Commercial profits and business necessity governed dividend liability under section 23A(1), so deemed distribution was not justified.

Liability under section 23A(1) depends on whether, on commercial principles, it was unreasonable to expect dividend distribution having regard to the company's actual profits, accumulated losses, and business needs. Here, substantial brought-forward losses and the replacement of five buses at necessary cost to preserve the transport undertaking and its permits showed that the year's profits were not realistically available for dividends. The deemed-distribution order could not therefore be sustained, and liability under section 23A(1) was held not to arise.

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Issues: Whether, on the facts and in the circumstances of the case, the assessee was liable under section 23A(1) of the Indian Income-tax Act, 1922, for the assessment year 1958-59.

Analysis: The commercial or accounting profits are to be computed on commercial principles, and the question whether a dividend should reasonably have been declared depends on the smallness of such profits and the surrounding business circumstances. The company had substantial brought-forward losses, had replaced five buses at considerable cost to maintain its transport business, and the replacement was found necessary to avoid adverse effects on its permits and continuity of operations. In these circumstances, the profits of the year could not reasonably be regarded as available for dividend distribution, and the order treating the assessee as liable under section 23A(1) could not be sustained.

Conclusion: The liability under section 23A(1) was not attracted and the answer was in the negative, against the Revenue and in favour of the assessee.

Ratio Decidendi: In determining liability under section 23A(1), the relevant test is whether, on commercial principles, it would be unreasonable to expect dividend distribution having regard to the company's commercial profits, accumulated losses, and the necessity of preserving the profit-making apparatus of the business.

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