Srinivasan, J.:— In relation to the income-tax assessment for the assessment year 1952-53, the Income-tax Officer found that the dividend declared by the assessee, not being a company in which the public are substantially interested, to be less than 60 per cent, of the profits available for distribution. The Income-tax Officer also held that, having regard to the profits made, the company could have declared a larger dividend. He accordingly applied section 23A and made an order that a further sum of Rs. 77,692 shall be deemed to have been distributed as dividends among the six shareholders of the company. The assessee appealed to the Appellate Assistant Commissioner, contending that on the basis of the book profits, which represented the profits available for distribution, the company had declared dividends in excess of 60 per cent, thereof. This plea was rejected by the Appellate Assistant Commissioner who held that the adjusted book profits, that is to say, profits as finally determined by the inclusion of suppressions and inflations, were the book profits that should be taken into account for determining whether the dividend already declared was reasonable and in that the order of the Income-tax Officer was confirmed. The further appeal to the Tribunal also failed.

2. On the application of the assessee, the following question was referred to this court:

“Whether, on the facts and in the circumstances of the case, section 23A was properly applied?”

3. The statement of the case discloses the following facts. According to the books of account of the assessee, a net profit of Rs. 1,01,902 is disclosed. But this is inclusive of the necessary appropriation towards income-tax. The company, however, was finally assessed on an income of Rs. 2,04,222, the provision for taxes thereon being Rs. 81,529. During the relevant year, the company declared a dividend of Rs. 45,000. For the purpose of application of section 23A, the following have to be considered:

The assessable income of the company, less the income-tax and super-tax payable thereon 60 per cent, of this amount has to be computed and, if the dividends actually declared are less than this figure of 60 per cent, of the assessable income of the company as reduced, the initial basis for considering the application of section 23A is laid. The next step is for the Income-tax Officer, to be satisfied whether “having regard to the losses incurred by the company in earlier years or to the smallness of the profit made, the payment of a dividend or a larger dividend than that declared would be unreasonable”. If he is so satisfied then no order under section 23A can be made. If he does not come to that conclusion, then, with the previous approval of the Inspecting Assistant Commissioner, an order can be made by the Income-tax Officer, deeming the undistributed portion of the assessable income of the company of that previous year, as computed for income-tax purposes and reduced by the amounts of income and super-tax payable by the company in respect thereof, to have been distributed as dividends. The figures relevant to the application of the above provision (as it stood before its amendment by the Finance Act of 1955) are these:

Assessable income of the cempany Rs. 2,04,222 Lesstaxes; 81,529 Balance 1,22,693 60 per cent, thereof 73.617 Dividends declared 45,000

4. On the above figures, there is no dispute. The dividend declared is less than-60 per cent, of the assessable income of the company minus the taxes. The first condition relevant to the application of section 23A is, therefore, satisfied. What has next to be seen is whether, on account of the smallness of the profit made, the payment of any larger dividend than Rs. 45,000 would be unreasonable. This leads us to the question as to what is the “profit made” by the company.

5. Learned counsel for the assessee seems to claim that the expression “profits made” refers to the profits as disclosed by the accounts and further to the profits that were made only during that year; disregarding any profits of the previous year that might have been carried forward as such. It seems to us that this interpretation is hardly in consonance with the object of the section. The section was intended to ensure that the shareholders of a company did not avoid having to pay super-tax by the device of non-distribution of a reasonable portion of the profits of the company. If the interpretation upon this provision placed by the learned counsel for the assessee is correct, any assessee can evade the possible application of section 23A of the Act by so manipulating the accounts that the profits shown by the accounts are much less than the real profits. The profits made, therefore, necessarily indicate the profits that are determined by the Income-tax Officer to have been made, but not those intangible profits which go to make up the assessable income of the company. Decisions have laid it down.that there is a fundamental difference between the assessable income of the company and the profits made by it. It would be sufficient to refer to Commissioner of Income-tax v. Bipinchandra Maganlal and Company [1961] 41 I.T.R 290. In that case, the question arose whether the excess of the sale value of the machinery over the written-down value, which is treated as revenue receipt for the purpose of computing the assessable income of the company, should be taken into account as profits, in interpreting the expression “the smallness of the profits made”. Their Lordships of the Supreme Court held that the deliberate use of the expression “smallness of the profits” and not “smallness of the assessed income” clearly-showed that the two expressions “profit” and “assessable income” could not be equated and that the smallness of the profit in section 23A has to be.adjudged in the light of commercial principles and not in the light of the receipts, actual or fictional. They point out that the difference between the written-down value of the machinery and the price at which it was sold is deemed, to be profits liable to be included in the assessable income of the year but that is the result of a fiction and what is in truth a capital return is regarded, for the purpose of the Act, income. That would not, in the view of their Lordships, alter its real character and convert that amount into the assessee's business profits for the purpose of the application of section 23A.

6. Learned counsel's contention that, what the books.of account of the assessee disclose as the profits must be taken without question in considering the application of section 23A, can hardly gain acceptance. When the smallness of the profits made is the criterion on the basis of which the Income-tax Officer can proceed to make or not to make an order under section 23A, it falls within his jurisdiction to determine what are the profits that were made during the year in question. For instance, if the Income-tax Officer finds that there has been a suppression of profits he is not prevented from adding that amount of suppression to the book profits in arriving at the final figure of profits. But that is different from the computation of the assessable income which is well understood to take in other items which are not real.

7. It has been contended again that the expression “profits made” must be limited to the profits that were made during that accounting year alone and that no portion of the profits of the earlier year, even if that had been brought forward can be taken note of for the purpose of section 23A. We are not inclined to accept this argument. The question which the Income-tax Officer is called upon.to determine is, were there sufficient profits to justify the distribution of a larger dividend; and, in that context, we fail to see why an amount of profits carried.forward from the previous year and brought into account in the relevant year of account should not be included in the expression “profits made”. It would also be noticed that the Income-tax Officer is directed to have due regard to losses incurred by: the company in earlier years. In the context of the application of the provision, if the losses incurred in the previous years can be relied upon for riot invoking section 23A, even though there may.be profits in the relevant accounting year, equally so it seems to us that the profits-brought forward from the previous year can be included in the expression “profits made”.

8. It is however unnecessary for us to express any concluded opinion on this question, viz., whether the balance of profits brought forward from the earlier year can be taken into account for the purpose of section 23A, for the reason that even on the footing that the profits made during the year alone should be taken into consideration for the purpose of that provision, it is seen that the Income-tax Officer has proceeded to find whether it was not possible for the assessee to have paid a larger dividend.

9. The contention of the assessee that the profits as displayed by him in his books of account are the only profits which should come in for a consideration has to be repelled. It was found by the department in the course of the assessment proceedings that there had been a suppression of a sum of Rs. 15,000 under “luggage collections” and a further sum of Rs. 25,000 under “spare parts”, so that the profits made during the year must necessarily take into account these suppressions which had been kept out of the account books. There was a further amount of Rs. 34,000 and odd which related to the disallowance of depreciation. In the light of what we have said above, this sum, though added back to the profits for the purpose of determining the assessable income of the assessee, cannot be regarded as commercial profits available for being dealt with as such. There can however be no doubt that the sum of Rs. 40,000 represented concealed profits which had to be added to the book profits in order to arrive at the correct figure of the profits of the assessee.

10. The Income-tax Officer found that taking the book profits as disclosed by the assessee and deducting the tax payable thereon, the balance available came to Rs. 20,373. To this must be added the sum of Rs. 40,000 which represents the suppressed profits, so that the profits made during the year which were available for distribution came to above Rs. 60,000. As against this amount (which excludes the balance of the profits brought forward from the previous year), the assessee distributed as dividends a sum of Rs. 45,000.

11. The above facts leading to the determination of the profits made during the year are not challenged before us and, if that is so, the Income-tax Officer did certainly have material before him on the basis of which he was entitled to conclude that it would not have been unreasonable for the assessee to have declared a dividend larger than that which had actually been declared. The contention of the assessee however appears to have been that it was not till the assessment for the assessment year 1952-53 was concluded sometime in 1954 that the assessee could be aware of what the profits made during the year were in the view of the Income-tax Officer and that, on the materials which the assessee had before him, he was justified in distributing only the sum of Rs. 45,000 as dividend. We are not impressed with this argument. What was clearly found was that the books of account were unreliable and that the actual profits made during the year must be enhanced by the amounts suppressed. It was not notional addition by any means. That being so, the assessee's claim that he was ignorant of the volume of profits available during that year was rightly rejected by the departmental office below.

12. In the light of what we have stated, all the requirements of section 23A were satisfied and the application of that provision to the facts of the case has not been shown to be erroneous in any way. The question is accordingly answered in the affirmative and against the assessee, which shall pay the costs of the department. Counsel's fee Rs. 250.

13. Question answered in the affirmative.