Taxpublishers.in - InterestingDecision/IDDTF_101.htm - Tax Publishers Your Tax Solution Hub

Share via Whatsapp 101 Views


The Tax Publishers Additions under Section 2(22(e) deemed dividend basing profits before claiming depreciation - Sustainability *Facts:* Assessee was found to have taken advance from a company in which 18% shareholding was held by them. Accordingly the advance was added as deemed dividend under Section 2(22)(e). On higher appeal, plea of the assessee was accumulated profit for computing deemed dividend under Section 2(22)(e) was to be taken as profit less depreciation as per Income tax act. Held in favour of the assessee that accumulated profit would mean profit after depreciation as per income tax act. Since there will be loss and no profits after accounting for depreciation in the hands of the lending company the advance cannot be taxed as deemed dividend under Section 2(22(e) in the hands of the assessee company. *Applied:* Navnitlal C. Jhaveri v. CIT in (1971) 80 ITR 582 (Bom) : 1971 TaxPub(DT) 0118 (Bom-HC) CIT v. Jamnadas Khimji in (1973) 92 ITR 105 (Bom) : 1973 TaxPub(DT) 0355 (Bom-HC) ACIT v. Yasin Hotels Pvt. Ltd. in ITA No. 1888/Mad/2007 for AY 2004-05/(2009) 121 TTJ 713 (Chennai) : 2009 TaxPub(DT) 0830 (Chen-Trib) CIT v. Pushparthy Packs P Ltd. (2014) 221 Taxman 403 (Bom) : 2014 TaxPub(DT) 0730 (Bom-HC) *Ed. Note:* the decision of Navnitlal Jhaveri is a landmark verdict on this topic. "Profits for the purpose of ascertaining accumulated profits must be determined after allowing depreciation allowable and allowed under the Income-tax Act. Section 2 (6A) (e) creates a fiction. That fiction has been created for the purpose of the Income-tax Act. By that fiction a loan which in reality is not a dividend is to be deemed a dividend and would become liable to be brought to tax in the hands of the shareholder to whom the loan has been advanced. It is an artificial creation of liability and it is created by Income-tax Act. The words, therefore, used in that Section must be construed in the sense in which they have been used in the Income-tax Act and calculations must be made on the basis contemplated by the Income-tax Act. It would not be permissible to feed the fiction with material outside the Income-tax Act itself. Now depreciation is to be deducted from gross profits, because the amount of depreciation is to be set apart to replace the capital which is lost by the reason of the normal wear and tear of machinery, plant and like assets. Unless such depreciation is set apart, the gross profits will contain an element within them which is really of a capital nature. If the gross profits are treated as profits without provision of any depreciation, at the end of the useful life of the asset they will be lost completely. It is to for replacement of the capital assets so lost by reason of normal wear and tear that depreciation is allowed, so that at the end of the useful life of those assets a fund is available to replace those assets. In short, a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. Now, the Income-tax Act does make a provision for allowing depreciation as a deduction, for example, under Section 10 (2) (vii). In our opinion, therefore, for the purpose of calculating profits within the meaning of the phrase "accumulated profits" under Section 2 (6A) (e), an allowance of depreciation should be made by way of a deductions at the rates provided for by the Income-tax Act itself. It may be that in some cases a difficulty may arise in applying this principle, which is of a general application, if any assessee has not maintained its balance-sheets or account on the basis of the rates of depreciation allowable and allowed to him under the Income-tax Act, but on some different basis because of want of the necessary material to ascertain what threw actual depreciation actual depreciation allowed to the assessee under the Income-tax Act was". *Case:* XL Enterprises Ltd. v. ITO 2023 TaxPub(DT) 1929 (Kol-Trib)

The Tax Publishers

Additions under Section 2(22(e) deemed dividend basing profits before claiming depreciation - Sustainability

Facts:

Assessee was found to have taken advance from a company in which 18% shareholding was held by them. Accordingly the advance was added as deemed dividend under Section 2(22)(e). On higher appeal, plea of the assessee was accumulated profit for computing deemed dividend under Section 2(22)(e) was to be taken as profit less depreciation as per Income tax act.

Held in favour of the assessee that accumulated profit would mean profit after depreciation as per income tax act. Since there will be loss and no profits after accounting for depreciation in the hands of the lending company the advance cannot be taxed as deemed dividend under Section 2(22(e) in the hands of the assessee company.

Applied:

Navnitlal C. Jhaveri v. CIT in (1971) 80 ITR 582 (Bom) : 1971 TaxPub(DT) 0118 (Bom-HC)

CIT v. Jamnadas Khimji in (1973) 92 ITR 105 (Bom) : 1973 TaxPub(DT) 0355 (Bom-HC)

ACIT v. Yasin Hotels Pvt. Ltd. in ITA No. 1888/Mad/2007 for AY 2004-05/(2009) 121 TTJ 713 (Chennai) : 2009 TaxPub(DT) 0830 (Chen-Trib)

CIT v. Pushparthy Packs P Ltd. (2014) 221 Taxman 403 (Bom) : 2014 TaxPub(DT) 0730 (Bom-HC)

Ed. Note: the decision of Navnitlal Jhaveri is a landmark verdict on this topic.

"Profits for the purpose of ascertaining accumulated profits must be determined after allowing depreciation allowable and allowed under the Income-tax Act. Section 2 (6A) (e) creates a fiction. That fiction has been created for the purpose of the Income-tax Act. By that fiction a loan which in reality is not a dividend is to be deemed a dividend and would become liable to be brought to tax in the hands of the shareholder to whom the loan has been advanced. It is an artificial creation of liability and it is created by Income-tax Act. The words, therefore, used in that Section must be construed in the sense in which they have been used in the Income-tax Act and calculations must be made on the basis contemplated by the Income-tax Act. It would not be permissible to feed the fiction with material outside the Income-tax Act itself. Now depreciation is to be deducted from gross profits, because the amount of depreciation is to be set apart to replace the capital which is lost by the reason of the normal wear and tear of machinery, plant and like assets. Unless such depreciation is set apart, the gross profits will contain an element within them which is really of a capital nature. If the gross profits are treated as profits without provision of any depreciation, at the end of the useful life of the asset they will be lost completely. It is to for replacement of the capital assets so lost by reason of normal wear and tear that depreciation is allowed, so that at the end of the useful life of those assets a fund is available to replace those assets. In short, a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. Now, the Income-tax Act does make a provision for allowing depreciation as a deduction, for example, under Section 10 (2) (vii). In our opinion, therefore, for the purpose of calculating profits within the meaning of the phrase "accumulated profits" under Section 2 (6A) (e), an allowance of depreciation should be made by way of a deductions at the rates provided for by the Income-tax Act itself. It may be that in some cases a difficulty may arise in applying this principle, which is of a general application, if any assessee has not maintained its balance-sheets or account on the basis of the rates of depreciation allowable and allowed to him under the Income-tax Act, but on some different basis because of want of the necessary material to ascertain what threw actual depreciation actual depreciation allowed to the assessee under the Income-tax Act was".

Case: XL Enterprises Ltd. v. ITO 2023 TaxPub(DT) 1929 (Kol-Trib)