Deemed dividend and balancing charge: section 41(2) income is not accumulated profits under dividend provisions.

Section 41(2) creates a limited deeming fiction by taxing the balancing charge on sale of depreciated assets as business income, but it does not convert that amount into commercial profits. For section 2(22)(c), "accumulated profits" means profits capable of distribution as dividend and does not include a capital receipt or return of capital in substance. Accordingly, an amount assessed under section 41(2) on sale of depreciated assets by a company in liquidation does not form part of accumulated profits for deemed dividend purposes, and the addition under section 2(22)(c) is not sustainable.

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Issues: Whether the amount taxed under section 41(2) of the Income-tax Act, 1961, on sale of depreciated assets by a company in liquidation formed part of the company's "accumulated profits" for the purpose of section 2(22)(c) of the Income-tax Act, 1961, so as to be taxable as deemed dividend in the hands of the shareholders.

Analysis: Section 41(2) creates a legal fiction for the limited purpose of withdrawing excess depreciation allowance by treating the balancing charge as income from business or profession. That deeming provision does not alter the real character of the receipt into commercial profit. For section 2(22)(c), the expression "accumulated profits" refers to profits capable of accumulation and distribution as dividend, namely commercial profits, and not a return of capital. Where the company's assets are sold for less than their original cost, the excess over written down value but below original cost remains a capital receipt in substance, even if it is taxed under section 41(2). The earlier decisions on deemed dividend and balancing charge support this limited operation of the fiction and do not justify treating such amount as accumulated profits.

Conclusion: The amount assessed under section 41(2) of the Income-tax Act, 1961, did not constitute accumulated profits within section 2(22)(c); the deemed dividend addition was not sustainable and the appeal failed.

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