Dividends from actual profits: adjustment provision inapplicable where declared dividend equals distributable profit and larger payout would breach capital rules.

Application of the dividend-adjustment provision to property-owning companies assessed on notional income is limited where actual distributable profits constrain payment. The article explains that assessable income may exceed actual profits for companies assessed under the property-head; dividends are payable only from actual profits and distribution from capital is prohibited. The adjustment provision triggers if declared dividends are under the statutory proportion of assessable income unless tax authorities accept prior losses or small actual profits as reasonable cause. On the presented facts, no larger lawful dividend was supportable, so the provision was not properly invoked.

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Issues: Whether, on the facts and circumstances of this case, the provisions of Section 23A of the Indian Income-tax Act were properly invoked.

Analysis: The company derived its assessable income from property and was assessed under Section 9; its actual profits for the relevant years were Rs. 30,000 and Rs. 15,000 respectively and the whole of those actual profits was distributed as dividends. Assessable income in such cases is a notional figure and may exceed actual distributable profits. Dividends can be paid only out of actual profits; distribution out of capital is prohibited by company law. Section 23A applies to cases where declared dividends are less than sixty per cent of assessable income unless the income-tax officer is satisfied, having regard to prior losses or the smallness of actual profits, that a larger dividend would be unreasonable. Here there was no evidence that a larger dividend could reasonably have been declared because all available profits were already distributed and any larger distribution would have required an unlawful application of capital.

Conclusion: Section 23A applies to property-owning companies assessed under Section 9, but on the facts of this case the provisions of Section 23A were not properly invoked; there was no evidence to support a conclusion that a larger dividend could reasonably have been declared, and therefore the reference is answered in the negative in favour of the assessee.

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