Accumulated Profits include General Reserve; company payments for shareholder benefit treated as deemed dividends under section 2(6A)(e).

For section 2(6A)(e) purposes, amounts transferred to a general reserve retain the character of accumulated profits because transfer to reserve does not irretrievably appropriate profits; accordingly general reserve counts as accumulated profits. Payments by a company that discharge shareholder personal obligations, constitute advances or loans, or are for the individual benefit of the shareholder as evidenced by current account overdrawings fall within the heads in section 2(6A)(e) and are therefore treated as deemed dividends to the extent of available accumulated profits. The reference answers both questions in favour of the Revenue on those legal bases.

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Issues: (i) Whether "accumulated profits" for the purposes of section 2(6A)(e) include general reserve; (ii) Whether the net overdrawings of the assessees during the previous year ended March 31, 1956, amount to dividends within the meaning of section 2(6A)(e) of the Income-tax Act.

Issue (i): Whether "accumulated profits" for the purposes of applying section 2(6A)(e) include general reserve.

Analysis: The expression "accumulated profits" is not defined in the Act. Under company law principles and authorities cited, a transfer of profits to a general reserve does not, by itself, appropriate the sums irretrievably; sums in general reserve remain available to the company for distribution unless capitalised or otherwise earmarked. The court followed the Tribunal's reasoning that a mere transfer to reserve does not deprive the sums of their character as accumulated profits.

Conclusion: Answered in the affirmative. "Accumulated profits" include general reserve.

Issue (ii): Whether the net overdrawings of the assessees during the previous year ended March 31, 1956, amount to dividends within the meaning of section 2(6A)(e) of the Income-tax Act.

Analysis: Section 2(6A)(e) covers payments by a company by way of advance or loan, payments on behalf of a shareholder, or payments for the individual benefit of a shareholder, to the extent the company possesses accumulated profits. Examination of the current accounts showed payments by the company of the assessee's personal obligations (income-tax demands, insurance premia, other personal payments), interest charged on debit balances, and an implied understanding of reimbursement or adjustment. These payments fall within the heads enumerated in the provision as payments on behalf of, for the benefit of, or as loans/advances to the shareholder; thus they attract the definition of "dividend" where there are sufficient accumulated profits.

Conclusion: Answered in favour of the Revenue. The net overdrawings are deemed dividends within section 2(6A)(e).

Final Conclusion: The reference is answered in favour of the Revenue: general reserves are part of accumulated profits and the assessees' year-end overdrawings constitute deemed dividends under section 2(6A)(e) where accumulated profits are adequate.

Ratio Decidendi: For the purposes of section 2(6A)(e) of the Income-tax Act, amounts placed to a company's general reserve retain the character of accumulated profits, and payments by a company on behalf of or for the individual benefit of a shareholder, or utilising company funds in the circumstances shown by current account overdrawings, fall within the provision's definition of "dividend" where the company possesses adequate accumulated profits.

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