Deemed dividend and accumulated profits: depreciation must be deducted before computing commercial profits under tax law.

Depreciation allowable under the Income-tax Act must be deducted when computing accumulated profits for deemed dividend under section 2(22)(e). The provision was treated as pari materia with the corresponding 1922 Act clause, so earlier authorities remained relevant. Accumulated profits were construed as commercial profits, but only after allowing normal depreciation at the prescribed rates. On that basis, depreciation was held deductible in determining whether deemed dividend arose, and the addition was deleted.

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Issues: Whether, for computing accumulated profits under section 2(22)(e), depreciation allowable under the Income-tax Act is to be deducted while determining deemed dividend.

Analysis: The provision governing deemed dividend was treated as pari materia with the corresponding clause in the Income-tax Act, 1922, and decisions under the old Act were held relevant. The expression "accumulated profits" was understood to mean profits in the commercial sense, but the Court found that commercial profits must still reflect normal depreciation. Reliance was placed on earlier authority holding that depreciation at the rates prescribed by the Income-tax Act must be deducted in ascertaining accumulated profits, and those decisions were found not to have been overruled.

Conclusion: Depreciation under the Income-tax Act is deductible while computing accumulated profits for section 2(22)(e), and the addition as deemed dividend was rightly deleted.

Ratio Decidendi: For the purpose of deemed dividend under section 2(22)(e), accumulated profits are commercial profits after allowing normal depreciation at the rates prescribed by the Income-tax Act.

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