Commercial profits determination requires assessment of true nature of receipts, allowing adjustments to book profit; dividend feasibility considered.

Commercial profits must be determined by reference to the true nature of receipts and outgoings rather than being confined to the assessee's profit and loss account; adjustments to book profit are permissible to arrive at true commercial profit, and capital loss is not deductible from commercial profit though it is a relevant factor when assessing feasibility of declaring a larger dividend. Considering reserves, cash and bank balances and overall financial soundness is proper when testing feasibility under the statutory provision. Applying these principles the invocation of the provision was held justified in favour of revenue.

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Issues: Whether, on the facts and in the circumstances of the case, the application of the provisions of section 23A of the Income-tax Act was justified and in accordance with law.

Analysis: The Court examined whether the assessment of commercial profits for the purposes of section 23A must be confined strictly to the book profit shown in the profit and loss account or whether adjustments are permissible to arrive at true commercial profits. The Court affirmed that commercial profits are to be determined with reference to the true nature of receipts and outgoings and are not conclusively determined by the assessee's method of preparing the profit and loss account. The Tribunal had computed commercial profit by adding back amounts disallowed in assessment and by excluding capital loss from reduction of commercial profit; the capital loss, though not deductible from commercial profit, remains a relevant factor when considering the feasibility of declaring a larger dividend. The Tribunal also considered the company's reserves, cash and bank balances and overall sound financial position when assessing feasibility, and the Court found those considerations relevant and properly applied.

Conclusion: The invocation of section 23A was justified; the Tribunal's approach to compute commercial profits (excluding capital loss from reduction of commercial profit) and to consider capital loss together with reserves and cash position for feasibility was correct. The decision is against the assessee and in favour of the revenue.

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