1976 (9) TMI 3 - SC - Income Tax

Hold that the development rebate reserve created by the company by duly charging the amount of profit and loss account, although liable as a deduction under the 1922 Act, constituted accumulated profits of the company within the meaning of section 2(6)(e). We accordingly affirm the decision of the High Court and dismiss this appeal

Summary

Issues Involved:
1. Whether the development rebate reserve created by the company constitutes "accumulated profits" within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Development Rebate Reserve as Accumulated Profits:

The core issue in this case is whether the development rebate reserve created by the company, by duly charging the amount to the profit and loss account and being allowable under the Act, constitutes "accumulated profits" within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922.

Facts:
- The assessee, a major shareholder and managing director of Sadhana Textile Mills Pvt. Ltd., had withdrawn substantial amounts from the company's account during the accounting year 1957-58.
- The Income-tax Officer treated these withdrawals as advances or loans and taxed them as dividends under section 2(6A)(e) of the 1922 Act.
- The Appellate Assistant Commissioner modified the figure of deemed dividend and took the highest amount of advance made to the assessee at a particular point in time as the taxable dividend.
- The amount of development rebate allowed to the company was Rs. 2,36,470, debited in the profit and loss account for the accounting year 1956, leaving a balance of Rs. 6,641.
- The Appellate Assistant Commissioner treated the entire sum of Rs. 2,43,111 as accumulated profits.

Legal Analysis:
- The term "accumulated profits" in section 2(6A)(e) refers to profits in the commercial sense, not assessable or taxable profits under the 1922 Act.
- The distinction between commercial profits and assessable profits was emphasized, with commercial profits being the actual gain made by the business.
- Depreciation allowance under section 10(2)(vi) of the 1922 Act is a deductible item from assessable profits, but development rebate under section 10(2)(vib) is an incentive for installing new machinery or plant and not a recurring allowance.
- The development rebate, though not part of assessable profits, forms part of commercial profits.
- The Gujarat High Court's view in Commissioner of Income-tax v. Viramgam Mills Co. Ltd. equating normal depreciation with development rebate was not accepted.

Judgment:
- The development rebate reserve created by the company, by duly charging the amount to the profit and loss account, constitutes accumulated profits within the meaning of section 2(6A)(e).
- The High Court's decision was affirmed, and the appeal was dismissed with no order as to costs.

Conclusion:
The Supreme Court held that the development rebate reserve created by the company constitutes accumulated profits under section 2(6A)(e) of the Indian Income-tax Act, 1922, thereby affirming the High Court's decision and dismissing the appeal.