Accumulated profits under deemed dividend rules exclude current year profits and require deduction of tax and dividend provisions

For section 2(6A)(e) of the Indian Income-tax Act, 1922, accumulated profits mean profits brought forward from prior periods and available for distribution, not profits arising during the current accounting year. The provision for taxation and any declared dividend must be deducted when computing accumulated profits because they reduce the amount actually available for loan treatment as deemed dividend. On that construction, a loan can be treated as dividend only to the extent of accumulated profits computed without current year profits and after making the relevant deductions and appropriations.

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Issues: (i) Whether accumulated profits for the purpose of section 2(6A)(e) of the Indian Income-tax Act, 1922 include the current year's profits; (ii) Whether the amounts provided for taxation and dividend should be deducted in computing accumulated profits.

Issue (i): Whether accumulated profits for the purpose of section 2(6A)(e) of the Indian Income-tax Act, 1922 include the current year's profits.

Analysis: The expression "accumulated profits" in the deeming provision for loans treated as dividend refers to profits brought forward from the past and already accumulated, not profits arising during the relevant accounting year. The object of the provision is to prevent distribution of profits as loans, but the fiction operates only to the extent of accumulated profits. Authorities construing the same expression in closely related provisions under the 1922 Act were treated as establishing that current profits are outside the concept of accumulated profits.

Conclusion: Current year's profits are not included in accumulated profits for section 2(6A)(e), and this issue is answered in favour of the assessee.

Issue (ii): Whether the amounts provided for taxation and dividend should be deducted in computing accumulated profits.

Analysis: Accumulated profits must reflect the real profits available for distribution after deducting liabilities and amounts already appropriated out of those profits. A provision for taxation reduces the amount capable of being accumulated, and a declared dividend is likewise an appropriation which cannot remain part of accumulated profits for the purpose of the deeming provision.

Conclusion: The provision for taxation and the declared dividend had to be deducted in arriving at accumulated profits, and this issue is also answered in favour of the assessee.

Final Conclusion: The reference was answered by holding that the loan could be treated as dividend only to the extent of accumulated profits computed without including current year profits and after deducting the relevant provisions and appropriations.

Ratio Decidendi: For section 2(6A)(e) of the Indian Income-tax Act, 1922, accumulated profits mean profits accumulated from prior periods and available after deduction of real liabilities and appropriations, and do not include current year profits.

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