Commercial profits test under dividend restriction provision: surplus, losses, and future needs made higher dividend unreasonable on the facts.

Section 23A(1) required assessment of commercial profits, not merely book or assessable income, and the test was whether prudent directors would consider a larger dividend reasonable in light of surplus funds, the company's overall financial position, prior losses, and future requirements. On the facts found, the Tribunal held that the disallowed amounts and sums still to be collected left insufficient profit to justify a higher dividend, and the revenue did not show that this finding was perverse or unsupported by material. Section 23A(1) was therefore not applicable on those facts, and the referred question was answered for the assessee.

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Issues: Whether section 23A(1) of the Indian Income-tax Act, 1922, applied to the company for the relevant assessment year, having regard to the smallness of profits and the availability of surplus money for dividend distribution.

Analysis: The relevant inquiry under section 23A is not confined to assessable income or figures shown in the books, but requires consideration of commercial profits and whether a prudent businessman, placed in the position of the directors, would regard it as reasonable to distribute a larger dividend. The decisive factors include the availability of surplus money, the company's overall financial position, prior losses, and the reasonable requirements of the future. On the facts found, the Tribunal concluded that the amounts disallowed and the amounts remaining to be collected left insufficient profit in the assessee's hands for a higher dividend, and the revenue failed to show that this finding was perverse or unsupported by material.

Conclusion: Section 23A(1) was not applicable on the facts found, and the answer to the referred question was in favour of the assessee and against the revenue.

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