Deemed dividend rules require development rebate in accumulated profits and payment-by-payment testing of account debits.

For deemed dividend under section 2(6A)(e), development rebate was treated as part of accumulated profits because it remained an appropriation out of profits until applied to capital development, and prior-year rebate reserves could not be excluded merely because the allowance arose in earlier years. The provision also required a payment-by-payment examination: a debit in a mutual, open and current account was a loan or advance only when made, and later credit balances did not erase an earlier loan. The statutory test was each payment made during the year, not the year-end balance.

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Issues: (i) Whether development rebate allowed under the Act formed part of the company's accumulated profits for the purpose of deemed dividend under section 2(6A)(e); (ii) whether only the development rebate reserve of the relevant accounting year could be included in accumulated profits to the exclusion of earlier years' reserves; (iii) whether debits in the assessee's mutual, open and current account constituted loans or advances within section 2(6A)(e); and (iv) whether the relevant test was the balance outstanding at the end of the accounting year or each payment made during the year.

Issue (i): Whether development rebate allowed under the Act formed part of the company's accumulated profits for the purpose of deemed dividend under section 2(6A)(e).

Analysis: Development rebate was treated as distinct from depreciation. It was held to be an allowance out of profits intended for development and expansion, not for replacement of worn-out assets. Although allowed as a deduction in computing taxable income, it retained its character as profit until actually applied to capital development. Since section 2(6A)(e) operates on accumulated profits, such rebate could not be excluded merely because it had been allowed as a deduction.

Conclusion: The development rebate reserve was includible in accumulated profits; the issue was against the assessee.

Issue (ii): Whether only the development rebate reserve of the relevant accounting year could be included in accumulated profits to the exclusion of earlier years' reserves.

Analysis: The expression "accumulated" was held to refer to profits accumulated before the commencement of the previous year relevant to the assessment year. Current-year profits did not form part of accumulated profits, but prior-year accumulations did. The relevant fund had therefore to be computed with reference to profits brought forward from earlier years and not confined to the reserve of the immediate accounting year.

Conclusion: Earlier years' development rebate reserves were not excluded from accumulated profits; the issue was against the assessee.

Issue (iii): Whether debits in the assessee's mutual, open and current account constituted loans or advances within section 2(6A)(e).

Analysis: Each payment had to be examined at the time it was made. A debit entry was a loan only if, at that moment, it made the company a creditor of the assessee and was not merely a repayment against an existing credit balance. Contra entries representing remuneration already payable were not loans. On the facts, the debits before the credit of 1 February 1958 were loans, while later debits were repayments against the assessee's credit balance and were not deemed dividends.

Conclusion: The relevant debits were to be tested payment-wise and not by the year-end balance; the issue was against the assessee.

Issue (iv): Whether the relevant test was the balance outstanding at the end of the accounting year or each payment made during the year.

Analysis: Section 2(6A)(e) uses the words "any payment", which requires examination of each payment at the date it is made. The existence of a later credit balance does not negate an earlier loan, and the highest debit or year-end balance is not the statutory test. The amount of accumulated profits must be correlated with each payment as and when made.

Conclusion: The governing test was each payment made during the year, not the year-end balance; the issue was against the assessee.

Final Conclusion: The reference was answered in a manner adverse to the assessee, with the deemed-dividend provision applied on a payment-by-payment basis and development rebate included in accumulated profits.

Ratio Decidendi: For section 2(6A)(e), accumulated profits include prior-year development rebate reserves, and the deeming fiction applies to each payment at the time it is made, subject to the profits then available after proper deductions.

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