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TMI Blog1976 (9) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... -60. The decision of the Tribunal was partly in favour of the assessee and partly in favour of the revenue. In respect of the assessment year 1958-59, a reference under section 66(l) of the 1922 Act was made by the Tribunal to the High Court. Four questions were referred--one at the instance of the Commissioner of Income-tax and three at the instance of the assessee. The High Court by its judgment under appeal which is reported in Commissioner of Income-tax v. P. K. Badiani has answered almost all the questions against the assessee. Hence, this appeal. Mr. V. Rajagopal who had argued the case of the assessee before the High Court appeared before us in support of the appeal also. He could not and did not attack the decision of the High Court as respects questions Nos. 2, 3 and 4. But he strenuously urged before us for reversal of the High Court judgment in regard to question No. 1, which was referred at the instance of the Commissioner. If the assessee could succeed before us in getting an answer in his favour to the said question, then, substantially he would have succeeded in getting the whole of the relief. The first and the only question which falls for our examination in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the profit and loss account. The Appellate Assistant Commissioner of Income-tax treated the entire sum of Rs. 2,43,111 as the amount of accumulated profits possessed by the company. Finding the highest amount of advance to the assessee at a particular point of time to be aggregating to Rs. 1,83,493.70 he directed the addition of the said amount in the assessee's income under section 2(6A)(e) of the 1922 Act. The High Court has directed some modification in the calculation of the said amount while answering the other questions referred to it at the instance of the assessee and we need not go into their details. The main question for our determination in this appeal is whether the aggregate of the development rebate allowed to the company under section 10(2)(vib) of the 1922 Act could be treated as accumulated profits in the hands of the company under section 2(6A)(e). The Income-tax Acts have undergone numerous changes from time to time and various amendments have been made both in the 1922 Act as also in the 1961 Act. We shall do well to quote all the sub-clauses (a) to (e) of section 2(6A) of the 1922 Act. They read as follows : "2(6A) 'dividend' includes -- (a) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical passage from the judgment of Fletcher Moulton L.J. in In re Spanish Prospecting Co. Ltd., which runs thus : " 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates ............. If the total assets of the business at the two dates be compared, the increase which they show at the later date as compared with the earlier date (due allowance of course being made for any capital introduced into or taken out of the business in the meanwhile) represents in strictness the profits of the business during the period in question." Bhagwati J. has quoted the above passage with approval in the case of E. D. Sassoon Co. Ltd. v. Commissioner of Income-tax. Almost to the same effect was the view expressed by Mahajan J., as he then was, in the case of Commissioner of Income-tax v. Ahmedbhai Umarbhai Co. In Commissioner of Income-tax v. Bipinchandra Maganlal Co. Ltd., Shah J., as he then was, delivering the judgment on behalf of the court w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responding to section 32 of the 1961 Act. It would appear from the report of the Taxation Enquiry Commission 1953-54, Vol. II, as to what is the nature of the depreciation allowance : vide Chapter V, page 74. The normal depreciation provided in clause (vi) and the additional depreciation mentioned in clause (via) of section 10(2) of the 1922 Act is permitted to be deducted from the "written down value". By and large, the cost of replacements is allowed as deductions in lieu of depreciation in respect of certain assets. By the amendments made by the Income-tax (Amendment) Act, 1946, the Finance Act, 1955, and the Finance Act, 1956, certain initial depreciation was allowed in respect of buildings newly erected or the machinery and plant newly installed. Obviously, it was by way of an incentive for the new structures or the new installations. The amount of initial depreciation was not deductible in determining the "written down value" although under proviso (c) it was to be taken into account in the aggregate of all allowances so as not to permit them to exceed the maximum limit provided therein. Development rebate was provided in clause (vib) with effect from 1st April, 1955, by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... past profits within the meaning of the proviso to section 23A of the 1922 Act as it stood at the relevant time. It held that it could not form part of the accumulated past profits as in the words of Wixon (vide Wixon's Accounts Hand Book), it was "the estimated expiration of asset value" or as observed by Paton in his Accountants' Hand Book, third edition, it is an out-of-pocket cost as any other costs. Says the learned author in the above book, at page 746, thus : "There is still widespread misapprehension as to the precise significance of the depreciation charge. It is often deemed a more or less imaginary and hypothetical element, and is sharply contrasted with the regular 'out-of-pocket' operating costs. As a matter of fact there is nothing at all imaginary about depreciation as a cost of business operation and at bottom it is just as much an out-of-pocket cost as any other. The depreciation charge is merely the periodic operating aspect of fixed-asset costs, and there is no doubt as to the reality of such costs. Far from being a non-out-of-pocket charge depreciation represents the extreme example of prepayment." Mr. S.T. Desai, learned counsel for the revenue, drew our atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed dividend for the purpose of taxation. Under clause (e) an advance or loan of money to a shareholder by a private company has been directed to be treated as dividend to the extent to which the company possessed accumulated profits. The advance or the loan, by a legal fiction, is to resemble the actual dividend. For the purpose of distribution of the dividend the amount of development rebate could form part of the profits of the company ; a fortiori, it would be so for the purposes of clause (e) also. During the course of the arguments of this appeal, our attention was directed to a new facet of the question under consideration and that is this. In clauses (a) to (d) of section 2(6A) of the 1922 Act, so also in the corresponding clauses of section 2(22) of the 1961 Act, the expression "accumulated profits" is qualified by the expression "whether capitalised or not". But the, latter phrase is conspicuously absent in clause (e). What is the purpose of this difference in the phraseology of the various clauses of sub-section (6A)? The reason is not far to seek and yet not helpful to the assessee in this case. The profits of a company can be capitalised in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution of a company". Buckley on the Companies Acts, thirteenth edition, has pointed out at page 907 "profits carried to reserve do not cease to be profits unless and until they are effectually capitalised". Says the learned author at page 912 after referring to article 128 corresponding to regulation 96 of Table "A" of the Indian Companies Act : "A company may, if its constitution so allows, capitalize profits, instead of dividing them, by applying them in paying up unissued shares, or debentures or other securities, and issuing such shares or securities as fully paid to its members, thereby transferring the sum capitalized from profit and loss or reserve account to share or loan capital account." To the same effect is the statement of the law to be found in Palmer's Company Law, twenty-first edition, page 673. The "capitalisation of profits", says the learned author, "means that profits which otherwise are available for distribution among the shareholders are not divided among them in cash, but that the shareholders are allotted further shares--or debentures --which are, paid up wholly or in part out of those profits. The amount paid by the company out of its divisible pro ..... 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