Commercial profits under section 23A must reflect tax liability and earlier losses before judging dividend reasonableness.

Section 23A required an enquiry from the standpoint of a prudent businessman into whether a larger dividend was reasonably distributable after accounting for commercial profits. In computing distributable profits, approximate tax liability on those profits had to be deducted and earlier years' losses considered. The Tribunal's view that prior losses could be ignored because reserves existed was rejected, since adjustment of losses against current profits or reserves was a matter of business judgment, not tax direction. On that basis, the order under section 23A was not justified and the issue was resolved in favour of the assessee.

---

---

Issues: Whether, on the facts and circumstances of the case, an order under section 23A of the Indian Income-tax Act could be sustained having regard to the company's commercial profits, tax liability, and losses of earlier years.

Analysis: The relevant enquiry under section 23A was whether, from the standpoint of a prudent businessman, it would have been reasonable to declare a larger dividend than the one declared, after taking into account the commercial profits actually available for distribution. In computing distributable profits, the approximate tax liability on the commercial profits had to be deducted, and the losses incurred in earlier years also had to be considered as required by the section. The Tribunal's approach in ignoring the earlier loss because reserves existed was not accepted, since the manner in which a businessman chooses to adjust losses against current profits or reserves is a matter for business judgment and not for direction by the tax authorities.

Conclusion: The order under section 23A was not justified and the question was answered in favour of the assessee.

---