Summarize the following court judgment. Appeal No. 761 of 1957. Appeal by special leave from the judgment and order dated February 24	 1955	 of the former Bombay High Court in I.T.R. 48/X of 1954. Hardayal Hardy and D. Gupta	 for the appellant. N. A. Palkhivala and I. N. Shroff	 for the respondent. November 17. The Judgment of the Court was delivered by SHAH	 J. The Income Tax Appellate Tribunal	 Bombay Bench "A"	 referred under section 66(1) of the Indian Income Tax Act	 1922 hereinafter referred to as the Act the following question: "Whether the sum of Rs. 15	608 should have been included in the assessee Company 's "profit" for the purpose of determining whether the payment of a larger dividend than that declared by it would be unreasonable ?" The High Court answered the question in the negative. Against the order of the High Court	 with special leave under article 136 of the Constitution	 this appeal is preferred. M/s. Bipinchandra Maganlal & Co.	 Ltd. hereinafter referred to as the Company is registered under the Indian Companies Act	 The Company is one in 495 which the public are not substantially interested within the meaning of section 23A Explanation of the Act. Its paid up capital at the material time was Rs. 20	800 made up as follows: 20 shares of Rs. 50 each fully paid up and 1980 shares of Rs. 50 each	 Rs. 10 being paid up per share. In December 1945	 the Company purchased certain machinery for Rs. 89	000 and sold it sometime in March	 1947	 for the price for which it was originally purchased. In the books of account of the Company	 the written down value of the machinery in the year of account 1946 47 (April 1	 1946 to March 31	 1947) was Rs. 73	392. The trading profits of the Company as disclosed by its books of account for the year 194647 were Rs. 33	245. At the General Meeting held on October 21	 1947. the Company declared a dividend of Rs. 12	000 for the year of account. In assessing tax for the year of assessment 1947 48	 the Income Tax Officer computed the assessable income of the Company for the year of account 1946 47 at Rs. 48	761 after adding back to the profit of Rs. 33	245 returned by the Company	 Rs. 15	608 realised in excess of the written down value of the machinery sold in March	 1947. The Income Tax Officer passed an order under section 23A of the Act that Rs. 15	429 (being the undistributed portion of the assessable income of the Company as reduced by taxes payable) shall be deemed to have been distributed as dividend amongst the shareholders as at the date of the General Meeting	 and the proportionate share of each shareholder shall be included in his total income. Appeals preferred against his order to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal proved unsuccessful	 but the Appellate Tribunal at the instance of the Company referred the question set out hereinbefore to the High Court at Bombay under a. 66(1) of the Act. Section 23A(1) of the Act as it stood at the relevant time (in so far as it is material) was as follows: "Where the Income Tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company upto the end 496 of the sixth month after its accounts for that previous year are laid before the company in general meeting are less than 60% of the assessable income of the company of that previous year	 as reduced by the amount of income tax and super tax payable by the company in respect thereof	 he shall	 unless he is satisfied that having regard to 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	 make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income tax purposes and reduced by the amount of income tax and super tax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the share holders as at the date of the general meeting aforesaid. . . Clearly	 by section 23A	 the Income Tax Officer is required to pass an order directing that the undistributed portion of the assessable income of any company (in which the public are not substantially interested) shall be deemed to have been distributed as dividends amongst the shareholders if he is satisfied that (i) the company has not distributed 60% of its assessable income of the previous year reduced by the Income tax and super tax payable	 (ii) unless payment of a dividend	 or a larger dividend than that declared	 having regard to (a) losses incurred by the company in the earlier years or (b) the smallness of the profits made in the previous year	 be unreasonable. The total assessable income of the Company for the year of account was Rs. 48	761 and the tax payable thereon was Rs. 21	332: 60% of Rs. 27	249 (assessable income reduced by the income tax and super tax due) exceeded the dividend declared by Rs. 4	458. The first condition to the exercise of jurisdiction by the Income Tax Officer under section 23A was therefore indisputably fulfilled. But the Income Tax Officer had 497 still to be satisfied whether having regard to the smallness of the profit (there is no evidence in this case that loss was incurred by the Company in earlier years)	 it would be unreasonable to distribute dividend larger than the dividend actually declared. The Income Tax Officer did not expressly consider this question: he rested his decision on the rejection of the contention raised by the Company that the difference between the price of the machinery realised by sale and the written down value in the year of account could not be taken into account in passing an order under section 23A. He	 it seems	 assumed that if that difference be taken into account	 distribution of larger dividend was not unreasonable	 and the Tribunal proceeded upon the footing that the assumption was correctly made. Counsel for the Revenue submits in support of the appeal that the expression " smallness of profit " means no more than smallness of the assessable income	 and that in any event	 in the computation of profits	 the amount realised by sale of the machinery in the year of account in excess of its written down value was liable to be included in considering whether the condition relating to "smallness of profit" was fulfilled. At the material time	 section 2(6C) of the Act defined "income" as inclusive amongst others of any sum deemed to be profits under the second proviso to cl. (vii) of sub section (2) of section 10. By section 10	 in the computation of profits or gains of an assessee under the head "Profits and gains of business	 profession or vocation" carried on by him	 the amount by which the written down value of any building	 machinery or plant which has been sold	 discarded or demolished. or destroyed exceeds the amount for which the building	 machinery or plant is actually sold or its scrap value is to be allowed as a deduction. This allowance is however subject to an exception prescribed by the second proviso to el. (vii) sub section (2) of section 10 that where the amount for which any building	 machinery or plant is sold exceeds the written down value	 so much of the 63 498 excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profit of the previous year in which the sale took place. In computing the profits and gains of the Company under section 10 of the Act	 for the purpose of assessing the taxable income	 the difference between the written down value of the machinery in the year of account and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account	 and being such profit	 it was liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realized and the written. down value is made chargeable to income tax	 its character is not altered	 and it is not converted into the assessee 's business profits. It does not reach the assessee as his profits: it reaches him as part of the capital invested by him	 the fiction created by section 10(2)(vii) second proviso notwithstanding. The reason for introducing this fiction appears to be this. Where in the previous years	 by the depreciation allowance	 the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value	 i.e.	 the original cost less depreciation allowance	 the Revenue is justified in taking back what it had allowed in recoupment against wear and tear	 because in fact the depreciation did not result. But the reason of the rule does not alter the real character of the receipt. Again	 it is the accumulated depreciation over a number of years which is regarded as income of the year in which the asset is sold. The difference between the written down value of an asset and the price realized by sale thereof though not profit earned in the conduct of the business of the assessee is nationally regarded as profit in the year in which the asset is sold	 for the purpose of taking back what had been allowed in the earlier years. A company normally distributes dividends out of its business profits and not out of its assessable income. 499 There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. Computation of income for purposes of assessment of income tax is based on a variety of artificial rules and takes into account several fictional receipts	 deductions and allowances. In considering whether a larger distribution of dividend would be unreasonable	 the source from which the dividend is to be distributed and not the assessable income has to be taken into account. The Legislature has not provided in section 23A that in considering whether an order directing that the undistributed profits shall be deemed to be distributed	 the smallness of the assessable income shall be taken into account. The test whether it would be unreasonable to distribute a larger dividend has to be adjudged in the light of the profit of the year in question. Even though the assessable income of a company may be large	 the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it cannot do. For instance	 in the case of companies receiving income from property	 even though tax is levied under section 9 of the Act on the bona fide annual value of the property	 the actual receipts may be considerably less than the annual value and if the test of reasonableness is the extent of the assessable income and not the commercial profit	 there may frequently arise cases in which companies may have to sell off their income producing assets. The Legislature has deliberately used the expression "smallness of profit" and not "smallness of assessable income" and there is nothing in the context in which the expression "smallness of profit" occurs which justifies equation of the expression "profit" with "assessable income". Smallness of the profit in section 23A has to be adjudged in the light of commercial principles and not in the light of total receipts	 actual or fictional. This view appears to have been taken by the High Courts in India without any dissentient 500 opinion	 see Sir Kasturchand Ltd. vs Commissioner of Income Tax	 Bombay City (1)	 Ezra Proprietary Estates Ltd. vs Commissioner of Income Tax	 West Bengal (2) and Commissioner of income Tax	 Bombay City vs F. L. Smith & Co.	 (Bombay) Ltd. (3). By the fiction in section 10(2)(vii) second proviso	 read with section 2(6C)	 what is really not income is	 for the purpose of computation of assessable income	 made taxable income: but on that account	 it does not become commercial profit	 and if it is not commercial profit	 it is not liable to be taken into account in assessing whether in view of the smallness of profits a larger dividend would be unreasonable. In our judgment	 the High Court was right in holding that the amount of Rs. 15	608 was not liable to be taken into account in considering whether having regard to the smallness of the profit made by the Company	 it would be unreasonable to declare a larger dividend. The appeal therefore fails and is dismissed with costs. Appeal dismissed. (1) (1940) XVII I.T.R. 493. (2) (1950) XVIII I.T.R. 762. (3) (1959) XXXV I.T.R. 183.

The respondent company purchased certain machinery for Rs. 89	000 and sold it for the same value	 but in the books of account the written down value of the machinery was shown in the year of account as Rs. 73	392. The Income Tax Officer in computing the assessable income of the company added the difference	 i.e. Rs. 15	608	 between the actual value and the written down value to the profit of the company. The Income Tax Officer also passed an order under section 23A of the Income Tax Act	 and directed that the undistributed portion of the assessable income	 shall be deemed to have been distributed amongst the shareholders as dividend. Appeals against the order of the Income tax Officer proved unsuccessful and the Appellate Tribunal referred the following question to the High Court under section 66(1): "Whether the sum of Rs. 15	608 should have been included in the assessee company 's "profit" for the purpose of deter mining whether the payment of a larger dividend than that declared by it would be unreasonable. " The High Court answered the question in the negative. On appeal by special leave	 Held	 that the view taken by the High Court was correct. 494 By the fiction in section 10(2)(Vii) second proviso	 read with s.2(6C)	 what is really not income is	 for the purpose of computation of assessable income	 made taxable income: but on that account	 it does not become commercial profit	 and if it is not commercial profit	 it is not liable to be taken into account in assessing whether in view of the smallness of profits a larger dividend would be unreasonable. "Smallness of profit" should not be equated with "smallness of assessable income" but should be determined in accordance with commercial principles. Sir Kasturchand Ltd. vs Commissioner of Income tax	 Bombay City	 (1949) XVII I.T.R. 493	 Ezra Proprietary Estates Ltd. vs Commissioner of Income tax	 West Bengal	 (1950) XVIII I.T.R. 762 and Commissioner of Income tax Bombay City vs F. L. Smith & Co. (Bombay) Ltd.	 (1959) XXXV I.T.R. 183	 referred to.