Law:

Section:

Section 2(6A)(e) of the indian income-tax act, 1922 [corresponding to section 2(22)(e) of the income-tax act, 1961]-deemed dividend-Whether for purposes of finding out accumulated profits available for determining deemed dividend under section 2(6A)(e), amounts of depreciation fund and building reserve fund should be taken into account-Held, no in case of depreciation fund, but yes in case of building reserve fund which was not in nature of depreciation fund Facts The assessee was a shareholder in a company in which the public were not substantially interested within the meaning of section 23A of the 1922 Act. For determining the figure of deemed dividend under section 2(6A)(e ) of the 1922 Act, while making the assessment of the assessee-shareholder, the ITO had to determine the figure of accumulated profits of the company. The company showed its accumulated profits at a certain figure, but the ITO added thereto two sums representing the depreciation fund and the building reserve fund, thereby arriving at a higher figure of accumulated profits. On appeal, the AAC upheld the ITO's order. On second appeal, the Tribunal held that the amounts of depreciation fund and building reserve fund should not be taken into consideration in determining the accumulated profits. On reference: Held Although the expression 'accumulated profits' has not been defined in the Act, yet it is judicially well settled that a building and machinery depreciation fund is not profit and, therefore, cannot be treated as or included in 'accumulated profits'. It is a necessary deduction from out of the profits, since it is a fund set apart each year with a view to replacing the machinery and building, as the case may be, after the life of the present machinery or building is over. But the same cannot be said with respect to other funds, for example, initial depreciation or development rebate. Again, an assessee, by merely allocating part of his profits to a particular head, cannot change their character and they continue to remain profits only. Accordingly, on the facts of the instant case, while determining the accumulated profits, the amount of depreciation fund was not to be includible in…

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