Declared but unpaid dividends are not commercial profits for section 23A distribution tests

For section 23A of the Indian Income-tax Act, 1922, distributable profits must be determined by reference to actual commercial profits available to the company, not notional or assessable income. A dividend merely declared in favour of the assessee, but not actually paid, credited, or distributed, does not become part of commercial profits for this purpose. The mercantile system may govern income computation, but it does not convert a declared dividend into a real profit available for distribution. The analysis applies the prudent businessman test and treats only money actually reaching the company as relevant to the profit base.

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Issues: Whether, for action under section 23A of the Indian Income-tax Act, 1922, dividends merely declared in favour of the assessee but not actually paid, credited, or distributed could be included in the company's commercial profits for determining the applicability of the provision.

Analysis: The relevant inquiry under section 23A is the existence of commercial or accounting profits, not assessable income computed on notional or artificial bases. The mercantile system of accounting may govern assessment of income-tax, but it does not convert a dividend that has only been declared into an actual commercial profit available for distribution. The statutory scheme, including section 16(2), treats dividend income as arising only when it is paid, credited, or distributed or deemed so to be, and the settled law requires section 23A to be applied from the standpoint of a prudent businessman, looking to the real profits available at the date of distribution. On that approach, money never actually reaching the company cannot be treated as part of distributable commercial profits merely because it was declared in its favour.

Conclusion: The declared but unpaid dividend could not be taken into account as commercial profit for the purpose of section 23A, and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: For section 23A, distributable profits must be determined on the basis of actual commercial profits available to the company, and not on the basis of notional receipts or assessable income derived from mere declaration of dividend.

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