Reasonableness of dividend: consider distributable profits, approximate tax liability and prior-year losses before treating dividend as excessive.

Whether an assessing officer may treat a declared dividend as excessive turns on distributable profits available at the AGM and what a reasonable businessman would consider before declaring a dividend. The legal prescription requires regard to commercial profits for the year, the approximate tax liability on those profits, and prior-year losses; accumulated reserves do not permit disregarding prior losses. Applying these criteria to the facts shows distributable sums materially lower than the declared dividend, so the assessment under the dividend-provision was not justified and the outcome favoured the assessee.

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Issues: Whether, under the facts and circumstances of the case, the Income-tax Officer was right in passing an order under section 23A of the Income-tax Act?

Analysis: The issue required assessment of distributable profits available at the date of the annual general meeting and of factors that a reasonable businessman would consider before declaring a dividend. Relevant elements are the commercial profits for the year, the approximate tax liability on those profits, and losses incurred in the previous year; each must be taken into account in determining whether a larger dividend could reasonably have been declared. Applying these principles to the facts, commercial profits as assessed (Rs. 61,483, or alternatively Rs. 86,000 if additional receipts are included) less the approximate tax liability and the previous year's loss leave distributable sums materially lower than the dividend actually declared. The figure of accumulated reserves does not permit the Income-tax Officer to disregard the statutory requirement to have regard to prior-year losses when assessing the reasonableness of a dividend declaration.

Conclusion: The order under section 23A of the Income-tax Act was not justified; the question is answered in the negative and the decision is in favour of the assessee.

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