Capital losses matter in assessing dividend reasonableness under section 23A; carried-forward losses may be considered.

For section 23A, the Income-tax Officer must assess whether dividend declaration would be unreasonable by considering the smallness of current profits together with losses incurred in earlier years. Established capital losses or other carried-forward non-trading losses are relevant factors in that assessment, and the inquiry is not confined to one isolated consideration. Applying that principle, the Court held that the assessee's outstanding loss could properly be taken into account in judging the reasonableness of declaring dividend, and the issue was answered in favour of the assessee.

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Issues: Whether, for the purposes of section 23A, a capital loss or non-trading loss carried forward from earlier years could be taken into account in judging the smallness of the profits and the reasonableness of declaring dividend.

Analysis: Section 23A required the Income-tax Officer to consider whether, having regard to losses incurred in earlier years and the smallness of the profits made in the previous year, payment of dividend would be unreasonable. The Court accepted that the expression was not confined to one isolated factor and that all relevant matters bearing on unreasonableness had to be considered. Relying on the approval of the Supreme Court of the view that capital losses, if established, were relevant, the Court held that the assessee's outstanding loss could properly be considered in judging whether dividend declaration was unreasonable.

Conclusion: The question was answered in the affirmative, and the finding was in favour of the assessee.

Ratio Decidendi: For the application of section 23A, losses incurred in earlier years include established capital losses, and such losses are relevant in determining whether the payment of dividend would be unreasonable.

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