Commercial profits for dividend distribution cannot include unexplained loan credits without independent proof of distributable surplus.

An amount added in assessment merely because the genuineness of loan credits was not proved cannot automatically be treated as commercial profit available for dividend distribution under section 23A(1) of the Indian Income-tax Act, 1922. The relevant test is whether real commercial profits were available after applying ordinary commercial accounting principles, and that requires independent material showing distributable surplus. In the absence of such material, the deemed addition for assessment purposes did not justify including the sum in commercial profits, so section 23A(1) was not attracted.

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Issues: Whether the sum added back on account of unexplained loan credits was required to be included in the computation of commercial profits for the purposes of section 23A(1) of the Indian Income-tax Act, 1922, and whether the provision was attracted.

Analysis: The relevant inquiry under section 23A(1) is whether the company had real commercial profits available for dividend distribution after considering the ordinary commercial principles applicable to accounting profits. An addition made merely because the assessee failed to prove the genuineness of loan transactions does not, by itself, establish that the amount was available in the hands of the company as distributable surplus. In the absence of any further material showing availability of the added amount for distribution, the mere deeming addition for assessment purposes cannot automatically be treated as part of commercial profits for section 23A. Since the only basis for the addition was failure to prove the genuineness of the loans, and no other circumstance showed availability of those sums for dividend, the higher commercial profits alleged by the revenue could not be sustained.

Conclusion: The sum of Rs. 11,725 was rightly excluded from commercial profits, and section 23A(1) of the Indian Income-tax Act, 1922, was not attracted. The answer was in favour of the assessee.

Ratio Decidendi: For the purpose of section 23A(1) of the Indian Income-tax Act, 1922, an amount added back in assessment merely because the genuineness of a loan entry was not proved cannot be treated as commercial profit available for dividend distribution unless there is independent material showing such availability.

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