Dividend distribution reasonableness under section 23A must be judged on current year profits, not accumulated prior-year reserves.

For section 23A, the reasonableness of dividend distribution is assessed by reference to the commercial profits of the relevant previous year, not by adding accumulated profits brought forward from earlier years; earlier undistributed profits could not be treated as part of the statutory inquiry, and the subsidiary-liquidator receipt did not alter that position. For a company whose business consisted wholly or mainly in holding investments, the applicable statutory percentage under section 23A was 90%, not 65%. The principal controversy was resolved in favour of the assessee, while the percentage question was decided in favour of the revenue.

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Issues: (i) Whether, for applying section 23A, the reasonableness of dividend distribution had to be judged with reference only to the profits of the relevant previous year or also to accumulated profits brought forward from earlier years; (ii) whether the statutory percentage applicable to a company whose business consisted wholly or mainly in holding investments was 90% and not 65%.

Issue (i): Whether, for applying section 23A, the reasonableness of dividend distribution had to be judged with reference only to the profits of the relevant previous year or also to accumulated profits brought forward from earlier years.

Analysis: The language of section 23A required consideration of losses in earlier years and the smallness of profits made in the previous year. The statutory inquiry was directed to the commercial profits of the relevant year, not to accumulated profits or reserves brought forward from prior years. The Court applied the principle that the test of unreasonableness must be judged in the light of the profits of the year in question and held that earlier years' undistributed profits could not be added into the inquiry. The receipt from the subsidiary's liquidator was also treated as not warranting an expectation that it should have been distributed as dividend.

Conclusion: The issue was answered in favour of the assessee; the distribution had to be judged on the current year's profits and not on accumulated profits of earlier years.

Issue (ii): Whether the statutory percentage applicable to a company whose business consisted wholly or mainly in holding investments was 90% and not 65%.

Analysis: The answer followed the Court's earlier binding decision on the assessee's character as a company whose business consisted wholly or mainly in holding investments. On that basis, the statutory percentage under section 23A applicable to such a company was 90%.

Conclusion: The issue was answered in favour of the revenue; the applicable statutory percentage was 90% and not 65%.

Final Conclusion: The reference was disposed of with the principal controversy under section 23A decided in favour of the assessee, while the statutory-percentage question was decided in favour of the revenue.

Ratio Decidendi: For the purposes of section 23A, the reasonableness of dividend distribution is to be determined by reference to the commercial profits of the relevant previous year and not by adding accumulated profits brought forward from earlier years.

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