Deemed dividend requires accumulated profits computed under tax depreciation rules, not balance-sheet figures.

A loan advanced by a company to a shareholder is not taxable as deemed dividend under section 2(6A)(e) unless the company has accumulated profits computed under the Income-tax Act. Accumulated profits must be determined by profits recognised for tax purposes, after deducting depreciation at the rates allowable under that Act, and cannot be fixed merely by balance-sheet figures or depreciation computed under another statutory regime. Applying the Income-tax Act depreciation rates, the company had no accumulated profits at the relevant time and only unabsorbed depreciation remained to be carried forward, so the loan could not be treated as deemed dividend.

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Issues: Whether a loan advanced by a company to a shareholder could be treated as deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922 when the existence of accumulated profits depended upon the manner of computing depreciation.

Analysis: For the purpose of section 2(6A)(e), accumulated profits must be ascertained by determining profits in the sense recognised by the Income-tax Act, which requires depreciation to be deducted at the rates allowable under that Act. The computation cannot be controlled merely by figures shown in the company's balance-sheet or by depreciation worked out on another statutory basis. On the agreed material, application of Income-tax Act depreciation rates showed that the company had no accumulated profits at the relevant time and, instead, unabsorbed depreciation remained to be carried forward.

Conclusion: The loan could not be brought to tax as a deemed dividend under section 2(6A)(e) because the company had no accumulated profits.

Ratio Decidendi: For section 2(6A)(e) of the Indian Income-tax Act, 1922, accumulated profits must be computed on the basis of profits determined under the Income-tax Act after allowing depreciation at the rates permissible under that Act, and not merely on balance-sheet figures or depreciation worked out under another regime.

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