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TMI Blog1970 (3) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sum of Rs. 2,83,126 out of the loan to the assessee of Rs. 4,16,000 must be treated as dividends under section 2(6A)(e). Before the Tribunal the assessee had raised certain contentions and so had the department, and in view of those contentions the following questions of law have been referred. The questions are: "1. Whether section 2(6A)(e) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Company at the time relevant to this assessment year. This material, however, is not available from the statement of the case or any of the documents annexed thereto and forming part thereof. Both counsel, however, told us that the necessary material will be on the record of the Tribunal and if we felt it necessary, we should call for a supplemental statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 amount of depreciation to be allowed in the present case. Mr. Joshi, the learned counsel for the department, contended that the Malegaon Electricity Company has, as a matter of fact, calculated the depreciation in preparing its balance-sheets on the basis of the depreciation allowable and allowed under the Electricity Supply Act and that that is the only basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation 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 and, as a matter of fact as stated earlier, the parties have agreed upon the three statements which they have now put in. These statements clearly show, not only that the Malegaon Electricity Company did not at the relevant time have any accumulated profits whatever, but that, on the contrary, immediately before the accounting year under consideration, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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