Ramanujam, J.@mdashThe assessee in this case is a private limited company carrying on business in the manufacture and sale of chemicals. Its
paid up capital was Rs. 45,000 made up of 4,500 shares of Rs. 10 each. For the accounting year ending with September 30, 1959, the company
had shown a book profit of Rs. 4,255 after making a provision of Rs. 7,000 for income-lax and Rs. 5,845 for depreciation. It had declared a
dividend of Rs. 2,700 for the said accounting year.
2. The company had been assessed under the Income Tax Act for the 5aid accounting year relevant to the assessment year 1960-61 at a total
income of Rs. 15,174. In computing the total income the Income Tax Officer has added back to the book profits certain items of expenses which
have been disallowed. The Income Tax Officer took the view that the dividend of Rs. 2,700 actually declared fell short of the statutory amount of
dividend that should have been declared by the assessee-company u/s 23A , and, therefore, issued a notice to show cause as to why the
provisions of Section 23A should not be invoked. The assessee contended that under the provisions of Section 23A only commercial profits had
to be considered that the depreciation and other items of expenses amounting to Rs. 6,197 which had been disallowed and added back to the
book profits in the computation of income for Income Tax purposes cannot be taken to be commercial profits, and that if the said sum of Rs.
6,197 had been excluded, the commercial profits are so small that the assessee could not have reasonably declared a larger dividend. The Income
Tax Officer, however, did not accept the assessee''s contention and held that the assessee has not satisfactorily explained the non-distribution of
the statutory percentage of dividend and that, therefore, the provisions of Section 23A stood attracted.
3. The assessee appealed to the Appellate Assistant Commissioner and contended that the order u/s 23A was not justified having regard to the
smallness of profit and that the reasonableness of the distribution of dividend should be considered only with reference to the book profits of the
assessee which was only Rs. 4,255. The Appellate Assistant Commissioner, however, confirmed the order of the Income Tax Officer.
4. There was a further appeal to the Tribunal. It was contended by the assessee before the Tribunal that the amounts disallowed either as excess
depreciation or for any other reason should not be taken to be commercial profit and added to the book profit and that in any event the loss on
account of hydrochloric acid plant being written off should not have been included in the commercial profits. As against the said contention, the
revenue contended that the financial position of the company as disclosed by its balance-sheet as on September 30, 1959, was sound, that there
was reserve to the extent of Rs. 9,003 and also large cash and bank balances as on the said date, and that taking all the said circumstances into
consideration, it would not have been unreasonable to have declared a larger dividend. It was also contended that the loss on account of
hydrochloric acid plant being demolished amounted to a capital loss, and that such a capital loss should not be taken into account for the purpose
of finding out the feasibility of the declaration of larger dividends. The Tribunal, however, accepted the contention of the assessee that the items of
expenses disallowed by the Income Tax Officer in the course of the Income Tax assessment cannot be taken into account again for computation of
the commercial profits and added back to the book profit shown by the assessee. It then proceeded to work out the commercial profits at Rs.
6,772 as against the book profit of Rs. 4,255 shown by the assessee. Then on the question as to whether the capital loss resulting from the writing
off of the hydrochloric acid plant can be taken into account for arriving at the commercial profits, the Tribunal was of the view that such a capital
loss cannot be adjusted against commercial profits and on that basis it computed the distributable profit at Rs. 6,772. Then the Tribunal proceeded
to consider the question whether it is feasible for the company to declare a larger dividend if its commercial profit is determined at Rs. 6,772. In
deciding the question of feasibility the Tribunal took note of the capital loss of Rs. 2,345 being the cost of the hydrochloric acid plant written off, as
it is bound to do under the provisions of Section 23A, which provides that the losses incurred by the company in earlier years or the smallness of
the profit in the previous year should have to be considered, as also certain other facts, and found that the assessee has built up substantial reserve
amounting to Rs. 9,000 and odd and there is also considerable cash and bank balances at the end of the year. Considering all these facts the
Tribunal held that the payment of larger dividend would not be unreasonable and that, therefore, the provisions of Section 23A have rightly been
invoked in the assessee''s case. At the instance of the assessee the following question has been referred to us.
Whether, on the facts and in the circumstances of the case, the application of the provisions of Section 23A of the Income Tax Act was justified
and in accordance with law ?
5. The learned counsel for the assessee contended, firstly, that the book profit alone should form the basis for considering the feasibility of larger
dividend, and that no addition can at all be made to the book profit arrived at by the assessee under any circumstances. But it is well established
that the mode of preparation of the profit and loss account or the determination of the profits by the assessee cannot be taken to be final or
conclusive and the quantum of commercial profits have to be ascertained with reference to the true nature of the receipts and outgoings. In this
case, the Tribunal has determined the commercial profit at Rs. 13,600 and after deducting the Income Tax of Rs. 6,822, fixed the amount available
for distribution of dividend at Rs. 6,772 as against the book profit of Rs. 4,255 as shown by the assessee in the profit and loss account. It is true
that in calculating the commercial profit the capital loss at Rs. 2,345 which has been deducted from the profits of the year in the profit and loss
account of the assessee has been added back. According to the learned counsel, this should not have been done and the assessee having incurred
the capital loss during the accounting year was justified in setting off that loss against the commercial profit. As already stated, the Tribunal has
taken a view that since the said sum of Rs. 2,345 represented the capital loss it cannot go to reduce the commercial profit. We are also of the view
that the capital loss cannot be taken into account for the purpose of finding out the commercial profit in any of the accounting years for the purpose
of Section 23A. It is no doubt true that even the capital loss has to be taken into account when considering the feasibility of declaration of dividend.
But that circumstance cannot be taken by the assessee to contend that any capital loss should go to reduce the commercial profit which has to be
considered for purposes of Section 23A.
6. The learned counsel for the assessee then contends that though the Tribunal says that the capital loss has to be taken note of when arriving at the
feasibility of declaring a dividend, it has in fact not done so. But we find from the order of the Tribunal that the Tribunal actually took into
consideration the capital loss white considering the feasibility of declaring a larger dividend. The Tribunal specifically refers to this and says that as
the assessee has built up substantial receive and the cash and bank balances at the end of the accounting year and the current assets and liabilities
of the company as seen from the balance sheet indicate the sound financial position of the company, the declaration of a larger dividend would not
be unreasonable. What the Tribunal has done in this case is that it took note of not only the capital loss but also the other relevant circumstance
such as built up reserves, the sufficient cash and bank balances, value of assets when compared with its liabilities all showing the sound financial
position of the company and took the view that the commercial profits are such that a larger dividend would not have been unreasonable. If, as
contended by the learned counsel for the assessee, the Tribunal has not taken the capital loss as a relevant circumstance while considering the
feasibility of a declaration of a larger dividend, it is possible to question the conclusion of the Tribunal. The Tribunal, however, took that
circumstance as a relevant circumstance and ultimately held that the declaration of a larger dividend in the circumstances of the case would not
have been unreasonable. Though the learned counsel for the assessee would contend that the other circumstances pointed out by the Tribunal are
not germane for deciding the question of feasibility of a declaration of dividend, we are not in a position to say that the other circumstances pointed
out by the Tribunal apart from the capital loss are irrelevant, in considering the feasibility of declaring a dividend. We, therefore, accept the view of
the Tribunal that Section 23A has been properly invoked in this case.
7. We, therefore, answer the question referred to us in the affirmative and against the assessee. The revenue will be entitled to its costs. Counsel''s
fee Rs. 250.
