Commercial profits under section 23A may exclude bona fide litigation compromise payments with a business connection.

For section 23A, commercial profits must be assessed on a business basis, not merely by reference to assessable income. A genuine payment actually made out of company funds may be deducted if it has a business connection, even if it is not allowable in income-tax computation. Here, a sum paid under a bona fide compromise of protracted litigation was treated as an actual and genuine outgoing made to remove a disturbing business element, so it reduced the profits available for distribution and was deductible for section 23A purposes.

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Issues: Whether, for the purpose of section 23A, the sum of Rs. 50,000 paid under a compromise of pending litigation could be deducted in computing the commercial profits and the availability of profits for distribution.

Analysis: Section 23A applies only where the statutory conditions are satisfied and the question of smallness of profits must be judged on commercial profits, not merely on assessable income. A genuine payment actually made out of the company's funds may be taken into account in ascertaining commercial profits if it has a business connection. On the facts found, the payment was made pursuant to a bona fide compromise in protracted litigation and was treated as an actual and genuine outgoing. The finding that it was made to get rid of a disturbing element supported its business character, and the mere fact that the amount was not allowable in income-tax assessment did not prevent its deduction for section 23A purposes.

Conclusion: The sum of Rs. 50,000 was deductible in computing the profits for section 23A, and the answer was in favour of the assessee.

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