Commercial profits under section 23A may exclude a bona fide reserve for probable liability, but unsupported farm loss remains includible.

For section 23A of the Income-tax Act, 1922, commercial profits are assessed on commercial principles, and a bona fide reserve created against a probable liability may be excluded even before the liability has crystallised. On that basis, the reserve of Rs. 60,000 set aside against a likely guarantee claim was excluded from commercial profits. By contrast, the farm-related loss was not shown to be a legitimate business loss or linked to the assessee's stated objects, so its inclusion in commercial profits was upheld.

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Issues: (i) Whether, in computing commercial profits for the purposes of section 23A of the Income-tax Act, 1922, the sum of Rs. 60,000 set apart as reserve against a possible guarantee liability was liable to be included; (ii) whether the other disputed amount relating to the farm loss was rightly included in the commercial profits.

Issue (i): Whether, in computing commercial profits for the purposes of section 23A of the Income-tax Act, 1922, the sum of Rs. 60,000 set apart as reserve against a possible guarantee liability was liable to be included.

Analysis: The reserve was created because a guarantee furnished by the assessee for a subsidiary company was likely to be enforced on the company's liquidation. The relevant inquiry was whether a dividend larger than that declared would be unreasonable judged by commercial considerations. A reserve need not always be tied to an already ascertained loss or liability if the circumstances justify setting aside funds against a probable liability.

Conclusion: The sum of Rs. 60,000 was not to be included in the commercial profits, and this issue was decided in favour of the assessee.

Issue (ii): Whether the other disputed amount relating to the farm loss was rightly included in the commercial profits.

Analysis: There were no facts showing that the farm loss was a legitimately allowable business loss, and it was not established that the farm formed part of the assessee's objects. On that material, the exclusion of the amount from commercial profits was not justified.

Conclusion: The farm-related amount was properly included in the commercial profits, and this issue was decided against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee by excluding the reserve for possible liability from commercial profits, but was answered against the assessee on the remaining point relating to the farm loss.

Ratio Decidendi: For section 23A, commercial profits are to be assessed on commercial principles, and a reserve made bona fide against a probable business liability may be excluded even if the liability has not yet crystallised; however, an unsupported farm loss may still be added to profits.

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