R.S. Narula, J.
1. The question, 'whether, on the facts and in the circumstances of the case, provisions of Section-23A were applicable to the case?' has been referred to us under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called 'the Act'), at the instance of the Commissioner of Income-tax, Punjab, Jammu & Kashmir, and Himachal Pradesh, Patiala, in the following circumstances:
Messrs. Avon Cycles Private Ltd., Ludhiana (hereinafter referred to as 'the assessee'), submitted returns of income for the assessment years 1956-57 and 1957-58, on the basis of accounts which were found to be defective, inasmuch as no day-to-day record had been kept by the assessee for the consumption of raxv materials and stores. In his order, dated February 9, 1959, relating to the 1956-57 assessment year, the Income-tax Officer did not, therefore, accept the figures of profit furnished by the assessee and after invoking the proviso to Section 13, computed the profits of the assessee at certain flat rates with, the agreement of the assessee, and worked out the gross profits on that basis. The result was that the gross profit computed by the Income-tax Officer was Rs. 36,603 more than that shown by the assessee in his return. The other add-baeks ordered by the Income-tax Officer due to inadmissible expenditure, etc., are not relevant for our purposes. Similarly, in his order of the same date relating to the assessment year 1957-58, a sum of Rs. 10,488 was added to the gross profits of the assessee on the basis of the same flat rates (as agreed to by the assessee for the year 1956-57) by invoking the proviso to section !3 of the Act.
2. Two separate orders (annexures 'B' and 'B-l ' to the statement of case) were then passed by the Income-tax Officer on February 11, 1960, under Section 23A of the Act, on the ground that even if the entire disputed add-backs were deleted in appeal, the assessee would still be left with anincome of the order of Rs. 25,000 or so in respect of the assessment year 1956-57 and Rs. 92,145 in respect of the assessment year 1957-58. Inasmuch as no dividend had been declared by the assessee in respect of either of the two years, super-tax at the rate of 25 rip. in a rupee was levied on the assessed income after allowing due deductions under Section 23A(1) of the Act. Two separate appeals were preferred by the assessee against the orders of the Income-tax Officer under Section 23A of the Act in respect of the two years in question. While disposing of those appeals by his orders, dated March 26, 1962, and March 28, 1962, the Appellate Assistant Commissioner of Income-tax, Jullundur Range, considered the question of loss in the earlier years floss of Rs. 13,400 in 1953-54, and loss of Rs. 3,000 in the assessment year 1954-55), but held that if the losses of 1953-54 and 1954-55 assessment years were set off against the commercial profits of the assessment year 1955-56, there would still be left some profit in that year; and there was a profit of Rs. 47,000 in the assessment year 1956-57. It was, therefore, held that after deducting the tax payable on the profit of Rs. 47,000 there would still be sufficient amount which was available with the assessee for distribution of dividends, and, therefore, the order of the Income-tax Officer under Section 23A of the Act was justified.
3. When the second appeals of the assessee against the abovesaid two orders came up for hearing before the Income-tax Appellate Tribunal, it was found that the figure of total income had not been properly analysed for purposes of determination of the question of applicability of Section 23A. The Income-tax Officer was, therefore, directed (as stated in paragraph 2 of the appellate order of the Tribunal, dated September 11, 1964) to furnish a separate analysis of each year in a prescribed form. On receipt of the requisite analysis the Tribunal by its order, dated September 11, 1964, allowed the appeals of the assessee on the following findings:
(i) before applying Section 23A of the Act, the losses of the earlier years and the smallness of profits of the assessee should be considered;
(ii) in order to find out whether Section 23A is at all applicable, only commercial profits of an assessee should be taken into consideration;
(iii) the bulk of the surplus in the hands of the assessee was due to the fact that the books of account of the assessee had not been accepted, and the income of the assessee was computed on estimate basis. In determining the commercial profits, the assessing authorities cannot take into consideration the income estimated by the Income-tax Officer. The estimated additions (Rs. 36,603 in one year and Rs. 10,488 in the other year) were, therefore, liable to be excluded in determining the figure of profit left for distribution; and
(iv) the Tribunal was satisfied that the avoidance of super-tax was not a motive behind the non-declaration of dividends and it was the loss (inthe earlier years) and the smallness of profits which was responsible for the non-declaration of dividends.
4. On the basis of the above-mentioned findings, the Tribunal held that the approach of the revenue, both on the facts of the case and in law, was erroneous, and while allowing the appeals of the assessee, directed that both the orders under Section 23A be set aside,
5. The application of the Commissioner of Income-tax under Section 66(1) of the Act, though contested by the assessee, was allowed and the question quoted in the opening sentence of this judgment was referred to us. A copy of the Tribunal's order, dated September 11, 1964 (annexure 'E'), was made part of the statement of the case. Section 13 of the Act provides as below:
'Method of accounting.--Income, profits and gains shall be computed, for the purposes of Sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee:Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
6. It is the common case of both sides that Section 13 had been rightly invoked by the income-tax authorities, and that there is no more any quarrel with the order of assessment of income of the assessee in respect of the two years in question on the basis of income computed under the proviso to Section 13. It is also not in dispute that the figures of Rs. 36,603 and Rs. 10,488 added to the gross income of the assessee were exclusively and solely related to the profits earned by the company and no part thereof was in the nature of add-backs for inadmissible expenditure or in the nature of deemed income under any provision of law or even in the nature of anything other than the profits earned from the business of the assessee.
7. Section 23A of the Act, as amended in 1955, was applicable to the proceedings for the assessment year 1956-57, and the said provision, as further amended in 1957, was applicable to the assessment year 1957-58. The amendment made in the section by the 1957 Act is, however, not material for our purposes. I would, therefore, confine myself to the relevant part of Section 23A(1) of the Act as it existed during 1956-57, which was in the following terms:
' 23A. Power to assess companies to super-tax on undistributed income in certain cases.--(1) Subject to .... where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately followingI.the expiry of that previous year or less than sixty per cent. of the total income of the company of that previous year....
the Income-tax Officer shall, unless he is satisfied that, having regardto losses incurred by the company in earlier years or to the smallness of theprofits made in the previous year, the payment of a dividend .... wouldbe unreasonable, make an order in writing that the company shall, ....be liable to pay super-tax at the rate of four annas in the rupee on theundistributed balance of the total income of the previous year, that is tosay, . . . .' '
8. A lucid analysis of the above quoted provision has been made by their Lordships of the Supreme Court in Commissioner of Income-lax v. Gangadhar Banerjee and Co. (Private) Ltd.  57 I.T.R. 176, 181 ; 35 Comp. Gas. 620 ;  3 S.C.R. 439 (S.C.). ' According to that analysis, the first part of the section defines the scope of the jurisdiction of the Income-tax Officer to act under that provision. Once again it is the common case of both the parties that the assessee, which is a company, not having declared any dividend in respect of the years in question, the Income-tax Officer had the jurisdiction to act under Section 23A of the Act. The second part of Subsection (1) of Section 23A provides for the exercise of that jurisdiction. The third part relates to the assessment and computation of super-tax. We are concerned in the instant case with the second part of Section 23A(1). No dividend having been declared by the assessee (no dividend having been declared undisputably amounts to a deficiency in the statutory percentage), the Income-tax Officer was bound to invoke Section 23A of the Act, and then to consider whether any super-tax had to be levied on the assessee.
9. The second part of Section 23A(1) enjoins on the assessing authorities a duty to first consider, whether,--
(a) it would have been unreasonable to declare any dividend (or more dividend than that actually declared) having regard to the losses incurred by the company in the earlier years; or
(b) it would have been unreasonable to declare any dividend having regard to the smallness of the profits made in the previous year under assessment.
10. If the assessing authority is satisfied that the declaration of the dividend (or the declaration of the dividend below the statutory percentage) was not unreasonable either in view of the smallness of profits during the previous year, or in view of the losses suffered by the company in the earlier years, it is bound to decline to proceed further under Section 23A. No super-tax can be levied under that provision in case the assessing authority records a finding on any of the above-mentioned two questions in favour of the assessee. The whole dispute in the present case relates to the question of satisfaction of the assessing authority on one or both of theabovementioned points. It was in order to determine the question of small-ness of profits relevant under the above-mentioned part of Section 23A(1) that the question of the income added by invoking the proviso to Section 13 being treated or not being treated as commercial profits of the firm came up for consideration before the assessing authorities in the present case. In Gangadhar Banerjee's case the Supreme Court has laid down that the income which has to be taken into account for coming to a proper decision on the question of smallness of profits or otherwise under Section 23A of the Act is not the gross or the total receipts of the assessee actual or fictional, but the profits earned by the company determined in the light of commercial principles. It has nowhere been laid down that profits of an assessee computed under the proviso to Section 13 of the Act are not commercial profits. We are inclined to agree with the submission of Mr. B. S. Gupta that the Tribunal was in error in observing in its appellate order that in determining the commercial profits, the assessing authority cannot take into consideration the income estimated by the Income-tax Officer under the proviso to Section 13. Estimated additions to commercial income of an assessee, in our opinion, partake of the same character as the income returned by an assessee himself on the basis of inaccurate or incomplete accounts. .The mere fact that the income is not computed from the books of the assessee, but on the basis of an estimate does not, in our opinion, clothe the estimated addition with any character other than that of commercial income. While determining the question of smallness of profits in the relevant previous year, the Tribunal appears to have excluded from consideration the additional income computed by the Income-tax Officer under the proviso to Section 13 of the Act. We are unable to justify that part of the Tribunal's order on any possible interpretation of any portion of Section 23A of the Act. The question whether profit of the company available for distribution was so small that it would be unreasonable for it to declare. dividend is, as laid down by a Division Bench of the Madras High Court in Rasipuram Union Motor Service Private Ltd. v. Commissioner of Income-tax,  53 I.T.R. 702 (Mad.) essentially one of fact, and unless a finding is recorded and an order is made which is palpably contrary to the evidence on record, the court cannot say that the order is bad and erroneous in law. This does not, however, debar us from expressing the opinion given above as the question of smallness of profits appears to have been determined in this case by the Tribunal on an erroneous interpretation of Section 23A. In these circumstances, we might normally have remitted the case to the Tribunal to clarify if it was in a position to state that it is satisfied even after taking into account the estimated additions of incomethat the non-declaration of dividends by the assessee during the years in question was not unreasonable in view of the smallness of profits earned by it in that year. But it is unnecessary for us to adopt that course in view of the finding recorded by the Tribunal to the effect that it was satisfied that it was the loss in the earlier years which was responsible for non-declaration of dividends in addition to the responsibility for such non-declaration being also due to smallness of profits in the previous years concerned. As already observed, the Tribunal had to pass an order setting aside the assessment under Section 23A of the Act, even if one of the abovesaid two findings was to be correct. The learned counsel for the revenue did not contend that the findings of the Tribunal to the effect that it was the loss which was responsible for the non-declaration of dividends was not intended to convey anything other than loss ' in the earlier years '. The finding of the Tribunal, and it is conceded that the Tribunal was competent to record such a finding, about the non-declaration of dividends being due to loss in the earlier years being a pure finding of fact, is binding on all concerned at this stage.
11. The Income-tax Appellate Commissioner considered the question of losses in the earlier years, but did not give relief to the assessee on that ground as he found the losses to have been adjusted in the subsequent years. That approach to the problem was clearly erroneous in view of the law laid down by their Lordships of the Supreme Court in Commissioner of Income-tax v. Jubilee Mills Ltd.  68 I.T.R. 630, 635-36; 38 Comp. Gas. 348;  2 S.C.R. 539 (S.C.). In that case it was held that even if the applicability of Section 23A is attracted on account of the case falling within its first portion, the Income-tax Officer has to consider whether having regard to the losses incurred by the company in earlier years (or having regard to the smallness of its profits), it would have been unreasonable for the company to declare a dividend larger than which it had actually declared. In that connection it was observed further as below:
'The argument was stressed that where the company adjusts losses against the paid-up capital and reconstructs its capital, the financial position of the company and its dividend distributing capacity in subsequent years have to be judged only by the result of its trading after reconstruction and not with reference to earlier losses which have disappeared by adjustment. In our opinion, there is no warrant for the argument put forward on behalf of the appellant. There is nothing in the language or context of Section 23A(1) of the Act to suggest that the expression ' losses incurred in the earlier years' should be construed so as to exclude losses incurred prior to the reconstruction and to include only unadjusted or carried forward losses still outstanding in the books of the company. In our opinion, the losses which have been adjusted in the books of the company at the time of reconstruction do not cease to be ' losses incurred by the company in the earlier years' within the meaning of Section 23A(1)'.
12. The assessing authorities were, therefore, bound to consider the question of unreasonableness or otherwise of non-declaration of dividends having regard to the losses incurred by the assessee-company in the earlier years. It was on a consideration of this matter that the Tribunal appears to have recorded a finding in paragraph 6 of its appellate order in favour of the assessee.
13. For the foregoing reasons, we would answer the question referred to us as below.
' On the facts and in the circumstances of the case, the provisions of Section 23A of the Act were applicable to the case, inasmuch as the assessee company had declared no dividends in the years in question, but the order of the Tribunal setting aside the assessments under Section 23A was correct in view of its finding on the question of losses in the earlier years.'
14. In the circumstances of the case, the parties are left to bear their own costs.
Mehar Singh, C.J.
15. I agree.