1987 (10) TMI 105 - AT - Income Tax

Summary

Issues:
1. Addition under section 2(22)(e) for deemed dividend
2. Treatment of expenditure on plant and machinery in research division for accumulated profits calculation
3. Addition of hundi loan under section 69D

Issue 1: Addition under section 2(22)(e) for deemed dividend

The Income-tax Officer made an addition of Rs. 3,83,930 under section 2(22)(e) for deemed dividend, which was later reduced to Rs. 1,55,985 by the CIT (Appeals). The dispute arose regarding the inclusion of Rs. 2,95,360 spent on research & development expenditure on building, plant, and machinery in the accumulated profits calculation. The assessee argued that the plant and machinery expenditure of Rs. 2,12,360 was necessary to stay competitive and should not be considered in accumulated profits. The Tribunal held that 'accumulated profits' refer to commercial profits and excluded the plant and machinery expenditure from the calculation, thereby deleting the addition.

Issue 2: Treatment of expenditure on plant and machinery in research division for accumulated profits calculation

The Tribunal referred to precedents like P. K. Badiani v. CIT and CIT v. Gangadhar Banerjee & Co. (P.) Ltd. to define 'accumulated profits' as commercial profits. It emphasized that outgoings, like the plant and machinery expenditure, should be excluded from accumulated profits calculation. The Tribunal differentiated between capital expenditure and commercial profits, highlighting the necessity of plant and machinery for technological advancement. Therefore, it ruled that the plant and machinery expenditure of Rs. 2,12,360 should not be included in accumulated profits.

Issue 3: Addition of hundi loan under section 69D

The Income-tax Officer disallowed Rs. 4,13,823 as hundi loans under section 69D, which was reduced to Rs. 2,15,343 by the CIT (Appeals). The dispute centered on whether hundi borrowals should only be through crossed account payee cheques and the genuineness of the transactions. The Tribunal analyzed the nature of the hundi documents, confirming their genuineness and English language. It cited previous Tribunal orders to support the exclusion of hundi borrowals when identity and genuineness are established, leading to the deletion of the addition of Rs. 2,15,343.

In conclusion, the Tribunal partially allowed the appeal by excluding the plant and machinery expenditure from accumulated profits calculation and deleting the addition related to hundi loans under section 69D. Other grounds raised in the appeal were rejected as not pressed.