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2023 (3) TMI 1109 - AT - Income TaxDisallowance 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)? - A.R. submitted that the correct accumulated profits have to be ascertained after making necessary adjustments towards depreciation as per Income Tax Act - HELD THAT - We observe that in case the depreciation as per Income Tax Act is taken into account then the accumulated profits of the assessee would be working out to be in negative meaning thereby that there are no accumulated profits for the purpose of Section 2(22)(e) - In the aforesaid decisions M/S. PUSHPARTHY PACKS PVT. LTD. 2013 (12) TMI 200 - BOMBAY HIGH COURT and YASHIN HOTELS (P) LIMITED. 2008 (9) TMI 435 - ITAT MADRAS-B it has been held that the accumulated profits have to be arrived at after allowing depreciation as per the Act and not as per Companies Act. Accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition of disallowance. Appeal of the assessee is allowed.
Issues Involved:
1. Confirmation of disallowance under Section 2(22)(e) of the Income Tax Act. 2. Determination of "accumulated profits" for the purpose of Section 2(22)(e). Summary: Issue 1: Confirmation of Disallowance under Section 2(22)(e) The only issue raised by the assessee was against the part confirmation of disallowance to the extent of Rs. 4,55,83,131/- as made by the AO under Section 2(22)(e) of the Income Tax Act. The AO noted that the assessee received an advance of Rs. 8,58,26,789/- from P N Memorial Neurocentre & Research Institute Ltd., against which no interest was paid or provided. The assessee company held 17.94% equity shares in P N Memorial Neurocentre & Research Institute Ltd., which had accumulated profits of Rs. 12,42,02,096/- as on 31.03.2012. Consequently, the AO treated the advance as deemed income under Section 2(22)(e) and added it to the income of the assessee. The Ld. CIT(A) partly allowed the appeal by deleting the addition of Rs. 4,02,43,658/- representing the opening balance but sustained the addition of Rs. 4,55,83,131/- received during the year. Issue 2: Determination of "Accumulated Profits" The Ld. A.R. argued that the accumulated profits noted by the AO were not correct as they did not account for depreciation adjustments as per the Income Tax Act. The correct accumulated profits should be determined after allowing depreciation as per the Income Tax Act. The Ld. A.R. relied on several decisions, including Navnitlal C. Jhaveri vs. CIT, CIT vs. Jamnadas Khimji, ACIT vs. Yasin Hotels Pvt. Ltd., and CIT vs. Pushparthy Packs P Ltd., which held that accumulated profits should be ascertained after allowing depreciation as per the Income Tax Act. The Ld. D.R. contended that accumulated profits were not defined in the Act and should be interpreted as per the Companies Act. The Ld. D.R. argued that accepting the assessee's argument would render the provisions of deemed dividend otiose. The Tribunal noted that if depreciation as per the Income Tax Act is considered, the accumulated profits would be negative, indicating no accumulated profits for the purpose of Section 2(22)(e). The Tribunal, following the decisions cited by the Ld. A.R., held that accumulated profits should be determined after allowing depreciation as per the Income Tax Act. Consequently, the Tribunal set aside the order of the Ld. CIT(A) and directed the AO to delete the addition of disallowance. Conclusion: The appeal of the assessee was allowed, and the order was pronounced in the open court on 23rd March 2023.
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