Accumulated profits for deemed dividend purposes include development rebate reserve unless the profits are actually capitalised.

For deemed dividend purposes under section 2(6A)(e) of the Indian Income-tax Act, 1922, "accumulated profits" means commercial profits, not merely assessable profits. A development rebate, although allowable as a tax deduction, was treated as an incentive allowance for new machinery and plant and not as a business cost reducing commercial profits. Merely transferring the amount to a reserve by debiting the profit and loss account did not amount to capitalisation of profits. Because the profits were not actually capitalised, the development rebate reserve retained the character of accumulated profits and could be included under the deemed dividend provision; the assessee's contention failed.

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Issues: Whether a development rebate reserve created by debiting the profit and loss account, though allowable as a deduction under the 1922 Act, constituted "accumulated profits" of the company for the purposes of section 2(6A)(e) of the Indian Income-tax Act, 1922.

Analysis: The expression "accumulated profits" in section 2(6A)(e) refers to profits in the commercial sense and not merely assessable profits. Development rebate, though deductible for tax computation, was treated as an incentive allowance for installation of new machinery and plant, and not as a deductible item of business cost or expenditure in the ascertainment of commercial profits. Mere transfer of the amount to a reserve account by debiting the profit and loss account did not amount to capitalisation of profits. Since the profits had not been capitalised, they retained their character as accumulated profits and could be taken into account for the deemed dividend provision.

Conclusion: The development rebate reserve formed part of the company's accumulated profits within section 2(6A)(e) of the Indian Income-tax Act, 1922, and the assessee's contention failed.

Ratio Decidendi: For the purposes of deemed dividend provisions, "accumulated profits" means commercial profits, and a reserve created by setting apart development rebate does not cease to be accumulated profits unless the profits are actually capitalised.

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