Deemed dividend computation must use assessable income, while commercial profits matter only for the reasonableness inquiry.

In proceedings on deemed dividend under the Income-tax Act, 1922, the statutory minimum had to be tested by reference to assessable income reduced by tax, not commercial profits. Commercial profits became relevant only at the later stage when the authority considered whether a larger distribution was unreasonable having regard to earlier losses or the smallness of profits. The Tribunal was wrong to mix these distinct inquiries while computing the dividend percentage. The order was not vitiated merely because no notice under the second proviso had been issued, and the assessee's challenge failed.

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Issues: Whether, in proceedings under section 23A(1) of the Income-tax Act, 1922, the Income-tax Officer was required to consider commercial profits when determining if the declared dividend fell below the statutory minimum, and whether failure to issue notice under the second proviso vitiated the order despite the dividend having fallen below the prescribed percentage of assessable income.

Analysis: The statutory test under section 23A(1) turns on assessable income reduced by tax, not on commercial profits. Commercial profit becomes relevant only at the later stage when the authority considers whether, having regard to earlier losses or the smallness of profits, payment of a larger dividend would be unreasonable. The Tribunal erred in mixing the two concepts while computing the percentage of distributable dividend. However, the matter of reasonableness of further distribution remained open for lawful reconsideration on the correct statutory basis.

Conclusion: The Tribunal was not justified in holding the order under section 23A(1) to be vitiated merely because no notice under the second proviso had been issued, and the reference was answered against the assessee.

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