Commercial profits under dividend restriction rules must be judged on commercial principles, not inflated by assessment fictions.

Section 23A of the Indian Income-tax Act, 1922 requires the test of "smallness of profits" to be applied on commercial principles, not by treating assessable income as identical to commercial profit. Although the excess realised on sale of machinery could be brought to tax through statutory fiction under the assessment provisions, that fiction did not alter its real character for the separate enquiry into whether a larger dividend would be unreasonable. Amounts deemed income for assessment purposes were therefore not automatically includible in commercial profits for section 23A. The excess on sale of machinery was excluded from commercial profits, and the question was answered in favour of the assessee.

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Issues: Whether the amount realised on sale of machinery in excess of its written down value was to be treated as commercial profit for deciding, under section 23A of the Indian Income-tax Act, 1922, whether payment of a larger dividend than that declared would be unreasonable.

Analysis: The statutory scheme under section 23A requires the Income-tax Officer to consider, apart from the statutory percentage of assessable income distributed, whether a larger dividend would be unreasonable having regard to the smallness of the profits made. The expression used is "smallness of profits" and not "smallness of assessable income". The computation of assessable income under section 10, including the fiction created by the second proviso to section 10(2)(vii) and the inclusive definition in section 2(6C), may treat the excess realised on sale of machinery as taxable income, but that fiction does not alter its real character for the purpose of commercial accounting. What is not in truth business profit cannot be elevated into commercial profit merely because it is deemed to be income for assessment purposes. The test under section 23A is to be applied on commercial principles.

Conclusion: The amount of Rs. 15,608 was not liable to be included in the company's commercial profits for the purpose of section 23A, and the question was answered in favour of the assessee.

Final Conclusion: The statutory fiction governing assessment could not control the distinct enquiry under section 23A into whether the profits were too small to justify a larger dividend, so the assessment-based excess on sale of machinery was excluded from commercial profits.

Ratio Decidendi: For the purpose of section 23A, the words "smallness of profits" refer to commercial profits determined on commercial principles, and not to assessable income enlarged by statutory fictions.

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