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Issues: (i) Whether the depreciation fund was includible in accumulated profits for determining deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922. (ii) Whether the building reserve fund was includible in accumulated profits for determining deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922.
Issue (i): Whether the depreciation fund was includible in accumulated profits for determining deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922.
Analysis: The expression "accumulated profits" was held to exclude amounts which are not real profits but are set apart as a necessary provision for replacement of depreciable assets. Depreciation represents a deduction from profits and does not retain the character of profits for the purpose of deemed dividend.
Conclusion: The depreciation fund was not includible in accumulated profits, and the answer was in favour of the assessee.
Issue (ii): Whether the building reserve fund was includible in accumulated profits for determining deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922.
Analysis: A reserve merely set apart from profits does not cease to be profits unless it is shown to be in the nature of depreciation or a like replacement fund. The building reserve fund was not shown to be a depreciation fund or its equivalent, and therefore it could not be excluded from accumulated profits.
Conclusion: The building reserve fund was includible in accumulated profits, and the answer was in favour of the Department.
Final Conclusion: The reference was answered partly for the assessee and partly for the Department by excluding the depreciation fund but including the building reserve fund in accumulated profits.
Ratio Decidendi: For determining accumulated profits under section 2(6A)(e) of the Indian Income-tax Act, 1922, a depreciation or replacement fund is not profit, but amounts merely transferred to reserve remain profits unless they are truly in the nature of depreciation or an equivalent replacement provision.
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