Deemed dividends and later actual distributions must be credited when computing undistributed profits under section 23A(1).

Section 23A(1) of the Income-tax Act, 1922 applied only where the company had failed to distribute the requisite dividends within the statutory period; amounts already taken out of the company as dividends or as payments deemed to be dividends were not ignored merely because they arose during the accounting year. Advances to shareholders falling within section 2(6A)(e) were treated as dividend distributions for computing the undistributed balance, and actual dividends later declared were also to be credited. On that basis, section 23A(1) did not apply to the company for the assessment years concerned.

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Issues: Whether section 23A(1) of the Income-tax Act, 1922 could be applied where advances made to shareholders during the accounting year were treated as deemed dividends under section 2(6A)(e), and whether dividends declared after the statutory period could be ignored for computing the undistributed balance.

Analysis: Section 23A(1) was held to operate only where the company had not distributed the requisite dividends within the period contemplated by that provision, but the provision did not exclude amounts which had already gone out of the company as dividends or as payments deemed to be dividends merely because they were not declared after the expiry of that period. Advances to shareholders falling within section 2(6A)(e) were treated as dividend distributions for the purpose of section 23A, and the timing of those advances during the accounting year did not make section 23A(1) applicable. The Court also accepted that actual dividends subsequently distributed should be given credit in determining the undistributed balance.

Conclusion: Section 23A(1) could not be applied to the company for the assessment years in question.

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