Notional income excluded from the commercial profits inquiry; it counts for total income but not for dividend-control powers.

Notional income assessable under the Income-tax law is part of a company's assessable total income for the statutory dividend-distribution percentage inquiry, but it does not form part of the company's commercial 'profits' for the separate profits-based inquiry when considering exercise of dividend-control powers; the court applied a commercial viewpoint, treating section-based notional charges as legal fictions that could not have been distributed as dividends and therefore must be excluded from the profits assessment, resulting in the tax officer being required to omit such notional income when deciding whether profits are too small to justify intervention.

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Issues: Whether notional income assessed under section 42(2) of the Income-tax Act, 1922 must be treated as part of the company's "profits" for the second (profits based) limb of section 23A(1) when determining whether the Income-tax Officer may exercise powers under section 23A.

Analysis: Section 23A(1) contains two distinct inquiries: the first part refers to the company's total income (which includes assessable notional income) for determining whether the statutory percentage of dividend has been distributed; the latter part requires the Income-tax Officer to consider losses of earlier years and the company's profits in the accounting year from a commercial viewpoint to decide whether declaring a larger dividend would be reasonable. Income taxed under section 42(2) is a notional legal fiction and, although part of assessable total income for tax purposes, does not represent actual profits earned by the company in a commercial sense and could not have been distributed as dividends. The presence of subsection (5) of section 23A (now repealed) confirms that notional dividends may be treated as part of total income for the first limb but does not enlarge the meaning of "profits" in the latter limb to include notional income. Precedents cited apply the commercial approach and exclude notional income under section 42(2) from the profits inquiry under the second part of section 23A(1).

Conclusion: Notional income assessable under section 42(2) of the Income-tax Act, 1922 is part of total income for the first part of section 23A(1) but does not constitute "profits" for the second part of section 23A(1); accordingly the Income-tax Officer must exclude such notional income when determining whether the company's profits are so small as to justify exercising powers under section 23A. The question referred is answered in the negative in favour of the assessee.

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