Distributable surplus test under section 23A: no dividend duty where losses and tax liabilities leave no real surplus.

Where a company's accepted figures, after accounting for carried-forward losses and outstanding tax liability, left no distributable surplus, it was justified in not declaring a dividend. On that basis, the commercial profits question under section 23A of the Indian Income-tax Act, 1922, did not arise separately, because the company could not be treated as having profits available for distribution. The section therefore did not support levy of super-tax on the facts. The decisive inquiry is whether any real surplus remained for dividend distribution after allowing for losses and tax liabilities; if none remained, section 23A is not attracted.

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Issues: (i) Whether the assessee-company was justified in not declaring dividend having regard to its past losses, tax liability and the smallness of profits; (ii) whether section 23A of the Indian Income-tax Act, 1922, applied on the facts for the assessment years in question.

Issue (i): Whether the assessee-company was justified in not declaring dividend having regard to its past losses, tax liability and the smallness of profits.

Analysis: The assessed figures, after taking into account the losses brought forward and the outstanding tax liability, showed that nothing remained available for distribution as dividend. The figures found by the Tribunal were treated as final, and on that basis there was no surplus from which a dividend could reasonably be declared.

Conclusion: Yes. The assessee-company was justified in not declaring dividend, and this conclusion is in favour of the assessee.

Issue (ii): Whether section 23A of the Indian Income-tax Act, 1922, applied on the facts for the assessment years in question.

Analysis: Once the absence of distributable surplus was established on the accepted figures, the question whether the additions made under the proviso to section 13 constituted commercial profits did not require a separate decision. The applicability of section 23A became purely consequential, because the company could not be said to have had profits available for dividend distribution.

Conclusion: On the facts, section 23A did not justify the levy of super-tax, and the answer to the issue is in favour of the assessee.

Final Conclusion: The reference was answered for the assessee on the decisive issue of absence of surplus and distributable profits, and the consequential question was also answered in the assessee's favour.

Ratio Decidendi: For the purposes of section 23A, the relevant inquiry is whether, on the accepted commercial results and after allowing for losses and tax liabilities, any real surplus was available for dividend distribution; if none remained, action under section 23A is not warranted.

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