Prudent businessman test for dividend reasonableness under section 23A defeated the Revenue's challenge to the company's distribution.

Whether dividend distribution was unreasonable under section 23A depended on a mixed question of law and fact, not a pure factual inquiry, because the statutory test had to be applied to the company's financial position. The proper approach was to assess reasonableness from the standpoint of a prudent businessman, having regard to prior losses, commercial profits available for distribution, and the business needs of the company. On the facts stated, the dividend already declared was a substantial part of the commercial profits and the company could not in any event have distributed the statutory percentage from those profits. The declaration of dividend was therefore not unreasonable and section 23A did not apply.

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Issues: Whether, on the facts and in the circumstances of the case, the declaration of Rs. 12,000 as dividend was unreasonable so as to justify application of section 23A of the Indian Income-tax Act, 1922.

Analysis: The basic figures were not in dispute: the assessed income, tax payable, carried-forward losses, and the resulting commercial profits available for distribution. The question whether a larger dividend should have been declared under section 23A was not a pure question of fact, but a mixed question of law and fact, because it required application of the statutory standard of reasonableness to the established financial facts. The proper approach was to consider the matter from the standpoint of a prudent businessman, taking account of prior losses, present commercial profits, and the business needs of the company. On the facts, the dividend already declared represented a substantial portion of the commercial profits, and the company could not have distributed the statutory percentage out of commercial profits in any event.

Conclusion: The declaration of Rs. 12,000 as dividend was not unreasonable, and section 23A was not properly applicable. The answer to the referred question was therefore against the Revenue and in favour of the assessee.

Ratio Decidendi: In applying section 23A, the Income-tax Officer must judge the reasonableness of dividend distribution on business considerations from the standpoint of a prudent businessman, and the resulting conclusion is a mixed question of law and fact.

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