Realised capital gains may count as distributable profits under section 23A unless company rules or capital impairment prohibit dividend.

Realised capital gains from the sale of capital assets may be treated as commercial profits available for dividend under section 23A of the Indian Income-tax Act, 1922, unless the company's memorandum or articles prohibit such distribution or payment would impair paid-up capital. The test is commercial principles read with the company's constitution, and realised accretions are not excluded from distributable profits merely because they arose from capital assets. On the stated facts, there was no constitutional bar and dividend declaration would not reduce capital, so the realised gain counted as profit for assessing whether non-declaration of dividend was justified.

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Issues: Whether section 23A of the Indian Income-tax Act, 1922 applied to the assessee company where the amount available for distribution included realised capital gains from sale of shares, and whether such gains could be treated as profits available for dividend in the absence of any prohibitory provision in the company's constitution.

Analysis: The availability of dividend has to be tested on commercial principles and in the light of the company's constitution. Realised accretions to capital assets are not, by that reason alone, excluded from distributable profits. They may be treated as profits available for dividend unless the memorandum or articles prohibit such distribution or the payment would reduce paid-up capital. On the facts, there was no constitutional prohibition against distribution of the realised gain, and the balance-sheet showed that declaration of dividend would not eat into capital. The realised gain was therefore a real profit and not merely a notional or capital return. For section 23A, such realised capital gains could be taken into account in judging whether the profits were small enough to justify non-declaration of dividend.

Conclusion: Section 23A was applicable to the assessee company, and the non-declaration of dividend was not justified on the ground that the realised capital gain was outside commercial profits.

Final Conclusion: The reference was answered against the assessee, and the additional super-tax order under section 23A was sustained.

Ratio Decidendi: Realised capital gains from the sale of capital assets form part of commercial profits for section 23A purposes unless the company's constitution prohibits their distribution or the payment would impair paid-up capital.

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