2010 (9) TMI 726 - HC - Income Tax

Deduction u/s 80-IA - Deemed dividend u/s 2(22)(e) Whether depreciation is required to be deducted from Gross total income for calculation of deduction u/s 80IA when the assessee did not claim depreciation - Held that - deduction under Chapter VI-A of the Act, (which includes section 80-IA) has to be computed on the gross total income determined after all deductions allowable under sections 30 to 43D of the Act and any device adopted by the assessee to reduce or inflate the profits of eligible business has got to be rejected. The quantum of deduction under section 80-IA of the Act has to be determined by computing the gross total income from the business after taking into consideration all the deductions allowable under sections 30 to 43D of the Act. - Decided in favor of revenue. Regarding deemed dividend - Counsel for the assessee did not dispute that all the conditions laid down under clause (e) of section 2(22) of the Act for treating the loan advanced by AMPL to the assessee-company as a dividend were satisfied - The opening balance of Rs. 1,76,39,425 was not advanced by AMPL to the assessee during the relevant previous year and could, therefore, not be treated as the amount of loan or advance received by the assessee during the relevant previous year - The opening words any payment occurring in clause (e) of section 2(22) of the Act contemplates actual payment made by the company to the assessee for being treated as a dividend in computing income of the assessee - Since lending of money was a substantial part of the business of AMPL, the money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it has to be excluded from the definition of dividend by virtue of clause (ii) of section 2(22)(e) of the Act Decided in the favour of the assessee

Summary

Issues Involved:
1. Whether depreciation must be deducted for computing total income under section 80-IA of the Income-tax Act, 1961, even if not claimed by the assessee.
2. Whether the amount of Rs. 2,18,60,949 represents deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Regarding the first issue:
The court addressed whether the total income of the assessee should include allowable depreciation under section 32 for the purpose of availing deduction under section 80-IA of the Income-tax Act, 1961, even if the assessee had not claimed it. The court referred to the Full Bench decision in Plastiblends India Ltd. v. Addl. CIT [2009] 318 ITR 352, which held that special deductions under Chapter VI-A, including section 80-IA, must be computed on the gross total income determined after all allowable deductions under sections 30 to 43D, including current depreciation under section 32. The court concluded that the quantum of deduction under section 80-IA must be determined by computing the gross total income from the business after considering all allowable deductions. Therefore, the first question was answered in favor of the Revenue and against the assessee.

Regarding the second issue:
The court examined whether the loan amount of Rs. 2,18,60,949 received by the assessee from AMPL should be treated as deemed dividend under section 2(22)(e) of the Act. The definition of "dividend" under section 2(22) includes any payment by a company by way of advance or loan to a shareholder holding not less than ten percent of the voting power, to the extent of the company's accumulated profits, unless the advance or loan is made in the ordinary course of business where lending money is a substantial part of the business.

The court noted that AMPL, the lending company, was a private limited company in which the public were not substantially interested, and the majority shareholders of AMPL were also the majority shareholders of the assessee-company. The court observed that during the relevant financial year, AMPL had actually lent Rs. 11,68,135 to the assessee, and the remaining amount included opening balances and provisions for interest, which could not be treated as loans or advances received during the relevant year.

The court then considered whether the loan of Rs. 11,68,135 fell under the exclusion clause (ii) of section 2(22)(e), which excludes loans made in the ordinary course of business where lending money is a substantial part of the business. The court found that AMPL was engaged in the business of lending money, and a significant portion of its assets and income were derived from this activity. The court concluded that lending money was a substantial part of AMPL's business, and therefore, the loan to the assessee was excluded from the definition of "dividend." Thus, the second question was answered in favor of the assessee and against the Revenue.

Conclusion:
The appeal was partly allowed. The first question was answered in favor of the Revenue, requiring the recomputation of the assessee's income by deducting allowable depreciation. The second question was answered in favor of the assessee, excluding the loan amount from being treated as deemed dividend. The matter was remanded to the Assessing Officer for recomputation, and both parties were left to bear their own costs.