Commercial profits test excludes notional tax income from section 23A dividend calculations.

For section 23A of the Income-tax Act, 1922, only the company's real commercial profits of the relevant accounting year could be considered for dividend-distribution purposes. Excess realised on the sale of a depreciated asset, though taxable as income under the deeming provisions of section 10(2)(vii) and section 2(6C), was not an actual profit shown in the profit and loss account and remained notional income for tax purposes. It could not be treated as part of the company's actual commercial profits merely because depreciation had earlier been allowed. The issue was answered in the negative, in favour of the assessee.

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Issues: Whether, for the purpose of section 23A of the Income-tax Act, 1922, the excess realised on sale of a depreciated asset, though assessable as income under the second proviso to section 10(2)(vii) and section 2(6C), could be treated as part of the company's actual commercial profits of the relevant year.

Analysis: The statutory power under section 23A depends on the company's actual profits, judged on commercial principles, and not merely on assessable income. The amount realised over written down value was taxable only because the Act treated it as income by an inclusive and notional definition. Such a sum did not appear in the profit and loss account as commercial profit and could not be converted into actual profit merely because depreciation had earlier been allowed. The excess represented notional income for tax purposes, while section 23A required consideration only of the profits of the year of account, not past reserves or accumulated depreciation adjustments.

Conclusion: The excess realised on sale of the machinery could not be included as actual profits for section 23A purposes; the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: For section 23A, only real commercial profits of the relevant accounting year are to be considered, and a sum deemed to be income for taxation under a notional provision does not become an actual profit for dividend-distribution purposes.

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