Deemed dividend rules require earlier shareholder advances to reduce accumulated profits, even if they were never taxed before.

For section 2(6A)(e) of the Indian Income-tax Act, 1922, a loan or advance to a shareholder is deemed dividend when made, to the extent of accumulated profits then available. Earlier advances that satisfied the deeming provision must be notionally deducted from accumulated profits even if they were not actually assessed as dividend in those years. Otherwise, accumulated profits would be overstated and the statutory fiction defeated. The later advance could therefore be taxed only to the extent of the remaining accumulated profits, and the assessee's contention succeeded.

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Issues: Whether, for the purpose of section 2(6A)(e) of the Indian Income-tax Act, 1922, accumulated profits available for treating advances to a shareholder as deemed dividend must be reduced by advances in earlier years which satisfied that provision but were not actually assessed as deemed dividend.

Analysis: Section 2(6A)(e) creates a statutory fiction by which a loan or advance to a shareholder becomes dividend at the moment it is made, to the extent of the company's accumulated profits at that time. The fiction is not dependent on whether the Department has actually assessed the earlier advance as dividend. If earlier advances satisfying the section are ignored, the accumulated profits would be artificially inflated and the statutory scheme would be defeated. The accumulated profits must therefore be notionally reduced by earlier loans or advances that were liable to be treated as deemed dividend, whether or not they were in fact brought to tax in those years.

Conclusion: The earlier advances had to be deducted from accumulated profits, and only the balance supported by remaining accumulated profits could be treated as deemed dividend; the assessee's contention succeeded.

Final Conclusion: The deemed dividend computation had to be made on the basis of accumulated profits as reduced by earlier advances, so the Department could not tax the entire later withdrawal by ignoring its omission to assess earlier loans.

Ratio Decidendi: For section 2(6A)(e), accumulated profits must be reduced by all earlier advances that satisfy the deeming provision, even if they were not actually assessed as dividend in the earlier years, because the fiction operates when the loan or advance is made.

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