2013 (12) TMI 200 - HC - Income Tax

Determination of accumulated profits - Deemed dividend - Whether depreciation is allowable while computing taxable income - Held that - Following Commissioner of Income Tax vs. Jamnadas Khimji Kothari 1972 (10) TMI 24 - BOMBAY High Court - The depreciation arising from the wear and tear of the business assets is a first charge on profits, without deducting which it is not possible to arrive at a profit in a year - The normal depreciation as provided under the Income Tax Act and not as per the Companies Act, has to be taken into consideration while computing the Income Tax of an assessee - Decided against Revenue.

Summary

Issues:
1. Interpretation of accumulated profits for tax assessment.
2. Determination of depreciation for taxable income under Income Tax Act vs. Companies Act.

Issue 1: Interpretation of accumulated profits for tax assessment

The appeal raised substantial questions of law regarding the determination of accumulated profits for tax assessment. The primary contention was whether accumulated profits should be calculated after considering depreciation under the Income Tax Act or the Companies Act. The appellant argued that authorities had erred in not accounting for depreciation as per the Companies Act, which affects the taxable income calculation. Reference was made to a judgment highlighting the distinction between "profits in the commercial sense" and profits under the Income Tax Act. The appellant sought a review of the Assessing Officer's order based on this argument.

The CIT(A) noted that for assessing taxable income, depreciation should be considered as per the provisions of the Income Tax Act. The judgment in the case of P. K. Badiani vs. Commissioner of Income Tax clarified the concept of accumulated profits, emphasizing that profits carried to reserve do not cease to be profits unless capitalized. The court's analysis focused on the treatment of profits transferred to a reserve account without effective capitalization. The court concluded that the appellant's argument regarding depreciation under the Companies Act was not valid in the context of determining taxable income under the Income Tax Act.

Issue 2: Determination of depreciation for taxable income under Income Tax Act vs. Companies Act

The court deliberated on whether the Assessee is entitled to claim depreciation while computing taxable income as per the Income Tax Act or the Companies Act. Precedents such as Star Chemicals Pvt. Ltd. vs. Commissioner of Income Tax and Commissioner of Income Tax vs. Jamnadas Khimji Kothari established that depreciation under the Income Tax Act is a first charge on profits, essential for arriving at the profit in a year. The court emphasized that the normal depreciation under the Income Tax Act must be considered for income tax assessment, rather than the depreciation provided in the company's books of account. It was settled that the Assessing Authority should adhere to the depreciation guidelines outlined in the Income Tax Act for computing taxable income.

In conclusion, the court held that the judgment in the case of P. K. Badiani vs. Commissioner of Income Tax was not applicable to the present case. The appeal was dismissed, affirming that depreciation for taxable income assessment should be based on the provisions of the Income Tax Act, not the Companies Act. No further orders were issued regarding costs.

This detailed analysis of the judgment provides a comprehensive understanding of the issues related to the interpretation of accumulated profits and the determination of depreciation for taxable income under different statutes.