Correct tax liability must reflect only additions finally sustained before testing distributable surplus under Section 23A.

The computation of tax liability under Section 23A had to be made on the income finally upheld, not on an addition later reduced on appeal. Because only part of the alleged undisclosed loans survived and the balance was deleted, the Tribunal's assumption that the entire addition remained was incorrect. The distributable surplus and the validity of the Section 23A order could be examined only after applying the correct tax liability. The Tribunal was therefore directed to reconsider the matter on that basis.

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Issues: Whether the order under Section 23A of the Income-tax Act, 1922, was justified in law in view of the correct tax liability arising after deletion of part of the addition made from undisclosed sources.

Analysis: The Tribunal had proceeded on a tax liability calculated on the footing that the entire addition of Rs. 80,000 from undisclosed sources survived. The Court held that this was not the correct basis because only Rs. 40,000 of the alleged loans had been sustained, while the remaining Rs. 40,000 had been deleted. The computation of tax liability had therefore to be made on the income as finally upheld, and only thereafter could the question of distributable surplus and the validity of the order under Section 23A be determined.

Conclusion: The matter required reconsideration by the Tribunal on the basis of the correct tax liability.

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