1982 (8) TMI 47 - HC - Income Tax

Summary

Issues:
Exclusion of 'depreciation fund' and 'building reserve fund' for determining accumulated profits under section 2(6A)(e) of the Indian Income-tax Act, 1922 for assessment years 1955-56 and 1956-57.

Detailed Analysis:
The judgment pertains to a question referred under section 256(i) of the Income Tax Act regarding the exclusion of the 'depreciation fund' and 'building reserve fund' for determining accumulated profits for specific assessment years. The case involved an appeal against the reassessment order made in 1968, which included these funds in the calculation of accumulated profits. The Tribunal, following a decision of the Bombay High Court, ruled in favor of the assessee, excluding these amounts from accumulated profits.

The definition of 'dividend' under section 2(6A)(e) of the Act was crucial in determining whether the funds in question should be considered as part of accumulated profits. The expression 'accumulated profits' was not explicitly defined in the Act but had been interpreted by various High Courts and the Supreme Court. The Gujarat High Court decision in CIT v. Viramgam Mills Co. Ltd. and the Bombay High Court decision in CIT v. P. K. Badiani were cited to establish that funds allocated for depreciation of machinery and buildings should not be treated as profits.

The Bombay High Court decision was affirmed by the Supreme Court, emphasizing that depreciation funds are not profits but rather a fund set aside for replacing depreciating assets. The judgment highlighted the distinction between depreciation funds and other funds like initial depreciation or development rebates, which may still be considered as profits. The Court concluded that the depreciation fund should be excluded from accumulated profits, following the principles established in prior decisions.

Therefore, the Court partially favored the Department and partially favored the assessee in its response to the question referred. The judgment clarified that the depreciation fund should be excluded from accumulated profits, while the building reserve fund should not be treated in the same manner. The decision was based on the nature and purpose of the funds in question, aligning with established legal principles and interpretations of accumulated profits under the Income Tax Act.

In conclusion, the judgment provided a comprehensive analysis of the legal principles surrounding the exclusion of specific funds from accumulated profits for tax assessment purposes, emphasizing the commercial sense of profits and the distinction between various types of reserves and funds.