Reasonable dividend distribution must account for statutory reserve compliance before assessing whether a larger dividend could have been paid.

Reasonable dividend distribution under section 104 of the Income-tax Act had to be assessed with reference to the company's statutory obligation to create reserve under section 205A of the Companies Act. The Tribunal had not examined the accounts to verify whether the reserve was in fact created, or whether sufficient funds still remained after such compliance to support a larger dividend. Because the lower authorities proceeded on the assumption that a higher dividend could still have been distributed, the matter was remanded to the Tribunal for fresh examination of the accounts and reconsideration of the dividend question.

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Issues: Whether, in determining liability under section 104 of the Income-tax Act, 1961, the Tribunal was required to consider the assessee-company's statutory obligation to create reserve under section 205A of the Companies Act, 1956, and whether, after such compliance, a larger dividend could reasonably have been distributed.

Analysis: The question of reasonable distribution of dividend had to be assessed in the light of the company's legal obligations under the Companies Act, 1956. The Tribunal had not examined the accounts to ascertain whether a statutory reserve had in fact been created, nor whether, after making such reserve, sufficient funds still remained to enable distribution of the requisite percentage of dividend. Since the lower authorities had proceeded on the footing that larger dividend could still have been distributed, the matter required reconsideration on the actual accounts and statutory compliance.

Conclusion: The matter was remanded to the Tribunal for fresh examination of the accounts and for a reconsideration of whether, after creation of the statutory reserve, the company could reasonably have distributed a larger dividend.

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