Commercial profits and dividend reasonableness control super-tax liability where earlier tax arrears do not justify a low dividend.

Under section 23A of the Income-tax Act, 1922, dividend reasonableness is judged by commercial profits and the surrounding circumstances, including any earlier losses or the smallness of profits. The expression "smallness of profits" refers to commercial profits, not merely assessed income. On the facts found, the company failed to show that a larger dividend was unreasonable, and payment of earlier years' tax arrears in the accounting year did not justify treating the low dividend as reasonable or the company as commercially insolvent for dividend purposes. The assessee-company was therefore liable to pay super-tax.

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Issues: Whether the assessee-company was liable to pay super-tax under section 23A of the Income-tax Act, 1922, on the facts and circumstances of the case.

Analysis: The governing test under section 23A is whether the dividend distributed is below the statutory percentage and, if so, whether, having regard to losses in earlier years or the smallness of profits, it would be unreasonable to require a larger dividend. The expression "smallness of profits" refers to commercial profits, not merely assessed income. The Court held that the company had not established any material showing that payment of a larger dividend was unreasonable. The alleged payment of tax arrears of an earlier year in the accounting year in question was not, on the facts found, a relevant circumstance reducing the commercial profit so as to justify the low dividend. The Tribunal had misdirected itself in treating that payment as making the company commercially insolvent for dividend purposes.

Conclusion: The assessee-company was liable to pay super-tax under section 23A.

Ratio Decidendi: In proceedings under section 23A, the reasonableness of dividend distribution must be judged on commercial profits and relevant circumstances placed before the authority, and payment of earlier years' tax is not ordinarily a ground for treating a low dividend as reasonable unless special facts show that such payment had to be met out of the profits of the year in question.

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