Commercial profit for dividend purposes may include disallowed expenditure where it reflects inflated claims or suppressed income.

For section 23A(1) purposes, the relevant figure is the real commercial or accounting profit, not merely the assessed profit or book profit. Disallowances may be added back where they represent suppressed income or inflated expenditure, because such amounts do not lose their commercial character by reason of accounting treatment. On the facts, the disallowed spare parts and maintenance claim was treated as an excess and inadequately supported expenditure claim, so it could be brought back into the profit computation for dividend purposes.

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Issues: Whether, for applying section 23A(1) of the Indian Income-tax Act, 1922, the disallowance of expenditure relating to spare parts and maintenance could be added back to the book profits while determining the commercial profits available for dividend.

Analysis: The governing test under section 23A(1) is the real commercial or accounting profit, not merely the book profits or assessed profits. Additions made in assessment may be taken into account where they represent suppressed income or inflated expenditure, because such sums do not stand excluded from the real commercial profits merely by reason of accounting treatment. On the facts, the disallowed amount of Rs. 56,350 was found to represent an excess claim for spare parts and maintenance, based on inadequate stock records and a conclusion that the expenditure claimed exceeded the amount actually spent. The disallowance was therefore treated as an inflation of expenditure and not as an item incapable of being considered in determining distributable commercial profits.

Conclusion: The addition of Rs. 56,350 to the book profits was justified, and section 23A(1) was attracted. The answer was against the assessee and in favour of the Revenue.

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