Meaning of “Accumulated profits”

Case Name : CIT vs. Urmila ramesh

Citation : [1998] 96 taxman 533/230 ITR 422 (sc)

Court :Supreme court

Section : 2(22)

Meaning : Section 2(22) has used the expression ‘accumulated profits’, whether capitalised or not. This expression tends to show that under section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression ‘whether capitalised or not’ the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalised. The amounts should, in other words, be in the nature of profits which the company could have distributed to its sharehol-ders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalised, the return being of capital itself. Profits mean only commercial profit.

Case Name : P.K. Badiani vs. CIT

Citation : [1976] 105 ITR 642 (sc)

Court : Supreme court

Section : 2(22)

Meaning : The expression ‘accumulated profits’ occurring in sub-clause (e) of section 2(6a) of the 1922 act [corresponding to section 2(22)(e) of the 1961 act] or for that matter in any other clause, means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 act.

Case Name : CIT vs. Roshan lal

Citation : [1975] 98 ITR 349 (all.)

Court : Allahabad high court

Section : 2(22)

Meaning : Accumulated profits within the meaning of sub-clause (e) of section 2(6a) of the 1922 act will necessarily be comprised of the amount available for being distributed as profits. The word ‘accumulated’ means the profit earned bit by bit and accumulated. It does not mean that it should be carried forward from year to year. Profits can accumulate even within a single year. The entire amount which is available for distribution as profits on a particular date would be the accumulated profit and any amount paid as advance or loan to the shareholder to the extent of this amount of accumulated profits will be dividend within the meaning of section 2(6a)(e).

Case Name : First ITO vs. Short bros. (P.) Ltd.

Citation : [1966] 60 ITR 83 (sc)

Court : Supreme court

Section :2 (22)

Meaning : Within the expression ‘accumulated profits’ in the explanation to section 2(6a)(c) of the 1922 act [corresponding to section 2(22) of the 1961 act] were included capital gains outside the excepted periods.

Case Name : Mrs. Sujatha venkateswaran vs. Asstt. CIT

Citation : [1997] 61 ITD 485 (mad. – Trib.)

Court : Itat- madras

Section : 2(22)

Meaning : The ‘accumulated profit’ signifies firstly that there must have been profits in earlier years and secondly that amounts out of such profits have been accumulated from time to time, with the result that there is some amount of accumulated profits in the possession of the company just before the commencement of the accounting year. The profits referred to in this terminology can only mean commercial profit and not assessed income.

Case Name : M.B.S. Purushotham vs. ITO

Citation : [1988] 26 ITD 520/40 taxman 171 (hyd. – Trib.)

Court : Itat- hyderabad

Section : 2(22)

Meaning : While considering the expression ‘accumulated profits’ what is to be taken into account is the commercial profits, and while deciding the commercial profits the outgoings have to be taken into consideration. It is the profit possessed excluding the outgoing which can be considered in determining the accumulated profits.

Case Name : ITO Vs. K.C. Rajan

Citation : [2011] 47 SOT 166/12 taxmann.Com 498 (chennai)

Court : Chennai high court

Section : 2(22)

Meaning : The expression ‘accumulated profits’ appearing in explanations 1 and 2 to section 2(22)(e) is not linked to schedule vi of the companies act or profit and loss account and balance sheet prepared under the companies act. So, the ‘accumulated profits’ mentioned in section 2(22)(e) has to be construed as an aggregate of profits available to a company up to the date on which it had given advance or loans to a substantial shareholder. Naturally, such profits would have to be calculated considering all expenses including income-tax outgoes.