Dividend reasonableness must reflect business realities, and an established capital loss can justify not declaring dividend.

For section 23A(1), reasonableness of dividend policy must be assessed from business reality and the standpoint of prudent directors, not as a narrow tax-collection exercise. An established capital loss from depreciation in share value was a relevant commercial factor because it affected the company's overall financial position, even though the loss was capital in character and recovery might occur later. On that footing, the directors were justified in not declaring dividend, and the section 23A(1) order was unsustainable.

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Issues: Whether, for the purpose of section 23A(1), the assessee-company's capital loss arising from depreciation in the value of shares was a relevant circumstance in deciding whether payment of dividend would be unreasonable.

Analysis: The statutory scheme of section 23A(1) requires the Income-tax Officer to determine reasonableness from the standpoint of business realities and not merely from the standpoint of tax collection. The directors' decision must be judged as that of prudent business persons taking an overall view of the company's financial position. Even though the loss was capital in character, it was a substantial and established loss affecting the company's commercial position. The existence of a possible future recovery in share value did not make it unreasonable for the directors to act on the loss as it stood. The proper enquiry was whether, in the circumstances, a reasonable board would have declared dividend.

Conclusion: The capital loss was a relevant factor, and the directors were justified in not declaring dividend. The section 23A(1) order was not sustainable.

Ratio Decidendi: In applying section 23A(1), all relevant business considerations, including an established capital loss, must be taken into account, and dividend policy must be judged by the standard of a prudent business person on the company's overall financial position.

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