Prior-year losses remain relevant in dividend reasonableness under section 23A even after capital reconstruction.

Prior-year losses remained relevant in assessing the applicability of section 23A(1) of the Income-tax Act, even after they had been adjusted against paid-up capital through reconstruction. The court held that such losses continued to affect the company's financial position and its capacity to distribute dividends, so the proper test was whether any failure to declare a larger dividend was unreasonable in light of those losses and the weakened capital structure. Accordingly, the earlier losses had to be considered when judging the reasonableness of the dividend declared.

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Issues: Whether losses incurred by the company prior to reconstruction of its capital could be taken into account while considering the applicability of section 23A(1) of the Income-tax Act.

Analysis: The expression "losses incurred by the company in earlier years" in section 23A is relevant to the enquiry whether it was unreasonable for the company to declare a larger dividend. Losses do not lose all significance merely because they have been adjusted against paid-up capital by reconstruction; such losses may still affect the company's financial position and its ability to distribute dividends in later years. The test is not whether the company could have declared a dividend, but whether failure to do so was unreasonable in the light of its prior losses and resulting weakened capital structure.

Conclusion: The prior losses remained relevant for the purpose of section 23A(1) and had to be considered in judging the reasonableness of the dividend declared.

Ratio Decidendi: Losses incurred in earlier years remain relevant under section 23A(1) even after they have been adjusted against capital, because they continue to bear upon the reasonableness of dividend distribution in subsequent years.

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