Commercial profits for dividend test must follow actual book profits, not artificial assessable income under section 23A.

Section 23A turns on a company's real commercial profits shown in its books, not on assessable income computed by artificial tax adjustments. Where earlier dividends had been declared under mercantile accounting and the amount had already been reflected in shareholders' accounts, a later change in accounting method and consequent tax assessment did not convert that sum into fresh distributable profit. The test of smallness of profits had to be applied to actual business profits, and the amount of Rs. 3,30,915 was therefore not available for dividend distribution. The Tribunal was correct in treating the figure as outside commercial profits for section 23A purposes.

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Issues: Whether the sum of Rs. 3,30,915, brought into assessment as accrued finance charges after a change in the method of accounting, could be treated as commercial profits available for dividend distribution for the purposes of section 23A of the Indian Income-tax Act, 1922.

Analysis: The relevant enquiry under section 23A is directed to the company's real commercial profits and not to its assessable income computed on artificial tax rules. Where earlier dividends were declared on the basis of mercantile accounting and the amount in question had already been reflected in the shareholders' accounts, it could not be treated as fresh commercial profit merely because it was later brought to tax on an accrual basis after a change in the accounting method. The distinction between accounting profits and assessable profits is material, and the test of smallness of profits must be applied to the actual business profits shown in the accounts.

Conclusion: The sum of Rs. 3,30,915 was not available as commercial profits for dividend distribution under section 23A, and the Tribunal was correct in so holding.

Final Conclusion: The reference was answered by holding that the Tribunal's view was correct on the substantive tax question, with the company's true commercial profits being determined from its accounts and not from the artificial assessable figure.

Ratio Decidendi: For the purpose of section 23A, the statutory test is the smallness of actual commercial or accounting profits as reflected in the company's books, not the larger assessable income resulting from notional tax adjustments or a later change in accounting method.

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