Accumulated profits and shareholder overdrawings were treated as deemed dividends where reserve funds remained distributable and reimbursement was implied.

Profits transferred from a profit and loss account to a general reserve remained part of accumulated profits because the funds were still available for lawful distribution and had not been capitalised or otherwise irretrievably spent; the issue was answered for the Revenue. Net overdrawings in shareholders' current accounts were also treated as payments falling within the deeming provision because company funds were used for personal expenses and liabilities, debited to the accounts, and the course of dealings showed an implied obligation of reimbursement; the issue was answered for the Revenue as deemed dividends.

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Issues: (i) Whether the general reserve formed part of "accumulated profits" for the purpose of section 2(6A)(e); and (ii) whether the net overdrawings in the shareholders' current accounts constituted payments by way of loan, advance, or payment on behalf of or for the individual benefit of a shareholder within section 2(6A)(e).

Issue (i): Whether the general reserve formed part of "accumulated profits" for the purpose of section 2(6A)(e).

Analysis: The expression "accumulated profits" was not defined. The mere transfer of profits from the profit and loss account to a general reserve did not alter their character, because the amount continued to be available for lawful distribution and could be re-transferred for dividend purposes. Unless profits were capitalised or otherwise irretrievably spent, they remained accumulated profits.

Conclusion: The general reserve formed part of accumulated profits, and the question was answered in favour of the Revenue.

Issue (ii): Whether the net overdrawings in the shareholders' current accounts constituted payments by way of loan, advance, or payment on behalf of or for the individual benefit of a shareholder within section 2(6A)(e).

Analysis: The withdrawals were made from the company's funds for the shareholders' personal expenses and liabilities, including income-tax and insurance premia, and were debited to their current accounts. The presence of interest on the balances and the surrounding course of dealings showed an implied understanding of reimbursement. The statutory language covered not only loans and advances but also payments made on behalf of, or for the individual benefit of, a shareholder.

Conclusion: The overdrawings fell within section 2(6A)(e) and were taxable as deemed dividends, and the question was answered in favour of the Revenue.

Final Conclusion: The reference was answered against the assessees, holding that the general reserve was includible in accumulated profits and that the impugned current-account debits were deemed dividends within the statutory definition.

Ratio Decidendi: Profits transferred to a general reserve retain the character of accumulated profits unless capitalised or otherwise lost to distribution, and payments by a company to or for the benefit of a shareholder may constitute deemed dividends where the company retains a right to reimbursement.

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