Commercial profits for dividend purposes must exclude paid tax liabilities under appeal when assessing distributable surplus.

Arrear income-tax liabilities paid under subsisting assessment orders, though the assessments were still under appeal, had to be deducted when computing commercial profits and distributable surplus under section 23A of the Indian Income-tax Act, 1922. Taxes lawfully paid had gone out of the company's till and were not available for distribution as dividend. The relevant inquiry was the company's financial position within twelve months after the close of the previous year. On that basis, it was reasonable to hold that no dividend need be distributed, and the section 23A order was set aside.

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Issues: Whether, for the purpose of section 23A of the Indian Income-tax Act, 1922, arrear income-tax liabilities paid pursuant to subsisting assessment orders but pending appeal were to be deducted in computing commercial profits and distributable surplus, and whether it was unreasonable to require the company to distribute any dividend for the relevant previous year.

Analysis: Dividend under section 23A is to be judged with reference to the company's commercial profits and the profits actually available for distribution at the relevant time. Taxes lawfully assessed and paid, though the assessments were under appeal and had not yet been varied or set aside, had gone out of the company's till and were not available for distribution as dividend. The relevant point of time was the state of affairs within twelve months after the close of the previous year, and on that basis the arrear tax payment had to be taken into account in computing the true commercial profits.

Conclusion: The Tribunal was right in holding that it would be unreasonable to require the company to distribute any dividend and in setting aside the order under section 23A of the Indian Income-tax Act, 1922.

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