Unexplained income is not automatically distributable profit, and section 104 super-tax fails without proof of commercial surplus.

An addition sustained as unexplained or undisclosed income does not, by itself, become commercial profit available for dividend distribution. For additional super-tax under section 104 of the Income-tax Act, 1961, the Revenue had to prove on the facts that the amount formed part of the company's commercial profits and distributable surplus. Because no independent material showed that the addition represented income capable of distribution as dividend, the section 104 charge could not be sustained. The principle applied was that an assessment addition may be valid for tax purposes without automatically creating distributable profits for dividend purposes.

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Issues: Whether an addition sustained as income from undisclosed sources could, without further material, be treated as commercial profits available for distribution as dividend so as to attract additional super-tax under section 104 of the Income-tax Act, 1961.

Analysis: The addition to the assessee's income was made because the alleged loan transactions were not proved to be genuine. The Court applied its earlier decisions holding that such an addition may be valid for assessment purposes, but it does not automatically follow that the amount is part of commercial profits available for distribution. For section 104 to apply, the Revenue had to establish on the facts that the amount added back actually formed part of the company's commercial profits and distributable surplus. In the present case, no independent material had been brought by the Revenue to prove that the addition represented commercial income capable of distribution as dividend.

Conclusion: The question was answered in the affirmative and in favour of the assessee. The additional super-tax under section 104 was not justified.

Ratio Decidendi: An amount added in assessment as unexplained or undisclosed income does not, by that fact alone, become commercial profit available for dividend distribution; the Revenue must prove the existence of distributable surplus before section 104 can be invoked.

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