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TMI Blog1972 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... er referred to as " the company "). There is no dispute about the fact that in connection with the questions which arose between the parties the provisions of section 23A of the Act were applicable to the company. The assessee carried on business in the firm name and style of Messrs. Khimji Nagji and Co. and also in the name of " Shri Jamnadas Khimji " (his own name). The assessee had dealings with the company in both the above names from prior to 1st October, 1952. The ledger accounts of these dealings between 1st October, 1952, to 31st March, 1954, are in annexure " A " to the statement of the case. Having regard to the position of the assessee in these accounts with the company in connection with the assessment year 1955-56, the Income-tax Officer was of the view that the provisions in section 12(1B) read with section 2(6A)(e) of the Income-tax Act were applicable. He found that at the foot of the account of the firm of Messrs. Khimji Nagji and Co. there was a debit balance of Rs. 2,55,135 as on 1st April, 1954. He also found that there was a large credit balance in favour of the assessee in the account maintained in his own name (Shri Jamnadas Khimji). Upon making appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the balance-sheet, but there would be a deficit. Even if the above debit balance was considered " loan " the same could not be under the circumstances considered as having been made from accumulated profits as necessary under section 12(1B). The Appellate Assistant Commissioner accepted the submission of the assessee in respect of the above sum of Rs. 1,35,330 but not in respect of the other arguments. The Income-tax Tribunal by its order dated 11th January, 1963, upheld the contention of the assessee that the dealings of the assessee with the company were in a current account and could not be treated as " loans " for the purposes of section 12(1B) of the Act. In regard to the questions raised in respect of the calculation of accumulated profits the Tribunal held that the claim for calculation of depreciation on the basis of the rates prescribed by the Income-tax Act was not justified and was not admissible. Having regard to these findings the above two questions are referred for decision to this court. In connection with the first question, we have looked at the copies of the ledger accounts, which are annexure " A " to the statement of the case. In the account of the ssess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imji Nagji and Co., the assessee had remained liable to pay Rs. 2,55,135 to the company. It is difficult to accept the submission made on behalf of the assessee that this sum does not represent the balance of loans advanced by the company to the assessee in the account of Messrs. Khimji Nagji and Co. This finding made by the Income-tax Tribunal is that the nature of the two accounts is mutual, open and current account. Such an account cannot be described as a loan account. In that connection reliance is placed on the case of Potts' Executors v. Commissioners of Inland Revenue. That was relied upon by the Income-tax Tribunal in support of its findings. Now it appears to us that the observations in that case can have no bearing on our finding as regards the true nature of the above two accounts and the facts appearing from these accounts. The Tribunal appears to have been carried away by the vehemence of the arguments advanced by the counsel for the assessee before it and has accordingly on the question which could be decided by reference to the details in the accounts unjustifiably referred to the observations in the above case. In that case the account of the assessee-settlor with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of advance or loan which would have been treated as a dividend within the meaning of clause (e) of sub-section (6A) of section 2. . . . shall be treated as a dividend received by him in the previous year. . . " " 2. (6A) 'dividend' includes-. . . . (e) any payment by a company.... by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits. " In this connection it was extremely relevant of the revenue to ascertain the true nature of the transaction in the dealings between the company and the assessee-shareholder. The only fact that the entries in the two ledger accounts evidenced continuing withdrawals and deposits in the two accounts and that the accounts were accordingly current accounts, could never have the effect of proving that the accounts did not represent monetary transactions by way of loans and/or advances. In this connection it was not necessary for the Tribunal to refer to the various dictionary meanings as regards the phrases " advance " and " loan " nor was the above reported case relevant for ascertaining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2(6A)(e), namely, that the extent of the amount was covered by the accumulated profits of the company was satisfied. The question is whether the company had accumulated profits to the extent of the above amount of Rs. 2,55,135. In that connection the main contention on behalf of the assessee was that the reserve fund mentioned at Rs. 5,94,730 in the balance-sheet did not represent the correct amount of accumulated profits. This submission was accepted to the extent of Rs. 1,35,330 which was the compensation received from the Government on account of the damage resulting from the dock explosion of 1944 and carried to reserve fund. The further submission of the assessee was that the left-over balance of Rs. 3,55,000 and odd also did not represent the true accumulated profits. The submission was that in the balance-sheet the depreciation shown was not in accordance with the depreciation allowed by the assessment orders made in the previous years. The contention was that in arriving at the true figure of the accumulated profits from the reserve fund the depreciation as previously allowed by the previous assessment orders must be first deducted. The amounts of allowed depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " Unless such depreciation is set apart, the gross profits will contain an element within them which is really of a capital nature .... In short a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. " In the case of P. K. Badiani, the finding of the court was : " ....when arriving at the profits for that period the amount of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first as otherwise the initial capital would, to that extent, incorrectly and falsely be converted into and treated as profits. " We are bound to follow the findings made by this court in the above two decisions as regards the true meaning and construction of the phrase " accumulated profits " in section 2(6A)(e). We are, therefore, bound to hold that the Income-tax Tribunal in this case was entirely wrong in rejecting the contention made by the assessee that from the figure of reserve fund mentioned in the balance-sheet the true amount of depreciation allowed in accordance with the rates prescribed under the Income-tax Act and accordingly by the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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