Commercial profits test under section 23A excludes notional income deemed taxable under section 42(2) for dividend assessment.

Income deemed assessable under section 42(2) of the Income-tax Act, 1922 was treated as part of total income for the initial threshold under section 23A, but it could not be counted as profits for the later commercial test of whether declaring a larger dividend would be unreasonable. The Bombay HC noted that section 23A distinguishes between assessable income and actual commercial profits, and a deeming fiction created for taxation does not convert notional income into distributable profits. Section 23A(5) did not change that position. Accordingly, notional income under section 42(2) was excluded from the profits relevant to the dividend-distribution inquiry under section 23A.

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Issues: Whether income deemed assessable under section 42(2) of the Income-tax Act, 1922 forms part of the "profits" to be considered for making an order under section 23A of the Income-tax Act, 1922, so as to justify the conclusion that the company had unreasonable smallness of profits for dividend declaration.

Analysis: Section 23A uses two distinct expressions. For the initial condition, the Income-tax Officer must look to the assessee's total income, and notional income assessable to tax is included in that computation. But for the further inquiry whether the profits were so small that declaring a larger dividend would be unreasonable, the statute requires consideration of actual commercial profits, not merely assessable income. Income deemed under section 42(2) is a legal fiction created for taxation and does not represent profits actually earned by the company from a commercial standpoint. Such notional income, though taxable and part of total income, cannot be treated as profits capable of distribution as dividend for the purpose of the second part of section 23A. Section 23A(5) did not alter that position, as it dealt only with total income and not with the commercial profits test under the latter part of section 23A(1).

Conclusion: The notional income under section 42(2) could not be included in the profits relevant to section 23A, and the order under section 23A was not justified.

Ratio Decidendi: For the purpose of the dividend-distribution test under section 23A, the Income-tax Officer must consider actual commercial profits and not notional income assessable under a deeming provision.

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