Depreciation fund is not a reserve of past profits where yearly depreciation entries reflect asset wear and tear.

A depreciation fund was held not to be a reserve representing accumulations of past profits under the first proviso to section 23A(1) of the Indian Income-tax Act, 1922. The proviso applies only to reserves in the balance-sheet that are accumulated profits capable of being brought within section 23A. Depreciation is a charge made in computing commercial profits and reflects estimated asset wear and tear, not profits set apart after ascertainment. On the facts, the fund arose from yearly depreciation entries, the assets remained shown at cost, and there was no evidence of excess depreciation being appropriated out of profits. The answer was therefore in the negative, in favour of the assessee.

---

---

Issues: Whether the amount shown in the depreciation fund constituted a reserve representing accumulations of past profits within the meaning of the first proviso to section 23A(1) of the Indian Income-tax Act, 1922.

Analysis: The proviso applies only where the reserves shown in the balance-sheet represent accumulations of past profits capable of being brought within section 23A. A depreciation fund is not, by its nature, a fund of profits set apart after profits are ascertained; it is a charge taken into account in arriving at commercial profits and reflects the estimated expiration of asset value. On the facts, the amount had been built up by yearly depreciation entries, the assets had continued to be shown at cost, and there was no evidence that any excess depreciation had been set apart out of profits.

Conclusion: The depreciation fund did not constitute a reserve within the first proviso to section 23A(1), and the answer to the question was in the negative, in favour of the assessee.

---