Commercial profit adjustments counted in surplus computation for undistributed income rules where accounts did not reflect true profits.

Additions made to assess true commercial profits under the proviso to section 13 of the 1922 Act and section 145 of the 1961 Act were treated as part of the profits relevant for applying section 23A of the 1922 Act and section 104 of the 1961 Act. Where the assessee's accounting method did not reflect true commercial profits, and the assessed figures were not shown to be artificial or unsupported, the corrected assessed income could be considered in determining whether there was a distributable surplus. On that basis, the added sums were not excluded from the statutory surplus computation, and the issue was decided for the revenue.

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Issues: Whether amounts added to the assessed income by applying the proviso to section 13 of the Indian Income-tax Act, 1922, and section 145 of the Income-tax Act, 1961, were to be excluded while determining the applicability of section 23A of the 1922 Act and section 104 of the 1961 Act.

Analysis: The reference was confined to the limited question whether the additions made to reach the true commercial profits could be left out in computing the surplus relevant for application of the statutory provisions dealing with accumulated profits and super-tax on undistributed income. The assessed figures were not shown to be artificial, fictional, or otherwise unsupported; rather, the additions were made because the assessee's method of accounting did not reflect the true commercial profits. In that situation, and in the absence of any other material, the assessed income as corrected for commercial profit could properly be taken into account for deciding whether the company had distributable surplus.

Conclusion: The sums of Rs. 7,500 and Rs. 9,000 were not required to be excluded, and the question was answered against the assessee and in favour of the revenue.

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