Commercial profit: statutorily deemed sale gains do not qualify as actual commercial profits when assessing distributable profits.

An amount treated as income under the second proviso to clause (vii) of section 10 for excess of sale proceeds over written down value is a statutory or notional assessable item and does not constitute "actual" or "commercial" profits for assessing distributable profits under section 23A. The statutory deeming in section 2(6C) produces assessability but does not convert notional gains into commercial profit; depreciation reflects past profit allocation. The income-tax officer must assess commercial net profits as shown in the profit and loss account, subject to permissible adjustments, excluding purely notional statutory inclusions.

---

---

Issues: Whether an amount included as assessable income under the second proviso to clause (vii) of section 10 and ascribed to sale proceeds in excess of written down value (a notional or artificial profit) constitutes "actual" or "commercial" profits for the purposes of section 23A of the Income-tax Act, 1922.

Analysis: Section 2(6C) of the Income-tax Act, 1922 inclusively treats sums deemed to be profits under the second proviso to section 10(2)(vii) as income for tax purposes, producing an assessable but not necessarily a commercial profit. Section 23A requires the Income-tax Officer to judge the reasonableness of declared dividends with reference to actual or commercial profits of the relevant year, not to assessable or notional items brought into income solely by statutory deeming. Depreciation charged to profit and loss accounts represents allocation of past profits to reserves; an excess realised on sale over written down value is a notional statutory income which may be taxed but does not, from a commercial point of view, constitute the year's actual profit. The fact that depreciation was allowed in the relevant year does not convert a statutory notional profit into actual profit for section 23A purposes; the officer must consider the profit as shown in the profit and loss account subject to permissible adjustments, excluding notional assessable items treated as income only by statute.

Conclusion: The amount realised in excess of written down value and included in assessable income under the second proviso to section 10(2)(vii) is not to be treated as "actual" or "commercial" profits for the purposes of section 23A of the Income-tax Act, 1922; the Income-tax Officer must consider the commercial net profits as shown in the profit and loss account (subject to proper adjustments) when exercising powers under section 23A.

---