TMI Blog1970 (3) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... the Consolidated Electric Agencies Ltd. The latter company was the managing agent of the Malegaon Electricity Company. During the accounting year the Malegaon Electricity Company advanced to the assessee a loan of Rs. 4,16,000. The balance-sheet of the Malegaon Electricity Company for the year ended 31st March, 1956, shows that it had in its general reserve fund a sum of Rs. 80,000 and in its profit and loss appropriation account a profit of Rs. 2,91,603-0-8. The Income-tax Appellate Tribunal held that these two, amounts of Rs. 80,000 and Rs. 2,91,000 odd represented the accumulated profits of the Malegaon Electricity Company at the relevant time. The Tribunal held that in view of the accumulated profits the loan by the Malegaon Electricity Company to the assessee would attract the provisions of section 2(6A)(e) and would be liable to be deemed to be dividend to the extent of such accumulated profits. The Malegaon Electricity Company had advanced a loan during this accounting year to its another shareholder and that loan also was treated as a deemed dividend. By reason of apportionment of the amounts of these two loans which were deemed to be dividends, the Tribunal held that a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an electricity company and after the enactment of the Electricity Supply Act, 1948, it was governed by the provisions of that Act. For the purpose of making certain calculations under that Act the Malegaon Electricity Company was allowed depreciation on its capital assets at a certain rate which was lower than the rate for depreciation allowed to it under the Income-tax Act. The Malegaon Electricity Company's balance-sheets have all along been prepared on the basis of the depreciation allowance as calculated under the Electricity Supply Act, 1948. The result has been that the provision in the said balance-sheets for general reserve fund and the amount shown as profit in the profit and loss appropriation account do not correctly represent the position of the Malegaon Electricity Company in so far as the amount for depreciation as calculated under the Income-tax Act has not been reflected therein. Under the provisions of section 2(6A)(e), a loan is to be deemed to be a dividend only to the extent that the company possesses accumulated profits. It was, therefore, necessary to ascertain what was the correct amount of accumulated profits in the possession of the Malegaon Electricity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto consideration by the Malegaon Electricity Company in its balance-sheets on the one hand and by the actual assessment orders made by the income-tax authorities from the very inception of that company on the other, a question arises as to what is the correct method of determining "accumulated profits" under section 2(6A)(e) and, if there are any accumulated profits so determinable, what is the correct amount thereof. Now, " accumulated profits " signifies, firstly, that there must have been profits in earlier years and, secondly, that amounts out of such profits have been accumulated from time to time, with the result that there is some amount of accumulated profits in the possession of the company just before the commencement of the accounting year in this reference. That entails a determination as to what is the meaning of the word "Profits" in the phrase "accumulated profits." The latter determination is in this case an easy one because it involves no consideration other than that as to depreciation. It is not disputed on either side that for the purpose of arriving at profits the amount of depreciation must be deducted from gross profits. The only dispute is what is the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 deduction 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 accounts, 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 the actual depreciation allowed to the assessee under the Income-tax Act was. Fortunately, in the case before us, no such difficulty arises ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
