Telangana High Court in a recent case has held that for purposes of taxation,depreciation as granted with rates prescribed by Income-Tax Act, 1961 would have to be deducted for ascertaining the accumulated profits.
The question arose in an Babulal Jain, assessee’s appeal whose loan from a private company, in which he was a shareholder, was deemed The dividend under Section 2(22)(e) of the Income Tax Act, 1961. The provision prevents companies from distributing profits to shareholders in the form of loans, without categorizing them as dividends, to avoid taxation. The assessee contended that there are no accumulated profits and if the reworking of profits is done by deducting depreciation, there would be a negative figure.
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The Commissioner of Income-tax (Appeals) had held that profits disclosed are subject to adjustment and depreciation as granted in accordance with the rates prescribed under the Act and therefore, the accumulated profits are to be computed taking into account the depreciation as per the Income-tax Rules.
It was observed that in Commissioner of Income-tax, Bombay City v. JamnadasKhimji Kothari (1973), the Bombay High Court held that “accumulated profits” does not mean profits as disclosed by the company’s balance-sheet and would be subject to adjustment of depreciation.
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A division bench of Chief Justice Alok Aradhe and Justice J. SreenivasRao allowed the appeal and deleted the addition made by the Assessing Officer towards the Appellant’s income tax return for the relevant assessment year.
The court set aside the order passed by the Income-tax Appellate Tribunal and the order dated 23.09.2004 passed by the Commissioner of Income-tax (Appeals) is restored.
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