JUDGMENT K. Shivashankar Bhat, J.—In respect of the assessment year 1979-80, the following question has been referred under section 256(1) of the Income Tax Act, 1961 ("the Act", for short) : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that profits determined under section 41(2) are not to be taken into consideration for the purpose of computing the distributable profits under section 104(1) read with section 109(i) ?" 2. After the regular assessment for the year in question, the Income Tax Officer opined that the assessee had not distributed dividend during the relevant previous year and hence issued a notice initiating proceedings under section 104 of the Act. The assessee had sold some depreciated assets during the previous year, earning a sum of Rs. 4,23,850 in excess of the written down value, which the Income Tax Officer considered as part of the profits earned by the assessee though, in the profit and loss account, there was a net loss of Rs. 2,18,071. By virtue of section 41(2), the difference between the excess value and the net loss which was Rs. 2,34,580, was taxable. The Income Tax Officer opined that this taxable profit under section 41(2) attracted the provisions of section 104(1) also; consequently, he levied additional Income Tax under section 104. The assessee failed before the Commissioner (Appeals) also. The Appellate Tribunal accepted the assessee's contention and held that the difference between the written down value and the price at which the machinery is sold is deemed to be taxable profits under section 41(2) by virtue of the fiction created in the said provision, and that, such a difference was not, in fact, the income of the assessee at all; it is not business profits, as held by the Supreme Court in Commissioner of Income Tax, Bombay City Vs. Bipinchandra Maganlal and Co. Ltd., AIR 1961 SC 1040 a 3. It was contended by learned counsel for the Revenue that the aforesaid decision of the Supreme Court was rendered under the provisions of the Indian Income Tax Act, 1922 (old Act), wherein, there was no provision, similar to section 109 of the present Act, as it stood during the relevant years. Section 109 specifically provided for the computation of "distributable income" for the purpose of section 104; "statutory percentage" also is prescribed by section 109(iii). Section 109 specifically provided for the computation of "distributable income" for the purpose of section 104; "statutory percentage" also is prescribed by section 109(iii). The various items to be deducted from the "gross total income" to arrive at the "distributable income" do not include the difference between the "written down value" and the value received on the actual sale of the machinery; and therefore, this difference cannot be deducted from the gross total income. Section 2(24)(v) was referred to point out that the term "income" includes "any sum chargeable to Income Tax under clauses (ii) and (iii) of section 28 or section 41 or section 59"; therefore, the "gross total income" in section 109 would include the sum chargeable to tax under section 41(2). 4. The relevant provisions are section 41(2) and section 2(24)(v) of the Act which are similar to section 10(2A) and 2(6C) (iv) of the old Act. The present section 104 has replaced section 23A of the old Act. There was no provision similar to the present section 109, except a few aspects found in section 23A of the old Act. Having regard to the similarity of these provisions, it has to be Act, i.e., sections 41(2), 104, 2(24)(v), have not undergone and change from the comparable provisions of the old Act. If so, the decision rendered by the Supreme Court interpreting the relevant provisions of the old Act would equally govern those provisions of the present Act. 5. In the case of Commissioner of Income Tax, Bombay City Vs. Bipinchandra Maganlal and Co. Ltd., AIR 1961 SC 1040 a the Supreme Court held that section 23A provides two conditions to be satisfied for an order thereunder : (i) the profits and gains distributed as dividends are less than the statutory percentage of the distributable income of the company. That is to say, statutory percentage of the distributable income of the company is more than the profits and gains of the company distributed as dividends; (ii) Even if that were to he so, still, the Income Tax Officer cannot proceed to fasten the liability, if the is satisfied that it would be unreasonable to declare any dividend or a higher dividend than the actual dividend declared. It is necessary for the Income Tax Officer to expressly consider this question of reasonableness of unreasonableness of the dividend having regard to the smallness of the profit. 6. It is necessary for the Income Tax Officer to expressly consider this question of reasonableness of unreasonableness of the dividend having regard to the smallness of the profit. 6. Thereafter, the Supreme Court referred to section 2(6C) of the old Act, read with section 10(2), and observed at page 295 : "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 realised 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 of sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the Revenue is justified in taking back that it had allowed in recoupment against wear and tear, because, in fact, 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. 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 realised by sale thereof, though not profit earned in the conduct of the business of the assessee, is notionally 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. 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 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 considerable 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 to total receipts, actual or fictional." 7. Therefore, operation of the fiction created by section 23A and 2(6C) of the old Act was limited to the particular purpose and the Supreme Court held it not possible to extend the fiction to convert the actual "capital return" into a "commercial profit" for other purposes. The receipt on sale of the old machinery is a capital return; the said receipt cannot be considered to offset the seemliness of the commercial profits at all. 8. While, to arrive at the "distributable income" and "statutory percentage", the definition of income under section 2(24) (v) may be relevant, it cannot have any relevancy while considering the "smallness of profit" under section 104(2). The second condition, while applying section 104 of the Act, would still be governed by the concepts of "commercial profits" and "capital return" stated by the Supreme Court in Commissioner of Income Tax, Bombay City Vs. Bipinchandra Maganlal and Co. Ltd., AIR 1961 SC 1040 a Section 109 of the Act, in no way, affected the ratio of the decision of the Supreme Court in the said case to construe section 104(2) which is similar to the second condition stated in section 23A of the old Act. 9. In Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. Ltd., AIR 1961 SC 1040 a Section 109 of the Act, in no way, affected the ratio of the decision of the Supreme Court in the said case to construe section 104(2) which is similar to the second condition stated in section 23A of the old Act. 9. In Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., AIR 1965 SC 1977 the Supreme Court pointed out that, while applying the provisions of section 23A of the old Act, the Income Tax Officer should take an overall picture of the financial position of the business of the company and, while adjudging the reasonableness of the dividend declared, he should put himself in the position of a prudent businessman; he should deal with the problem with a sympathetic and objective approach. Before making an order under section 23A, a duty was cast on the Income Tax Officer to satisfy himself that, having regard to the losses incurred by the company in earlier year or "the smallness of the profit made", the payment of a dividend or a larger dividend than that declared would be reasonable. At page 181, the Supreme Court observed : "The Income Tax Officer, acting under this section, is not assessing any income to tax; that will be assessed in the hands of the shareholder. He only does what the directors should have done. He puts himself in the place of the directors. Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the tax collector but from that of a businessman. The yardstick is that of a prudent businessman. The reasonableness or the unreasonableness of the amount distributed as dividends is judged by business considerations such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. He must take an overall picture of the financial position of the business. It is neither possible not advisable to lay down any decisive tests for the guidance of the Income Tax Officer. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and hid sympathetic and objective approach to the difficult problem that arises in each case." 10. It depends upon the facts of each case. The only guidance is his capacity to put himself in the position of a prudent businessman or the director of a company and hid sympathetic and objective approach to the difficult problem that arises in each case." 10. The Supreme Court reiterated that "the words 'smallness of profit' in the section refer to actual accounting profits in comparison with the assessable profits of the year". (at page 183). 11. Section 23A was held to be in the nature of a penal provision and the Revenue has strictly to comply with the conditions laid down thereunder and the burden was entirely on the Revenue to prove the said conditions. 12. Gobald Motor Service (P.) Ltd. Vs. Commissioner of Income Tax, Madras, (1966) 60 ITR 417 SC was a case where the assessee deliberately omitted and suppressed certain receipts while computing the commercial profits for distribution as dividends. 13. M.R.M. Plantations P. Ltd. Vs. Commissioner of Income Tax, (1986) 160 ITR 213 Mad is a decision of the Madras High Court. The assesses company had treated certain receipts as part of profits, though the receipts were the result of the sale of immovable properties. The surplus of the profits had been transferred to the balance-sheet as commercial profits. This decision is clearly distinguishable on facts. 14. Somasundaram P. Ltd. Vs. Commissioner of Income Tax, ILR (1985) KAR 3412 is a decision of this court. The receipts were in fact omitted from the books of account, which were subsequently treated as part of the available surplus; hence, this court held the receipts to be considered as part of commercial profits. 15. In Cardamom Marketing Co. (Trav.) Ltd. Vs. Commissioner of Income Tax, (1986) 158 ITR 621 Ker the Kerala High Court held that capital gains received from part of the total income of a company within the meaning of section 109 and has to be taken into account in arriving at the distributable income for the purpose of levy of additional tax under section 104. The court had not occasion to consider the second aspect of section 104, as to the reasonableness of the dividends declared and the concept of "smallness of the profits". 16. In fact, the decision of the Madras High Court in Factors (P.) Ltd. Vs. The court had not occasion to consider the second aspect of section 104, as to the reasonableness of the dividends declared and the concept of "smallness of the profits". 16. In fact, the decision of the Madras High Court in Factors (P.) Ltd. Vs. Commissioner of Income Tax, (1975) 98 ITR 105 Mad lays down the principle touching the above aspect. It was held that, whether the capital gain in a particular case is to be treated as profits available for distribution under section 23A (of the old Act) of as a capital return would depend on the facts and circumstances of each case. At page 116, the court observed : "Whether the capital gain in a particular case is to be treated as profits available for distribution under section 23A or a capital return would depend on the facts and circumstances of each case. We have already seen that unless there is an express or implied prohibition under the constitution of the company either under the memorandum or the articles, capital gains are distributable income. The profits realised on sale of such an investment or an asset is a real profit and not a fictional profit or a national profit. The Supreme Court's decision in Commissioner of Income Tax, Bombay City Vs. Bipinchandra Maganlal and Co. Ltd., AIR 1961 SC 1040 a (already referred to) is not authority for the position that even in case where the sale price is more than the cost price and the amount, in fact, was realised and available in the hands of the assessee, it is only notional profit and not commercial profit. It is true that in certain cases capital gain would be in the nature of a return of capital itself and in those cases they would not be considered for the purpose of applicability of section 23A. Barring such exceptional cases, we are of the view that the Income Tax Officer would be justified in considering the amounts received by way of capital gains as forming part of the profits of an assessee while exercising the powers under section 23A of the Act." 17. The two cases pertain to capital gains; further they were not concerned with the second part of section 104 (or the second condition under section 23A of the old Act). 18. The two cases pertain to capital gains; further they were not concerned with the second part of section 104 (or the second condition under section 23A of the old Act). 18. A different note is found in the decision of the Calcutta High Court in Commissioner of Income Tax Vs. N. Guin and Co. (P.) Ltd., (1979) 116 ITR 475 Cal It was held therein that capital gain cannot be equated with commercial profit and it is only a notional or a deemed income. However, the manner in which the directors of the company treated such a receipt, while distributing the dividends, was held to be relevant, as an exceptional case. At page 486, the court observed : "In our view, when a company dispose of any of its capital asset and realises a price higher than its cost price resulting in a surplus then it will be for the directors to decide is such surplus would be treated as part of the profit of the company and included in the distributable surplus. If the directors of the company decide to treat the capital gains as part of the profits of the company and the amount is put back in the profit and loss account, and thereafter if only a part of such gains is distributed as dividend, it would be open to the Income Tax Officer to go into the question whether a greater proportion of such gains should shave been distributed. This would be an exceptional case. But where the entire surplus is channelled into reserves it is not for the Income Tax Officer to lay down that it should have been treated as profits." 19. We are not concerned with capital gain at all. We are required to consider the nature of the taxable profit under section 41(2) and its relevancy to an action under section 104, in the background of section 109. The ratio of Commissioner of Income Tax, Bombay City Vs. Bipinchandra Maganlal and Co. Ltd., AIR 1961 SC 1040 a fully governs the facts of the present case. 20. The Revenue has nowhere established that the second condition under section 104(2) was satisfied in the instant case. The "capital returns" which accrued to the assessee by the sale of depleted machinery has not bearing while considering the reasonableness of the non-declaration of dividend during the previous year. 20. The Revenue has nowhere established that the second condition under section 104(2) was satisfied in the instant case. The "capital returns" which accrued to the assessee by the sale of depleted machinery has not bearing while considering the reasonableness of the non-declaration of dividend during the previous year. In fact, there is not finding at all that the assessee acted unreasonably in not distributing any dividend during the relevant year in question. 21. In the result, we answer the question in the affirmative and against the Revenue. 22. Reference answered accordingly.