Law:

Section:

Section 2(22) of the Income-tax Act, 1961 (Corresponding to section 2(6A)(e) of the Indian Income-tax Act, 1922) - Deemed dividend - Assessment year 1958-59 - Whether expression "accumulated profits" occurring in clause (e) of section 2(6A) of 1922 Act, or in any of other clauses means profits in commercial sense and not profits liable to tax as income under 1922 Act - Held, yes - Whether, to extent profits are capitalised, company can not be said to possess any accumulated profits - Held, yes - Whether, however, mere transferring certain sum by debiting it to profit and loss account under development reserve account does not amount to capitalisation of profits - Held, yes - Whether therefore, development rebate reserve created by assessee-company by duly charging amount of profit and loss account, although liable as a deduction under 1922 Act, yet it constituted accumulated profits of company within meaning of section 2(6A)(e) of 1922 Act- Held, yes FACTS The assessee was a major shareholder in a company in which the public were not substantially interested within the meaning of section 23A of the 1922 Act. He was also the managing director of the said private limited company. He had a mutual open and current account in the books of the company. He in the accounting year 1957-58 had withdrawn considerable amounts of money from the company's account. The Income-tax Officer treated the withdrawals made by the assessee as advances or loans given by the company to him and taxed the amount as dividend under section 2(6A)(e) of the 1922 Act. On appeal, it was found that the aggregate amount of development rebate allowed to the company under section 10(2)(vib) of 1922 Act was Rs. 2,36,470. The said amount had been debited in the profit and loss account of the company for the accounting year 1956, leaving a balance of Rs. 6,641 only in the profit and loss account. The Appellate Assistant Commissioner treated the entire sum of Rs. 2,43,111 as accumulated profits possessed by the company. Finding the highest advance to the assessee at a particular point of time to be aggregating to Rs. 1,83,493 he directed the addition of the said amount in the assessee's income under…

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