARE HOLDER IN M/S NATCO LABORATO RIES LTD. WITH A SHARE HOLDING OF 10%. AS SUCH THE CASE LAW RELIED U PON BY THE ASSESSEE IS DISTINGUISHABLE ON FACTS AND HENCE CANN OT 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 TRANS ACTION DEFINITELY PARTAKES THE CHARACTER OF DEEMED DIVIDEND IN TERMS OF THE PROVISIONS OF SEC. 2(22)(E) OF THE I.T. ACT. THEREFORE, IN VIE W 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 TRANSACTION CANNOT BE CONSIDERED AS A DEEMED DIVIDEND ; THAT THE ASSESSEE IS NOT A SHAREHOLDER IN THE SAID COMPAN Y 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 MUMB AI SPECIAL BENCH]; II. CIT VS. UNIVERSAL MEDICAL PVT. LTD. [324 ITR 263 (BOM)]; III. ACIT VS. YASIN HOTELS (P) LTD., [19 DTR 306 (TR IB)]; 5. LD.DR, HOWEVER, SUBMITTED THAT THE INDIRECT TRANSFER THROUGH THE OTHER COMPANY HAS BEEN EXAMINED A ND SINCE BOTH COMPANIES ARE NOT COMPANIES IN WHICH PUBLI C ARE INTERESTED, THE INDIRECT TRANSFER IS CONSIDERED AS DEEM ED I.T.A. NO. 1112/HYD/2016 :- 7 -: DIVIDEND BY THE AO/CIT(A). HE SUPPORTED THE ORDERS O F AO/CIT(A). 6. I HAVE CONSIDERED THE RIVAL CONTENTIONS. AS SEEN FROM THE ORDER OF ITAT, THE ENTIRE ISSUE OF CONSIDERI NG THE TRANSACTION U/S. 2(22)(E) IS RESTORED TO AO. THE PROVI SIONS OF SECTION 2(22)(E) ARE AS UNDER: SECTION 2(22)(E) (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANT IALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF AD VANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFIC IAL OWNER OF SHARES (NOT BEING SHAR ES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBE R OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIA L INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN)] OR AN Y PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL B ENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE CO MPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS ; 6.1. AS CAN BE SEEN FROM THE ABOVE, TO INVOKE THE PROVISIONS OF SECTION 2(22)(E), THERE SHOULD BE A PAY MENT BY A COMPANY NOT BEING A COMPANY IN WHICH (I) PUBLIC AR E SUBSTANTIALLY INTERESTED II) OF ANY SUM BY WAY OF ADV ANCE OR LOAN TO A SHAREHOLDER BEING A SUBSTANTIAL SHAREHOLDER OR IN A CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR PA RTNER OR (III) ANY PAYMENT BY IN SUCH COMPANY ON BEHALF OF OR FOR INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER IV) TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESS ACCUMULATED PROFITS. I.T.A. NO. 1112/HYD/2016 :- 8 -: 6.2. IN THE GIVEN CASE, ASSESSEE IS NOT A SHAREHOLDE R OF PENNAR PATTERSON SECURITIES LIMITED. NEITHER THE PENNAR PATTERSON SECURITIES LIMITED IS A SHAREHOLDER IN NATCO LABORATORIES LTD., I AM INFORMED THAT NEITHER COMPANY I S A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTEREST ED. IT IS TO BE NOTED THAT THE SAID NATCO LABORATORIES LTD., STARTED ITS OPERATIONS ONLY DURING THE YEAR. ASSESSEES CONTENTIO NS ALL ALONG WAS THAT IT WAS A DIRECT LOAN FROM PENNAR PATTERSO N SECURITIES LIMITED AND IT WAS INTEREST BEARING. ASSESS EE ALSO CONTENDED THAT ASSESSEE PAID INTEREST ON WHICH THERE IS NO DISPUTE. AOS CONTENTION IS THAT ASSESSEE OBTAINED THE M ONEY BY WAY OF LOANS INDIRECTLY THROUGH THE MEDIUM OF PENNA R PATTERSON SECURITIES LIMITED, FROM NATCO LABORATORIES LTD ., SO THE PAYMENT BY SUCH COMPANY IS FOR THE INDIVIDUAL BENE FIT 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 INDI VIDUAL BENEFIT OF ANY SUCH SHAREHOLDER HAS TO BE A DIRECT PAY MENT. SINCE PENNAR PATTERSON SECURITIES LIMITED IS NOT A SHARE HOLDER 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 SHA REHOLDER IN PENNAR PATTERSON SECURITIES LIMITED NOR PENNAR PATTER SON SECURITIES LIMITED IN NATCO LABORATORIES LTD. THEREFORE , THE PROVISIONS OF SECTION 2(22)(E) ARE NOT ATTRACTED. IT IS TRITE LAW I.T.A. NO. 1112/HYD/2016 :- 9 -: THAT ONLY THE PAYMENTS RECEIVED BY A SHAREHOLDER CAN BE CONSIDERED U/S. 2(22)(E). THIS PRINCIPLE WAS ESTABL ISHED IN VARIOUS CASES AS RELIED ON BY ASSESSEE, MORE SO WIT H THE DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF BHO UMIK COLOUR PVT. LTD., [313 ITR (AT) 146 MUMBAI SPECIAL BENCH] AS APPROVED BY THE HON'BLE HIGH COURT OF BOMBAY IN THE C ASE OF CIT VS. UNIVERSAL MEDICAL PVT. LTD. [324 ITR 263 (BOM )]; THEREFORE, THE SAID PAYMENTS FROM PENNAR PATTERSON SECU RITIES LIMITED IN MY VIEW DOES NOT ATTRACT THE PROVISIONS OF S ECTION 2(22)(E) OF THE ACT. 6.4. EVEN IF IT IS CONSIDERED AS FOR THE INDIVIDUAL BENEFIT OF SHAREHOLDER IN AN INDIRECT WAY, THE ISSUE IS ALSO TO BE EXAMINED IN THE LIGHT OF HAVING ACCUMULATED PROFITS. ACCUMULATED PROFITS IS NOT DEFINED ORIGINALLY UNDER THE ACT AND EXPLANATION-2 WAS INCLUDED AFTER THE DECISION OF HON' BLE SUPREME COURT THAT ACCUMULATED PROFITS DOES NOT INCLUDE CURRENT PROFITS. THERE IS NO DISPUTE WITH REFERENCE TO TH E PROFITS EARNED BY THE COMPANY DURING THE YEAR. AO HAS CONSID ERED THE PROFITS AS ON 31-03-1994 OF RS. 24,73,352/-, AS R ESTRICTED BY CIT(A) IN THE FIRST ROUND, IN THE ABSENCE OF WORKI NG OF PROFITS AS ON THE DATE OF LOAN I.E., 24-03-1994. HOWEVER, I T WAS ASSESSEES CONTENTION BEFORE THE AO AND LD.CIT(A) THAT WORKING OF ACCUMULATED PROFITS SHOULD HAVE BEEN ARRIVED AT AF TER CONSIDERING THE NORMAL DEPRECIATION AS PER IT PROVISI ONS BUT NOT AS PER THE COMPANY LAW, AS HELD BY THE HON'BLE BOM BAY HIGH COURT IN THE CASE OF NAVNITLAL C. JHAVERI VS. CI T [80 ITR 582]. IT WAS HELD THAT FOR THE PURPOSE OF CALCULATING PROFITS WITHIN THE MEANING OF THE PHRASE ACCUMULATED PROFITS U/S. I.T.A. NO. 1112/HYD/2016 :- 10 -: 2(6A)(E) [CORRESPONDING TO SECTION 2(22)(E) OF THE INC OME TAX ACT, 1961], DEPRECIATION SHOULD BE ALLOWED BY WAY OF A DEDUCTION AT THE RATES PROVIDED FOR UNDER THE INCOME TA X ACT. HON'BLE BOMBAY HIGH COURT IN ANOTHER CASE VIZ., CIT, BOMBAY CITY-II, VS. JAMNADAS KHIMJI KOTHARI [92 ITR 105] H ELD AS UNDER: THE PHRASE ACCUMULATED PROFITS IN SECTION 2(6A)( E) OF THE ACT DOES NOT MEAN PROFITS AS DISCLOSED BY THE COMPANYS BALANCE-SHEET. THE PROFITS DISCLOSED WOULD BE SUBJECT TO ADJUSTMEN T 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 T HE 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 DECISION S 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 UN DER THE OLD ACT ARE RELEVANT. IT IS FURTHER CLEAR IN THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF P.K. BADIANI VS. CIT (SUPRA) THE EXPRES SION 'ACCUMULATED PROFITS' OCCURRING IN CL. (E) OF S. 2(6A) WOULD MEA N PROFITS IN THE COMMERCIAL SENSE. IN FACT, HONBLE SUPREME COURT OB SERVED 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 C OMMERCIAL SENSE AND NOT ASSESSABLE OR TAXABLE PROFITS LIABLE TO TAX AS INCOME UNDER TH E 1922 ACT. THE TERM PROFITS OCCURRING IN S. 2(6A)(E) MEANS P ROFITS IN THE COMMERCIAL SENSE, THAT IS TO SAY, THE PROFITS MADE BY THE COMPANY IN THE U SUAL AND TRUE SENSE OF THE TERM.' I.T.A. NO. 1112/HYD/2016 :- 11 -: 7. HAVING OBSERVED FOR THE PURPOSE OF S. 2(22)(E) T HAT THE ACCUMULATED PROFITS WOULD MEAN COMMERCIAL PROFITS, BUT THEN QUE STION 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 HONBLE MADRAS HIGH COURT IN THE CA SE OF G.R. GOVINDARAJULU NAIDU & ANR. VS. CIT (SUPRA), WE FIND THAT THE DECISION RELATED TO REDUCTION OF INITIAL DEPRECIATION FROM T HE PROFITS, THE HONBLE HIGH COURT WAS OF THE OPINION THAT SUCH INITIAL DEP RECIATION IS REQUIRED TO BE REDUCED FOR CALCULATING THE ACCUMULATED PROFI TS FOR DETERMINING THE DEEMED DIVIDEND. HOWEVER, THIS POSITION SEEMS T O HAVE BEEN OVERRULED BY THE HONBLE SUPREME COURT IN THE CASE OF P.K. BADIANI VS. CIT (SUPRA). HOWEVER, BEFORE US, THE QUESTION I S NOT OF REDUCTION OF INITIAL DEPRECIATION. BUT QUESTION IS WHETHER DEPRE CIATION SHOULD BE ALLOWED TO BE REDUCED FROM COMMERCIAL PROFITS TO DE TERMINE ACCUMULATED PROFITS FOR THE PURPOSE OF S. 2(22)(E). HONBLE BOMBAY HIGH COURT IN THE CASE OF NAVNITLAL C. JHAVERI VS. CIT (SUPRA) HAS VERY CLEARLY HELD AS UNDER : 'FOR THE PURPOSE OF CALCULATING PROFITS WITHIN THE MEANING OF THE PHRASE ACCUMULATED PROFITS UNDER S. 2(6A)(E), AN ALLOWAN CE FOR DEPRECIATION SHOULD BE MADE BY WAY OF A DEDUCTION AT THE RATES PROVIDED FO R BY THE IT ACT ITSELF.' 8. FROM THE ABOVE, IT BECOMES CLEAR THAT NORMAL CHA RGE OF DEPRECIATION AS PER IT ACT IS REQUIRED TO BE CONSIDERED FOR CALC ULATING ACCUMULATED PROFITS FOR THE PURPOSE OF DETERMINATION OF DEEMED DIVIDEND. SIMILAR VIEW WAS TAKEN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. JAMNADAS KHIMJI KOTHARI (SUPRA) WHERE IT WAS HELD A S FOLLOWS : 'THE PHRASE ACCUMULATED PROFITS IN S. 2(6A)(E) OF THE ACT DOES NOT MEAN PROFITS AS DISCLOSED BY THE COMPANYS BALANCE SHEET. THE PROFI TS DISCLOSED WOULD BE SUBJECT TO ADJUSTMENT AND DEPRECIATION AS GRANTED IN ACCORDANC E WITH THE RATES PRESCRIBED BY THE IT ACT WOULD HAVE TO BE DEDUCTED FOR ASCERTAINI NG THE ACCUMULATED PROFITS.' 9. WE FURTHER FIND THAT THESE TWO DECISIONS CANNOT BE SAID TO HAVE BEEN OVERRULED BY THE HONBLE SUPREME COURT. THIS B ECOMES CLEAR FROM THE OBSERVATION OF HONBLE COURT AT P. 649 OF 105 ITR WHICH IS AS UNDER : 'THE GUJARAT HIGH COURT IN THE CASE OF CIT VS. VIRA MGAM MILLS CO. LTD. (1961) 43 ITR 270 (GUJ) WAS CONCERNED WITH THE QUESTION AS TO WHE THER THE NORMAL DEPRECIATION RESERVE OF THE COMPANY COULD BE TAKEN TO BE THE ACC UMULATIONS OF PAST PROFITS WITHIN THE MEANING OF THE PROVISO TO S. 23A OF THE 1922 AC T AS IT STOOD AT THE RELEVANT TIME. IT HELD THAT IT COULD NOT FORM PART OF THE ACCUMULA TED PAST PROFITS AS IN THE WORDS OF WIXON (VIDE WIXONS ACCOUNTS HAND BOOK), IT WAS TH E ESTIMATED EXPIRATION OF ASSET VALUE OR AS OBSERVED BY PATON IN HIS ACCOUNTANTS HAND BOOK, THIRD EDITION, IT IS AN I.T.A. NO. 1112/HYD/2016 :- 12 -: OUT-OF-POCKET COST AS ANY OTHER COSTS. SAYS THE LEA RNED AUTHOR IN THE ABOVE BOOK, AT P. 746, THUS : THERE IS STILL WIDESPREAD MISAPPREHENSION AS TO TH E PRECISE SIGNIFICANCE OF THE DEPRECIATION CHARGE. IT IS OFTEN DEEMED A MORE OR L ESS 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 IMAGINA RY 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 PERIOD IC OPERATING ASPECT OF FIXED ASSET COSTS, AND THERE IS NO DOUBT AS TO THE REALITY OF S UCH COSTS. FAR FROM BEING A NON-OUT- OF-POCKET CHARGE DEPRECIATION REPRESENTS THE EXTREM E 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. BIBH UTI BHUSAN DUTT AND SUBMITTED THAT IT HAS TAKEN A VIEW DIFFERENT FROM THE ONE TAK EN BY THE GUJARAT HIGH COURT EVEN IN REGARD TO THE NATURE OF NORMAL DEPRECIATION ALLO WANCE. THE CALCUTTA CASE SEEMS TO BE ONE OF A PROPERTY HOLDING COMPANY, THE PROFITS O F WHICH WERE ASSESSABLE UNDER S. 9 WHEREIN THE QUESTION OF DEPRECIATION WAS NOT RELE VANT. IT IS NOT NECESSARY FOR US TO EXAMINE IN THIS CASE THE EXACT NATURE OF THE NORMAL DEPRECIATION ALLOWANCE AND WHETHER IT IS DEDUCTIBLE FROM THE PROFITS OF A PERS ON WHILE DETERMINING HIS COMMERCIAL PROFITS. THE VIEW EXPRESSED BY THE GUJARAT HIGH COU RT 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 ARGUMEN T 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 DEDUCTI BLE 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 PA RT OF THE COMMERCIAL PROFITS.' 10. FROM THE HIGHLIGHTED PORTION IN THE ABOVE PARA, THOUGH IT BECOMES CLEAR THAT HONBLE COURT HAS NOT DECIDED THIS ISSUE , BUT IT HAS INDIRECTLY APPROVED THE OBSERVATION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. VIRAMGAM MILLS CO. LTD. (196 1) 43 ITR 270 (GUJ) THAT DEPRECIATION IS A NORMAL CHARGE. AS WE OBSERVE D ABOVE, FOR DETERMINING THE COMMERCIAL PROFITS, WHAT IS REQUIRE D TO BE CONSIDERED IS WHETHER DEPRECIATION CHARGE IS TO BE REDUCED OR NOT. IN OUR VIEW, DEPRECIATION IS DEFINITELY CHARGED ON THE ASSETS OF THE COMPANY IN THE SENSE THAT IT REPRESENTS WEAR AND TEAR OF VARIOUS A SSETS WHICH ARE USED FOR THE PURPOSE OF BUSINESS. SUCH WEAR AND TEA R 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 T OWARDS PROFITS. SINCE IT ACT HAS PRESCRIBED PARTICULAR RATES OF DEP RECIATION, IN OUR VIEW, SUCH DEPRECIATION HAS TO BE REDUCED FROM THE COMMERCIAL PROFITS FOR THE PURPOSE OF S. 2(22)(E). THIS POSITION HAS B EEN INDIRECTLY RECOGNISED BY HONBLE SUPREME COURT. FURTHER, HONB LE BOMBAY HIGH COURT IN THE CASE OF NAVNITLAL C. JHAVERI VS. CIT ( SUPRA) AND IN THE I.T.A. NO. 1112/HYD/2016 :- 13 -: CASE OF CIT VS. JAMNADAS KHIMJI KOTHARI (SUPRA) HAS TAKEN THIS STAND AND IT CANNOT BE SAID THAT THIS POSITION HAS BEEN O VERRULED BY HONBLE SUPREME COURT. IN THESE CIRCUMSTANCES, WE FIND NOTH ING 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 BE CONSIDERED AFTER ALLOWING THE NORMAL DEPRECIATION . ASSESSEE HAS FURNISHED SUCH WORKING BEFORE THE LD.CIT(A), WHE REIN IT RESULTED IN THE LOSS OF RS. 3,35,59,784/-. CONSIDERIN G THE ABOVE, I AM OF THE OPINION THAT THERE ARE NO ACCUMULA TED PROFITS SO AS TO CONSIDER THE LOAN AS DEEMED DIVIDEN D. IN VIEW OF THAT, ASSESSEES GROUNDS ARE ALLOWED AND AO IS DIR ECTED NOT TO TREAT ANY AMOUNT AS DEEMED DIVIDEND ON THE FACTS OF TH E CASE. 7. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2018 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 31 ST JANUARY, 2018 TNMM I.T.A. NO. 1112/HYD/2016 :- 14 -: COPY TO : 1. V.C. NANNAPANENI (HUF), C/O. A.V. RAGHU RAM, ADVOCATE, 610, BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-6(3), HYDERABAD. 3. CIT (APPEALS)-9, HYDERABAD. 4. PR.CIT-6, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.