Accumulated profits under deemed dividend rules require prior-year profits, not a current tax refund.

Income-tax refund received during the accounting year did not constitute accumulated profits for the purpose of section 2(6A)(e) of the Indian Income-tax Act, 1922. The provision applies only where a company with accumulated profits makes a loan or advance to a shareholder, and accumulated profits are those brought forward up to the end of the previous accounting year; current-year receipts do not automatically qualify. As the company had no accumulated profits on the relevant date and the refund was not shown to be current profits of that year, the statutory condition for treating the advance as deemed dividend was not met. The amount was therefore not includible in the assessee's income as deemed dividend.

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Issues: Whether income-tax refunds received during the accounting year could be treated as accumulated profits so as to bring the advance made to the shareholder within the deeming provision of section 2(6A)(e) of the Indian Income-tax Act, 1922.

Analysis: The deeming provision applies only where a company having accumulated profits makes a loan or advance to a shareholder. Accumulated profits refer to profits gathered or brought forward up to the end of the previous accounting year and do not include current profits of the year in which the advance is made. As the company had no accumulated profits on the relevant date and the income-tax refund received during the year could not, by itself, be treated as accumulated profits or even as proved current profits for that year, the statutory condition for deeming the advance as dividend was not satisfied.

Conclusion: The amount of Rs. 35,260 was not includible in the assessee's income as deemed dividend under section 2(6A)(e); the answer to the reference was in the affirmative and in favour of the assessee.

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