Depreciation reserve included in accumulated profits where set apart from profits and not capitalised or otherwise exhausted.

A depreciation reserve created year by year out of profits remained part of a company's accumulated profits for distribution to shareholders under section 2(6A) of the Indian Income-tax Act unless it had been capitalised or otherwise ceased to be available as profit. A sum set apart in the accounts as a depreciation fund was not excluded merely because it was earmarked for future depreciation or repair needs, and a different accounting method could not change the legal effect of what the company had actually done. The reserve was therefore includible in accumulated profits, and its exclusion was incorrect.

---

---

Issues: Whether the depreciation fund of Rs. 46,200 created by the company could be excluded from the accumulated profits available for distribution to shareholders for the purpose of section 2(6A) of the Indian Income-tax Act.

Analysis: The relevant inquiry was confined to the actual state of the company's accounts and balance-sheet, which showed that a depreciation fund had been created year by year out of profits. Such a reserve remained part of the accumulated profits unless it had been capitalised or otherwise ceased to be available as profits. A reserve for depreciation was not treated as a sum outside profits merely because it had been set apart to meet future depreciation or repair needs. The fact that the company might have adopted a different accounting method did not alter the legal effect of what it had actually done.

Conclusion: The depreciation reserve of Rs. 46,200 was rightly included in the accumulated profits available for distribution, and the exclusion of that amount by the Tribunal was incorrect.

---