Commercial profits, not assessable profits, govern deemed dividend action under section 23A(1).

Section 23A(1) turned on the smallness of commercial profits, not assessable profits. The Income-tax Officer had to assess the company's position as a prudent director would, considering actual accounting profits, past losses, surplus funds and future needs, before treating a dividend as unreasonable. Where the company's books, depreciation basis, directors' approval and auditors' acceptance supported the commercial accounts, a different depreciation figure used in tax assessment did not by itself justify invoking the provision. An order for deemed dividend could not be sustained solely on the assessment computation, and the revenue's approach was rejected.

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Issues: Whether, for invoking section 23A(1) of the Indian Income-tax Act, 1922, the Income-tax Officer could proceed solely on the basis of assessed profits after disallowing depreciation claimed in the books, notwithstanding the company's commercial accounts and the basis on which depreciation had been charged.

Analysis: The governing test under section 23A(1) is the smallness of commercial profits, not assessable profits. The Income-tax Officer must place himself in the position of the directors and determine whether a larger dividend would have been unreasonable on business considerations, taking into account actual accounting profits, prior losses, present profits, surplus funds, and future requirements. Where the company had entered the assets at a particular value in its books, had charged depreciation on that basis, and the accounts had been accepted by the directors and auditors, the mere fact that a different depreciation figure was adopted in assessment proceedings did not justify treating the company as having failed to declare adequate dividend. The tribunal's finding that the proper value of the assets was not free from doubt supported the view that the commercial accounts could not be displaced for the purpose of section 23A(1) merely by the assessment computation.

Conclusion: The order under section 23A(1) could not validly rest only on the assessed income basis, and the question was answered in the negative, against the revenue and in favour of the assessee.

Final Conclusion: The reference failed for the revenue because the tribunal was justified in holding that section 23A(1) was wrongly applied on the basis adopted by the Income-tax Officer.

Ratio Decidendi: For section 23A(1), the decisive inquiry is the company's commercial profits judged on business principles, and not the assessable profits arrived at by disallowing items in tax assessment; an order for deemed dividend cannot be sustained where it is founded solely on the assessment computation rather than on the true commercial position.

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