Commercial profits from estimated assessments can support section 23A where the estimate excludes artificial or notional income.

Estimated profits based on defective books may be treated as real commercial profits for applying section 23A of the Indian Income-tax Act, 1922, so long as the estimate does not introduce artificial or notional income. The assessee's objection that no dividend could be declared under its books, or that profits arose only on completion of contracts, did not defeat section 23A because those accounting questions belonged to the assessment proceedings, not the limited enquiry under section 23A. The court distinguished authorities involving notional additions and held that they did not apply on the facts found. Section 23A was therefore correctly applied in favour of the revenue.

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Issues: Whether section 23A of the Indian Income-tax Act, 1922 was rightly applied on the basis of the assessed profits determined by estimate under the proviso to section 13, and whether the assessee could resist such application on the ground that no dividend could be declared according to its books or that profits arose only on completion of the contracts.

Analysis: The assessment year was not under challenge in this reference, and the enquiry was confined to the application of section 23A. Where the books were defective and the income-tax authorities estimated profits on materials available without introducing any artificial, notional or fictional income, the assessed profits could be treated as real or commercial profits for the purpose of determining distributable surplus. The contention based on the completed contract method did not affect the limited question under section 23A, because the correctness of the accounting method belonged to the assessment proceedings and not to the proceeding under section 23A. The court distinguished cases where assessable income included notional additions and held that those principles did not assist the assessee on the facts found here.

Conclusion: Section 23A was correctly applied. The question was answered in the affirmative, in favour of the revenue and against the assessee.

Ratio Decidendi: For the purpose of section 23A, estimated profits based on defective books may be treated as commercial profits if the estimate does not include artificial or notional income.

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