1972 (1) TMI 12 - HC - Income Tax

Court clarifies scope of accumulated profits under Income-tax Act, excludes current profits. Assessee prevails.

The court held that accumulated profits under section 2(6A) of the Indian Income-tax Act, 1922 do not include current profits. Additionally, the court ... Whether Appellate Tribunal was legally correct in holding that the accumulated profits (the purpose of distribution of dividends) will not include current profits for the purpose of section 2(6A) of the Indian Income-tax Act, 1922 - question is answered in affirmitive in favour of assessee Issues Involved:1. Whether the accumulated profits include current profits for the purpose of section 2(6A) of the Indian Income-tax Act, 1922.2. Whether Rs. 18,950 constituted accumulated profit for the purpose of section 2(6A) of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Accumulated Profits and Current Profits:The primary issue was whether the term 'accumulated profits' under section 2(6A)(e) of the Indian Income-tax Act, 1922 includes current profits. The Tribunal, relying on the Madras High Court decision in Commissioner of Income-tax v. M. V. Murugappa, held that 'accumulated profit' does not include current year's profits. The judgment noted that the term 'accumulated' implies profits that are stored up or put by, indicating past profits rather than current ones. The court cited several cases, including T. Appavu Chettiar v. Commissioner of Income-tax, which supported the view that current profits are distinct from accumulated profits. The court concluded that the term 'accumulated profits' in sections 2(6A)(c) and 2(6A)(e) should bear the same meaning, thus excluding current profits from the definition of accumulated profits.2. Calculation of Accumulated Profits:The second issue involved whether Rs. 18,950 constituted accumulated profit for the purpose of section 2(6A) of the Indian Income-tax Act, 1922. The assessee argued that the profits of the company for the year ending March 31, 1959, should not be included in the accumulated profits and that Rs. 11,000 provided towards tax liability and Rs. 6,900 for payment of dividend should be deducted from Rs. 18,950.98. The Tribunal held against the assessee, stating that the amounts of Rs. 6,900 and Rs. 11,000 are appropriations and not charges against the profits. The court, however, disagreed with the Tribunal on this point, stating that the term 'accumulated profits' should relate to profits that could be accumulated by the company from time to time, meaning all liabilities due from the company should be deducted from the profits. The court referenced the Bombay High Court's decision in Rajpal Brothers (P.) Ltd. v. Commissioner of Income-tax, which emphasized that accumulated profits should not be determined merely by totaling the assessed income but should reflect the actual profits accumulated and in the hands of the company.Judgment:The court answered both questions in favor of the assessee and against the department. Question No. 1 was answered in the affirmative, confirming that accumulated profits do not include current profits. Question No. 2 was answered in the negative, stating that the amounts of Rs. 11,000 and Rs. 6,900 should be excluded in determining the accumulated profits. The judgment was forwarded to the Income-tax Appellate Tribunal, Cochin Bench, under the seal of the court and the signature of the Registrar.