Accumulated profits for deemed dividend treatment must reflect real commercial profits, not merely prior assessed income.

Accumulated profits for treating shareholder loans as deemed dividends under section 2(6A)(e) mean the company's real commercial profits, not merely assessed income from earlier years. Expenditure and disbursements actually incurred must be deducted in computing those profits, although fictitious or nonexistent items do not reduce them. On that basis, the tax authorities could not aggregate prior assessed incomes to determine accumulated profits, and the loans could not be treated as dividends on the method adopted.

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Issues: Whether loans advanced by a private company to its shareholder could be treated as dividends under section 2(6A)(e) only on the basis of assessed income from earlier years, or whether accumulated profits meant the company's actual commercial profits after taking into account expenditure and disbursements in fact incurred.

Analysis: The statutory condition for treating a loan as dividend is that the company must possess accumulated profits at the relevant time. The expression "accumulated profits" was held to refer to real commercial profits available with the company, not merely the assessed income shown in earlier assessment orders. Where expenditure and disbursements were in fact incurred, they could not be treated as continuing in the company's hands for the purpose of computing accumulated profits, although bogus or nonexistent entries would not reduce such profits. On that basis, the authorities were not justified in computing accumulated profits by simply aggregating assessed incomes from prior years.

Conclusion: The loans could not be treated as dividends on the basis adopted by the tax authorities, and the answer to the referred question was in the negative, in favour of the assessee.

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