LexP. K. BADIANI versus THE COMMISSIONER OF INCOME TAX, BOMBAY
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638
P. K. BADIANI
v.
THE COMMISSIONER OF INCOME TAX, BOMBAY
September 21, 1976
[H. R. KHANNA, N. L. UNTWALIA AND JASWANT SINGH, JJ.]
Income tax Act (11 of 1922), ss. 2(6A)(e) and 10(2)(vi-b)-Devclopment
rebate treated as accumulated profits-Withdrawal of amo1111t by shareholder
from Company's account-If withdrawal can be treated as dividmd since amount
withdrawn is within accumulated profits.
'
Under s. 2(6A)(e), Income Tax Act, 1922, dividend includes any payment
by a company, not being a company in which the public are substantially
interested within the meaning of s. 23A, of any sum by way of advance to a
shareholder to the extent to which the company possesses accumulated profits.
The appellant-assessee was a shareholder in a company in which the public
were not substantially interested within the meaning of s. 23A.
He had with-
drawn some amounts from the company's account.
The company had been
allowed development rebate under s. 10(2)(vi-b) and that amount was debited
in the profit and loss account of the company for the accounting year leaving
a small balance of profit in the profit and loss account. The Appellate Assistant
Commissioner treated the entire sum, that is, the amount allowed as deyclopmerrt
rebate and the amount of balance in the profit and loss account, as the amount
of accumulated profits possessed by the company.
Treating the withdrawals by
the appellant as advances by the company to him a,nd finding the highest
amount of advance to the assessee to be within the total figure of accumulated
profits as arrived at by him, he directed the addition of the advance to the
assessee's income as dividend under s. 2 ( 6A )( e) of the Act. The Tribunal held
that the development rebate was not liable to be treated as accumulated profits;
bnt, on reference, the High Court substantially confirmed the order of the
Appellate Assistant Commissioner.
On the question whether the development rebate could be treated as accu-
mulated profits in the hands of the company under s. 2(6A) (e), the appellant
contended that the development rebate, being identical with initial depreciation
is in the nature of depreciation allowance, and since it is deductible from the
assessable profits of the company, it is also a type of outgoing expenditure or
out-of-pocket cost, and was therefore, deductible from the company's commercial
profits.
Dismissing the appeal,
HELD : The development rebate reserve created by the company, although
it does not form part of the assessable profits, undoubtedly forms part of the
commercial profits and hence constituted accumulated profits of the company
within the meaning of s. 2(6A) (e). [648D]
(1) The term 'profits' in taxation law varies in its meaning according to the
context.
The expression 'accumulated profits' occurring
in s. 2(6A) means
profits in the commercial sense that is profits in the real and true sense of the
term and not assessable or taxable profits. [642E]
.E. D. Sassoon & Company Ltd. and Others v. Commissioner of Income-tax,
Bombay City 26 ITR 27 at page 46, Commissioner of Income-tax, Bombay v.
Ahmedbhai Umarbliat & Co., Bombay 18 ITR 472 at 502, Commissioner of
Income-tax. Bombay City v. Bipinchandra MQf!anlal & Co. Ltd. 41 ITR 290
and Gobald Motor Service (P) Ltd. v. Commissioner of Income-tax, Mddras
60 ITR 417 followed.
{
(2) Although they are not identical and differ in some material particulars,
• -t"
initial depreciation and development rebate are similar in nature as both are by
P. K. BADIANI v. c. I. T. ( Untwalia, J.)
639
way of incentive for installation of new machinery or plant.
But the initial
depreciation or the development rebate is not a recurring allowance for t~e
subsequent years like the normal depreciation allowance provided ins. 10(2) (v1)
or the additional depreciation provided in s. 10(2)(vi-a). The normal depre-
ciation and the additional depreciation are permitted to be deducted from the
written down value. But the amount of the initial depreciation is not deductible
in determining the written down ya\ue. r644D-El
(3) Normal depreciation reserve of the company may not 'form part of the
accumulated past profits as held in Commissioner of Income-tax, Bombay v.
Viramgam Mills Co. Ltd. ( 43 ITR 270). But since the initial clepreciation or
the development rebate cannot be equated with normal depreciation, it is not a
deductible item of cost or expenditure in arriExcerpt shown. Read the full judgment & AI analysis in Lexace.