2008 (9) TMI 435 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - Whether accumulated profits as per the Companies Act are not the correct accumulated profits to be considered for the purpose of Section 2(22)(e)? - CIT(A) agreed with the contention of the assessee that accumulated profit is to be worked out only after allowing depreciation as per IT Act. Hence, deleted the addition made by the AO. HELD THAT - Admittedly, the provisions of s. 2(22)(e) are similar to the provisions regarding deemed dividend in the old Act, 1922 u/s. 2(6A)(e). Therefore, even the decisions rendered under the old Act are relevant. It is further clear in the decision of Hon'ble Supreme Court in the case of P.K. Badiani vs. CIT 1976 (9) TMI 3 - SUPREME COURT the expression accumulated profits occurring in cl. (e) of s. 2(6A) would mean profits in the commercial sense. We observed that, for determining the commercial profits, what is required 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 assets which are used for the purpose of business. Such wear and tear 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 towards profits. Since IT Act has prescribed particular rates of depreciation, in our view, such depreciation has to be reduced from the commercial profits for the purpose of s. 2(22)(e). This position has been indirectly recognised by Hon'ble Supreme Court. Further, Hon'ble Bombay High Court in the case of Navnitlal C. Jhaveri vs. CIT 1970 (3) TMI 33 - BOMBAY HIGH COURT and in the case of CIT vs. Jamnadas Khimji Kothari 1972 (10) TMI 24 - BOMBAY HIGH COURT has taken this stand and it cannot be said that this position has been overruled by Hon'ble Supreme Court. In these circumstances, we find nothing wrong with the order of the CIT(A) and confirm the same. In the result, the appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Deletion of addition under s. 2(22)(e) based on accumulated profit calculation.
2. Interpretation of "accumulated profit" for the purpose of deemed dividend.
3. Allowance of depreciation in calculating accumulated profits.

Analysis:

Issue 1: Deletion of addition under s. 2(22)(e) based on accumulated profit calculation
The Revenue challenged the deletion of the addition made by the Assessing Officer (AO) on account of deemed dividend under s. 2(22)(e). The contention was that the accumulated profit should be calculated without allowing depreciation as per the Income Tax (IT) Act. The CIT(A) agreed with the appellant's argument that accumulated profit should be determined after considering depreciation as per the IT Act.

Issue 2: Interpretation of "accumulated profit" for the purpose of deemed dividend
The main dispute revolved around the interpretation of "accumulated profit" under s. 2(22)(e). The Revenue argued that "accumulated profit" should connote commercial profit, and hence depreciation as per the IT Act should not be allowed. However, the appellant contended that depreciation must be considered while calculating accumulated profits. Various case laws were cited by both parties to support their arguments.

Issue 3: Allowance of depreciation in calculating accumulated profits
The Tribunal analyzed the decisions cited by both parties and observed that for the purpose of calculating accumulated profits under s. 2(22)(e), normal depreciation as per the IT Act should be considered. The Tribunal referred to judgments by the Bombay High Court and the Supreme Court, which emphasized the deduction of depreciation at rates provided by the IT Act to ascertain accumulated profits. It was concluded that depreciation is a legitimate cost of business operation and should be deducted from commercial profits to determine accumulated profits for the purpose of deemed dividend.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that depreciation should be allowed while calculating accumulated profits for the purpose of determining deemed dividend under s. 2(22)(e). The judgment provided clarity on the interpretation of "accumulated profit" and highlighted the significance of considering depreciation as a legitimate cost in determining commercial profits.