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1976 (9) TMI 3 - SC - Income TaxDevelopment rebate reserve - Treatment of accumulated profits of the company within the meaning of section 2(6A)(e) of the Act - profit and loss account - dividend - Word capitalisation - HELD THAT - The profits of a company can be capitalised in accordance with the articles of association and the law. On the capitalisation of the profits they cease to be profits in the hands of the company. The nature of the asset is changed although it does not make any difference in the total assets of the company. But profits stand transmuted and transformed into capital. The most common example of capitalisation of profits is by issuance of bonus shares to the shareholders. Clauses (a) to (d) were intended by the legislature to cover the cases of accumulated profits even though they may be capitalised. But the legislature did not intend to rope in the capitalised profits in clause (a). We may add that though under clause (b) distribution by a company of debentures debenture stock or deposit certificates in any form in lieu of capitalised profits is to be deemed dividend within the meaning of sub-section (6A) mere distribution of bonus shares after capitalising the accumulated profits unless the distribution entails the release by the company to its shareholders of any part of the assets of the company is not to be a deemed dividend. Even under the 1961 Act distribution of bonus shares to the equity shareholders after capitalising the profits in accordance with law is not to be a deemed dividend although distribution of such shares to preference shareholders is. It is thus clear that if money is paid to a shareholder of a private company by way of advance or loan after the accumulated profits have been capitalised in accordance with the law and the articles of association then such payment although it may represent a part of the assets of the company or otherwise cannot be co-related to the capitalised profits of the company. To the extent the profits have been capitalised the company cannot be said to possess any accumulated profits. But the obvious difficulty in the way of the appellant is that the accumulated profits of the company in the year in question were never capitalised. Mere transferring the sum by debiting it to the profit and loss account to the development reserve account did not amount to the capitalisation of profits. The nature of the assets in the hands of the company did not change. It remained profits in the hands of the company. Thus we hold that the development rebate reserve created by the company by duly charging the amount of profit and loss account although liable as a deduction under the 1922 Act constituted accumulated profits of the company within the meaning of section 2(6)(e). We accordingly affirm the decision of the High Court dismiss this appeal but in the circumstances make no order as to costs. Appeal dismissed.
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