Accumulated profits for deemed dividend exclude current-year earnings, and independent reference questions require a proper application.

For deemed-dividend purposes under section 2(6A)(e) of the Indian Income-tax Act, 1922, "accumulated profits" means profits accumulated before the relevant accounting year and does not include current profits earned in the year in which the loan is advanced; current-year profits were therefore excluded. On the reference procedure, a question not covered by the assessee's own reference application could not be sent to the High Court unless it was genuinely incidental to the question already referred under section 256(1) of the Income-tax Act, 1961. An independent and distinct issue on computation of accumulated profits could not be referred at the assessee's instance without a separate application.

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Issues: (i) Whether profits earned during the accounting year in which a loan is advanced can be included in "accumulated profits" for the purpose of deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922. (ii) Whether the Appellate Tribunal could, at the instance of the assessee who had not filed a reference application, refer an additional question on computation of accumulated profits to the High Court.

Issue (i): Whether profits earned during the accounting year in which a loan is advanced can be included in "accumulated profits" for the purpose of deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922.

Analysis: The expression "accumulated profits" was held to denote profits already accumulated before the relevant accounting year, as distinct from current profits earned during that year. The distinction had been consistently recognised in prior decisions, and the Court accepted that current profits do not form part of accumulated profits for the purpose of the deemed-dividend provision.

Conclusion: The answer was in favour of the assessee. Current profits could not be included in accumulated profits under section 2(6A)(e).

Issue (ii): Whether the Appellate Tribunal could, at the instance of the assessee who had not filed a reference application, refer an additional question on computation of accumulated profits to the High Court.

Analysis: Section 256(1) of the Income-tax Act, 1961 contemplates a reference application by the party seeking a reference. A non-applicant may support the order on grounds already negatived only where the additional question is intimately connected with the question properly referred; it cannot obtain a reference of an independent and distinct question without filing its own application. The second question concerned a separate issue on deductions for tax and dividend provisions and was not connected with the first question on current profits.

Conclusion: The answer was in favour of the revenue. The Tribunal was not competent to refer the second question, and the High Court's opinion on that question was void.

Final Conclusion: The appeal succeeded only to the extent that the High Court's answer on the second question was set aside, while the ruling on the first question in favour of the assessee was maintained.

Ratio Decidendi: For deemed-dividend purposes, "accumulated profits" excludes current profits, and a reference under section 256(1) cannot be made on an independent question at the instance of a party who did not apply for reference, unless the question is properly incidental to the referred question.

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