Commercial profits under section 23A must reflect bona fide accounts, not substituted assessment depreciation.

For section 23A of the Income-tax Act, 1922, commercial profits must be judged on bona fide business principles, and a company's balance-sheet is only prima facie evidence of its financial position when dividend is declared. Where depreciation has been charged in the accounts on bona fide commercial principles and there is no finding of inflation, deflation, mistake, or manipulation, the taxing authority cannot replace that figure with assessment depreciation merely because the tax records show a different written-down value. The book profits therefore could not be enhanced by adding back the difference in depreciation, and the issue was answered in the negative.

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Issues: Whether, for the purpose of section 23A of the Income-tax Act, 1922, the book profits of a company could be enhanced by adding back the difference between the depreciation actually charged in the accounts and the depreciation allowed in assessment.

Analysis: The applicable test under section 23A is whether the dividend declared was unreasonable having regard to commercial profits judged from a businessman's standpoint. The company's balance-sheet is not conclusive, but it is prima facie evidence of the financial position when the dividend was declared. Where depreciation has been charged in the accounts on bona fide commercial principles and there is no finding of inflation, deflation, mistake, or manipulation in the books, the taxing authorities cannot substitute assessment depreciation merely because the income-tax records show a different written down value. Enhancing available profits by the difference in depreciation would distort commercial profits when the accounts themselves reflect normal and bona fide depreciation.

Conclusion: The book profit was not liable to be enhanced by the difference between the depreciation actually charged and the depreciation allowed in assessment, and the question was answered in the negative.

Ratio Decidendi: For section 23A purposes, commercial profits must be determined on bona fide commercial principles and cannot be increased by substituting assessment depreciation for depreciation properly charged in the company's accounts absent proof of manipulation or error.

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