Commercial profits test governs dividend reasonableness under section 23A; higher dividend cannot be forced when finances and reserves are limited.

Section 23A was interpreted to require assessment of dividend propriety by reference to commercial profits, not merely assessed total income. The reasonableness of a higher dividend must be judged from the standpoint of a prudent businessman, taking account of prior tax liabilities and the company's reserves. On the stated facts, only a small balance remained after earlier tax obligations and the reserve position was modest, so insisting on a higher dividend would have been unreasonable and financially adverse. The section was therefore held inapplicable and super-tax was not leviable on that basis.

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Issues: Whether super-tax under section 23A of the Indian Income-tax Act, 1922 could be levied on the assessee for the assessment year 1960-61, or whether the non-payment of a higher dividend was justified having regard to commercial profits, prior tax liability and the company's reserves.

Analysis: For the purpose of the proviso to section 23A, the relevant enquiry is not the assessed total income but the commercial profits available for distribution. The reasonableness of dividend has to be judged from the standpoint of a prudent businessman and not from that of the taxing authority. On the facts, after providing for earlier tax liabilities, only a small balance remained out of the year's commercial profits, and the company's available reserve was modest. In those circumstances, requiring a higher dividend would have been unreasonable and would have adversely affected the company's finances and reserves.

Conclusion: The section was not properly attracted, and the question was answered in the negative in favour of the assessee.

Ratio Decidendi: In applying section 23A, the propriety of dividend distribution must be assessed on the basis of commercial profits and from the standpoint of a prudent businessman, and super-tax cannot be levied where payment of a higher dividend would be unreasonable in the circumstances.

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