Jeevan Reddy, J.
1. The question referred to us under s. 256(1) of the I.T. Act is :
'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in excluding the amount of 'depreciation fund' and 'building reserve fund' for the purpose of determining the accumulated profit available for determining deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, for the assessment Years 1955-56 and 1956-57 ?'
2. The question arises in the following circumstances :
The assessment for the years 1955-56 made on November 30, 1955, in respect of the assessee concerned herein was sought to be reopened under s. 34(1)(a) of the Indian I.T. Act, 1922, by a notice dated March 6, 1962, to included income from dividends as defined under s. 2(6A)(e) of the said Act. There assessment in pursuance of this notice was completed on June 27, and the matter was remitted to make a reassessment after obtaining completed particulars regarding the extend of accumulated profits. According, the assessment was completed on June 10, 1968. Against the said order an appeal was preferred to the AAC which was dismissed and then a further appeal to the Tribunal. Several contentions were raised before the Tribunal; but we are concerned herein only with one of the question decided by the Tribunal and which it held in favour of the assessee.
3. We shall state the facts relevant to the said question only. The assessee is a shareholder in a company which is not a company in which the public are substantially profits brought forward for the assessment years 1955-56 was Rs. 1,11,008. To this the ITO added the amount of depreciation fund of Rs. 86,770 and building reserves of Rs. 10,596 making a total sum of Rs. 2,08,374. Out of this amount, income-tax in a sum of Rs. 92,479 was deducted, leaving the balance of accumulated profits in a sum of Rs. 1,15,895. The contention of the assessee before the deportment fund and the building reserve fund should not be deemed to be part and parcel of accumulated profits. In other words the contention was that the said amounts should not be taken into account while determining the accumulated profits. Though the department authorities did not agree with this view, the Tribunal did, following the decision of the Bombay High Court in Navnitlal C. Jhaveri v. CIT : 80ITR582(Bom) . The Tribunal held that both these amounts should not be taken into consideration in determining the accumulated profits. Aggrieved by the decision of the Tribunal, the Department asked for and obtained this reference.
4. The expression 'dividend' is defined in clause (6A) of s. 2 of the 1922 Act. It is an inclusive definition and we are concerned only with clause (e) herein which reads as follows:
'Any payment by a company, not being a company, in which the public are substantially interest within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) 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.'
5. According to clause (e), any sum paid by way of advance or loan to the shareholder or any payment by any such company on behalf or for the individual benefits of a shareholder by a company of the type mentioned therein shall be treated as dividend, to the extent to which the company in either case possesses accumulated profits. The question is what does the expression 'accumulated profits' signify. This expression has not been defined in the Act but has received judicial interpretation at the had of several High Court as well as the Supreme court. The first decision sorted before us is a decision of the Gujarat High Court in CIT v. Viramgan Mills Co. Ltd. : 43ITR270(Guj) . There the question was whether the 'buildings and machinery depreciation dune' constitutes a reserve within the meaning of the first proviso to s. 23A (1) of the Act. The proviso said that when the reserve representing accumulations of past profits, which have not been the subject of an order under sub-s (1) of s. 23A exceed the paid up capital of the company s. 23A shall apply as if instead of the words 'sixty per cent' the words 'one hundred per cent.' were substituted. In that case an order in terms of the proviso was made by the ITO, which was question by the assessee contending that the inclusion of the building and machinery depreciation fund in the reserve is untenable in laws. in that machinery depreciation fund in the reserve is untenable in law. In that connection the Division bench of the Gujarat High Court referred to the off cited passage in In re Spanish Prospecting Co. Ltd.  1 Ch 92 by Fletcher-moultion L.J., which is to the following effect:
''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 years. 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 increases which they she at the later dated as compared with the earlier dated (due allowance of course being made for any capital introduced into or taken out of the business in the mean while) represents in strictness the profits of the business during the period in question.'
6. They also referred to the decision of Mahajan J. in CIT v. Ahmedbhai Umarbhai & Co. : 18ITR472(SC) and certain other decision and held ultimately that the amount allowed and allocated toward depreciation of machinery and building is indeed a fund of cash or other liquid asset set aside for the proposes of replacing the depreciating profit at the end of the its service life. it was further held that the expression 'profits' must be understood in a commercial sense and that it is not the same thing as the taxable income under the I.T. Act; a particular income to amount may not be taxable or may be exempt under the Income-tax Act but it may be exempt under the Income-tax Act but it may yet constitute profits in the commercial sense. It was observed that the recognition of depreciation is a condition precedent to the ascertainment of profits and must be dedicated out of the reserves for the purpose of the first proviso to s. 23A(1) of the Act. The court further observed that the depreciation fund did not represent accumulation of past profits and that the profits of the company could only be ascertained after providing for the depreciation in the assets of the company.
7. The next decision cited before us is of the Bombay High Court in CIT v. P. K. Badiani : 76ITR369(Bom) . The headnote of that decision clearly brings out the principle of the decision and we may set out to the extent it is relevant for the present purpose:
'Allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes its place and, therefore, 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. Development rebate is no intended to replace any capital loss by wear and tear or in any such other way. It, therefore, forms part of real profits and even after it is allowed as a deduction under section 10(2)(vib), it continues to retain its original character of profits. Thus, 'accumulated profits' included amounts of development rebate.'
8. This decision was affirmed by the Supreme Court in P. K. Badiani v. CIT : 105ITR642(SC) . In this decision, the Supreme Court referred to the aforesaid definition of profits by Fletcher-Moulton L.J. and to the decision of Mahajan J. and held finally that the deportations allowed in respect of buildings and machinery with a view to provide for a fund to replace the same as and when their life is over, and, therefore, any amount or fund representing deprecation is not profit. But, they made a distinction in the case of initial depreciation and development rebate which do not stand on the same footing and are in the nature of incentives to encourage industrial production. The Supreme Court in this decisions referred to the decision of the Gujarat High Court in CIT v. Viramgam Mills Co. Ltd : 43ITR270(Guj) with approval. It also referred to a decision of the Madras High court in CIT v. K. Srinivasan : 50ITR788(Mad) approvingly, where it was held (head note):
'For the purposes of section 2(6A)(e) of the Indian Income-tax Act, 1922, 'accumulated profits' include general reserves. Unless the profits is capitalized in some from or other mere transfer of the profit to any reserve account will not take away from profits the character of accumulated profits.'
9. When the decision of the Calcutta High Court in CIT v. Bibhuti Bhusan Dutt  48 ITR 233 was brought to their notice, the Supreme Court distinguished the same, holding that the was a case where the income of the assessee was assessed under the head 'Income from property' under s. 9 of the 1922 Act.
10. The principle that emerges from the above decision is that the building and machinery depreciation fund is not profits and, therefore, cannot be treated as or included in accumulated profits. It is a necessary deduction from out of the profits, since it is a fund set apart each year with a view to replace the machinery and building is over. But the same cannot be said with respect to other funds, for example, initial depreciation or development rebate, as the case may be. Again, an assessee by merely allocating a part of his profits to a particular head, cannot change their character; they continued to remind profits only, following the above principles, it must be held in this case that so far as the depreciation fund is concerned the Tribunal is right in holding that the same could not have been included in the accumulated profits within the meaning of sub-clause (e) of s. 2(6A). It being a depreciation fund, clearly falls within the principle of the decision of the Gujarat High Court referred to above. But so far as the building reserve fund is concerned it does not appeal that it is in the nature of a deprecation fund. It merely seems to be a fund set part for constructing new buildings, or, at any rate, an amount sets part out of the profits under that head. Unless this fund is in the nature of a depreciation fund or of a like nature, it is not entitled to be deducted while determining the accumulated profits. In the circumstances we must sold that the Tribunal was in error in treating the building reserve fund in the same footing as the depreciation fund. The decision of the Supreme Court referred to above makes it clear that several funds created comprising of initial depreciation, development rebate or in the name of general reserves do continue to be profits and are not deductible while determining the amount of accumulated profits.
11. For the above reasons we answer the questions referred to us partly in favour of the Department and partly in favour of the assessee. So far as the depreciation fund is concerned the answer shall be in the affirmative and in favour of the assessee. But so far as the building reserves fund is concerned out answer shall be in the negative and in favour of the Department.
12. In the circumstances of the case, we directed the parties to bear their own costs in this appeal.