CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
SECTION 109 — 'DISTRIBUTABLE INCOME', 'INVESTMENT COMPANY' AND 'STATUTORY PERCENTAGE' DEFINED
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · Historic / Omitted Provision
Status: OMITTED. Section 109 was omitted by the Finance Act, 1987, with effect from 1 April 1988.
Life of the provision: The definitions section of Chapter XI in the 1961 Act; it supplied the meanings of 'distributable income', 'investment company' and 'statutory percentage' on which the charge under section 104 operated. Omitted w.e.f. 1-4-1988.
Predecessor: section 23A of the Indian Income-tax Act, 1922 (in its post-Finance Act, 1955 form, under which the additional tax fell on the company itself rather than being deemed a dividend in the shareholders' hands). The bulk of the case law on the Chapter is therefore reported under section 23A and applies directly to sections 104–109, which re-enacted the scheme.
Finance Act, 2026 impact: None. The section was omitted in 1988; the Finance Act, 2026 makes no change to an already-omitted provision. Retained here for completeness of the treatise and for residual litigation, limitation and historical-assessment situations.
A. SECTION COMMENTARY
A.1 Function — the definitions on which the Chapter operated
Section 109 fixed the base on which, and the threshold below which, the additional income-tax under section 104 was attracted. Broadly: 'distributable income' was the total income reduced by the taxes payable and certain other specified deductions; an 'investment company' was a company whose income consisted mainly of investment income; and the 'statutory percentage' was the minimum proportion of distributable income required to be distributed, varying by class of company.
A.2 The operative scheme (editorial summary)
Editorial summary, not verbatim text (verbatim text belongs in the companion Block-1 file). Three definitions were critical. First, 'distributable income' — broadly the gross total income reduced by taxes and certain other specified deductions — represented the fund commercially available for distribution. Secondly, 'investment company' — a company whose income consisted mainly of investment income (interest, dividends, income from property and the like) — attracted a higher statutory percentage, because the scope for using such a company to accumulate income as an avoidance device was greater. Thirdly, the 'statutory percentage' fixed the minimum proportion of distributable income that had to be distributed to escape the charge.
A.3 Doctrinal themes
The computation of 'distributable income' was the arithmetical heart of the Chapter. Because it began from the assessed total income but was then adjusted, the interface between assessed income and commercial profits — the recurring theme of the Chapter XI / section 23A case-law — surfaced here as well: the statutory base had to be reconciled with the commercial surplus actually available, lest the charge fall on income that did not, in commercial terms, exist for distribution (Bipinchandra Maganlal; Gangadhar Banerjee). Classification under section 109 was frequently the threshold dispute: whether a company was an 'investment company' (income 'mainly' from investments) determined which statutory percentage applied, and therefore how large a distribution was required to avoid the charge.
A.4 Repeal and legacy
Omitted by the Finance Act, 1987 w.e.f. 1-4-1988; no change by the Finance Act, 2026. The definitional architecture — distinguishing investment income from active business income, and computing a 'distributable' surplus — foreshadowed later distribution-linked and anti-avoidance levies, including the dividend distribution tax regime (former section 115-O, in force 1-6-1997 until its abolition by the Finance Act, 2020) and the deemed-dividend provisions of section 2(22).
B. STATUTORY POSITION (verbatim heading & omission note; scheme summarised editorially)
Reproduced verbatim from the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025):
Distributable income, investment company and statutory percentage defined.
109. [Omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
Chapter note (verbatim): [Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
C. CASE LAW — CLUSTERED BY ISSUE
Cluster C-1 : Computation of distributable income — commercial profits, not assessed income
Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC).
Facts: A company in which the public were not substantially interested distributed dividends below the statutory measure. The dispute turned on the figure against which the shortfall (and the question of 'smallness of profit') was to be tested — the assessed total income, or the company's real, commercial profits. The assessable income had been swollen by notional and statutory adjustments (for example the balancing charge brought to tax on the sale of depreciable assets, and the disallowance of expenditure actually incurred), so that the income exigible to tax substantially exceeded the profit a businessman would regard as available for distribution.
Issue: Whether, for the purpose of section 23A of the 1922 Act, the 'smallness of profit' and the reasonableness of the dividend are to be judged by reference to the assessed income or by reference to the company's commercial (accounting) profits.
Held: The Supreme Court held that the 'smallness of profit' must be adjudged in the light of commercial or accounting profits, and not the assessable income. In arriving at the assessable profits the Income-tax Officer may disallow many expenses actually incurred and may, in computing income, include many items on a notional basis; profits assessed for tax are therefore not the same thing as the commercial profits out of which alone a dividend can in fact be paid. It is the latter that govern the reasonableness enquiry.
Ratio / why it matters: Commercial profits — not the assessed total income — are the touchstone for testing 'smallness of profit' and the reasonableness of a dividend under the undistributed-profits regime. This is the foundational proposition later carried into the working of section 104.
Relevance to this section: Directly governs section 104 (and the definition of 'distributable income' in section 109): the additional-tax enquiry begins from real, distributable commercial profit, not from the assessment figure.
Source: Supreme Court of India · (1961) 41 ITR 290 · verified via Indian Kanoon / CaseMine.
Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd. (1965) 57 ITR 176 (SC).
Facts: A private limited company declared a modest dividend for the relevant accounting year. The Income-tax Officer, taking the view that a larger dividend could and should have been declared, invoked section 23A and levied the additional super-tax on the shortfall in distribution.
Issue: What is the correct standard for deciding whether the payment of a dividend (or a larger dividend) would be 'unreasonable'; what profits and circumstances the officer must weigh; and how the tax liability of the company is to be treated in arriving at the distributable surplus.
Held: The Supreme Court laid down that the Income-tax Officer, in deciding whether the declared dividend is unreasonable, must put himself in the position of a prudent businessman or a director of the company and deal with the matter from the businessman's point of view and not that of the tax-gatherer. He is to take an overall view of the company's financial position — losses of earlier years, the present profits, the reasonable requirements of the business and like commercial considerations. Where the regular assessment has been completed, the actual tax assessed (not the estimated tax or the figure in the balance-sheet) is to be deducted in computing the commercial/distributable profits. The provision operates as a burden and the onus lies on the Revenue to establish that its conditions are satisfied before an order is made.
Ratio / why it matters: The reasonableness of a dividend under the undistributed-profits regime is a businessman's question answered on the company's commercial profits and overall financial picture; assessed tax is deductible in arriving at distributable profit; and the onus is on the Revenue.
Relevance to this section: The leading authority on the working of section 104 — it supplies the 'prudent businessman' test, the overall-circumstances enquiry and the rule for deducting assessed tax that section 109's 'distributable income' computation presupposes.
Source: Supreme Court of India · (1965) 57 ITR 176 · verified via Indian Kanoon.
Commissioner of Income-tax (Central), Calcutta v. Asiatic Textiles Ltd. (1971) 82 ITR 816 (SC).
Facts: The company, carrying on business as selling agents, was assessed on a total income that left a distributable balance of about Rs. 91,116; yet its profit and loss account disclosed a net commercial loss of about Rs. 11.6 lakh, the loss being attributable to a Rs. 12 lakh fall in the value of shares it held in another mill. The Income-tax Officer levied additional super-tax under section 23A(1) on the distributable surplus thrown up by the assessment.
Issue: Whether the non-declaration of dividend was 'unreasonable' where the company, though showing an assessed distributable surplus, had in commercial terms sustained a heavy loss.
Held: The Supreme Court held that where the directors of a company had reasonable grounds for not declaring any dividend it is not open to the Income-tax Officer to constitute himself a 'super-director'. In considering whether the payment of a dividend would be unreasonable, the officer does not assess any income to tax — he only does what the directors should have done, putting himself in their place; and though the object of the section is to prevent avoidance of tax, the provision must be worked not from the standpoint of the tax-collector but from that of a businessman. The substantial commercial loss was a relevant and, on the facts, decisive consideration.
Ratio / why it matters: The Income-tax Officer is not a 'super-director'; reasonableness is judged commercially and a genuine capital/commercial loss is a legitimate ground for withholding dividend, notwithstanding a positive assessed surplus.
Relevance to this section: Applies the Gangadhar Banerjee / Bipinchandra principle to a stark fact-pattern under section 104's predecessor; squarely relevant to the 'smallness of profit / losses' proviso to section 104.
Source: Supreme Court of India · (1971) 82 ITR 816 · verified via CaseMine.
Commissioner of Income-tax v. Williamson Diamonds Ltd. (1959) 35 ITR 290 (PC).
Facts: A Privy Council appeal concerning a provision analogous to section 23A, where the assessing authority sought to charge additional tax on undistributed profits and the company resisted on the ground of losses and the smallness of distributable profit.
Issue: Whether, in judging the 'smallness of profit' and the reasonableness of the distribution, the authority is confined to the commercial profit of the year in question or may take into account losses and the company's overall financial position.
Held: The Privy Council took the view that the smallness-of-profit and reasonableness enquiry is not confined to the bare commercial profit of the relevant year; losses and the broader financial position of the company are legitimately to be weighed. The decision is repeatedly relied upon in the Indian section 23A / section 104 jurisprudence (it is among the authorities considered in Gangadhar Banerjee) for the proposition that a comprehensive, businessman's view of the company's affairs is required.
Ratio / why it matters: In testing 'smallness of profit', the assessing authority may look beyond the current year's profit to losses and the company's overall position — a comprehensive rather than a single-year enquiry.
Relevance to this section: Persuasive Privy Council authority underpinning the proviso to section 104 (losses of earlier years / smallness of profit). Cited here as a widely-followed authority; the precise report should be consulted before being relied upon in argument.
Source: Judicial Committee of the Privy Council · (1959) 35 ITR 290 · widely cited in s.23A/s.104 jurisprudence (existence confirmed; full text to be verified from the ITR report before citation).
Cluster C-2 : Validity and object of the definitional scheme (cross-referenced from section 104)
Sardar Baldev Singh v. Commissioner of Income-tax, Delhi & Ajmer (1960) 40 ITR 605 (SC).
Facts: The reach and validity of section 23A were in question where the undistributed profits of a company controlled by a group were sought to be brought to charge, the assessee challenging the provision and its application.
Issue: Whether section 23A — the direct predecessor of Chapter XI — is constitutionally valid, and on what basis the assessing authority's satisfaction must rest.
Held: The Supreme Court upheld section 23A as a valid measure directed against the avoidance of personal taxation through the device of withholding distribution in companies controlled by a group. The provision was held to be a legitimate exercise of the taxing power; the officer's satisfaction was to be founded on objective material, and the statutory conditions and safeguards observed before the charge could be imposed.
Ratio / why it matters: The undistributed-profits charge is intra vires and anti-avoidance in object; it must be applied on objective satisfaction and within the statutory safeguards.
Relevance to this section: The foundational authority on the object, validity and character of the charge that section 104 re-enacted; it underpins the entire Chapter and the computation provisions of section 109.
Source: Supreme Court of India · (1960) 40 ITR 605 · leading authority on the validity of section 23A (added in the June 2026 revision; practitioners should confirm the precise report before citation).
D. PRACTITIONER'S NOTE
(1) Start from commercial profit, deduct tax actually assessed. The computation of 'distributable income' presupposes the commercial-profits measure and the deduction of the tax actually assessed (Gangadhar Banerjee; Bipinchandra).
(2) Classification drives the percentage. Whether the company was an 'investment company' fixed the statutory percentage; in any residual matter, settle the classification before computing the shortfall.
E. SOURCES & CITATIONS
Statutory composition verified against the Income-tax Act, 1961 (Bare Act as amended by the Finance Act, 2025), Chapter XI, which records: “[Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]” The marginal headings and omission notes quoted in Part B are reproduced verbatim from that source.
Finance Act, 2026: the in-house Finance Act 2026 Amendment Tracker records no item touching sections 104 to 109 or Chapter XI; the chapter having been omitted in 1988, the Finance Act, 2026 effects no change.
Case citations: the eight load-bearing authorities (Gangadhar Banerjee, Bipinchandra Maganlal, Asiatic Textiles, Williamson Diamonds; Raghuvanshi Mills, Jubilee Mills, East Coast Commercial, Sahu Jain) were web-verified (June 2026) against publicly reported sources (Indian Kanoon, CaseMine, CourtKutchehry and the Income Tax Reports as cited) and recur across the section files by design. The authorities added in the June 2026 revision (Sardar Baldev Singh; and, as analogous principle for the machinery sections, S.S. Gadgil, K.M. Sharma, Chhugamal Rajpal and Sirpur Paper Mills) are well-established Supreme Court decisions cited from their ITR/AIR reports; the precise report should be confirmed before filing.
Caveat: this material is treatise-style commentary for practitioners and academic use on a historic, omitted Chapter; it is not legal advice. Section 104 and its predecessor section 23A produced a large body of authority — the decisions selected are the leading and representative ones. Nothing here is invented; where a particular section number generated no distinct reported corpus, that is stated plainly.
CHAPTER XI — ADDITIONAL INCOME-TAX ON UNDISTRIBUTED PROFITS
SECTION 109 — 'DISTRIBUTABLE INCOME', 'INVESTMENT COMPANY' AND 'STATUTORY PERCENTAGE' DEFINED
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · Historic / Omitted Provision
Status: OMITTED. Section 109 was omitted by the Finance Act, 1987, with effect from 1 April 1988.
Life of the provision: The definitions section of Chapter XI in the 1961 Act; it supplied the meanings of 'distributable income', 'investment company' and 'statutory percentage' on which the charge under section 104 operated. Omitted w.e.f. 1-4-1988.
Predecessor: section 23A of the Indian Income-tax Act, 1922 (in its post-Finance Act, 1955 form, under which the additional tax fell on the company itself rather than being deemed a dividend in the shareholders' hands). The bulk of the case law on the Chapter is therefore reported under section 23A and applies directly to sections 104–109, which re-enacted the scheme.
Finance Act, 2026 impact: None. The section was omitted in 1988; the Finance Act, 2026 makes no change to an already-omitted provision. Retained here for completeness of the treatise and for residual litigation, limitation and historical-assessment situations.
A. SECTION COMMENTARY
A.1 Function — the definitions on which the Chapter operated
Section 109 fixed the base on which, and the threshold below which, the additional income-tax under section 104 was attracted. Broadly: 'distributable income' was the total income reduced by the taxes payable and certain other specified deductions; an 'investment company' was a company whose income consisted mainly of investment income; and the 'statutory percentage' was the minimum proportion of distributable income required to be distributed, varying by class of company.
A.2 The operative scheme (editorial summary)
Editorial summary, not verbatim text (verbatim text belongs in the companion Block-1 file). Three definitions were critical. First, 'distributable income' — broadly the gross total income reduced by taxes and certain other specified deductions — represented the fund commercially available for distribution. Secondly, 'investment company' — a company whose income consisted mainly of investment income (interest, dividends, income from property and the like) — attracted a higher statutory percentage, because the scope for using such a company to accumulate income as an avoidance device was greater. Thirdly, the 'statutory percentage' fixed the minimum proportion of distributable income that had to be distributed to escape the charge.
A.3 Doctrinal themes
The computation of 'distributable income' was the arithmetical heart of the Chapter. Because it began from the assessed total income but was then adjusted, the interface between assessed income and commercial profits — the recurring theme of the Chapter XI / section 23A case-law — surfaced here as well: the statutory base had to be reconciled with the commercial surplus actually available, lest the charge fall on income that did not, in commercial terms, exist for distribution (Bipinchandra Maganlal; Gangadhar Banerjee). Classification under section 109 was frequently the threshold dispute: whether a company was an 'investment company' (income 'mainly' from investments) determined which statutory percentage applied, and therefore how large a distribution was required to avoid the charge.
A.4 Repeal and legacy
Omitted by the Finance Act, 1987 w.e.f. 1-4-1988; no change by the Finance Act, 2026. The definitional architecture — distinguishing investment income from active business income, and computing a 'distributable' surplus — foreshadowed later distribution-linked and anti-avoidance levies, including the dividend distribution tax regime (former section 115-O, in force 1-6-1997 until its abolition by the Finance Act, 2020) and the deemed-dividend provisions of section 2(22).
B. STATUTORY POSITION (verbatim heading & omission note; scheme summarised editorially)
Reproduced verbatim from the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025):
Distributable income, investment company and statutory percentage defined.
109. [Omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
Chapter note (verbatim): [Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]
C. CASE LAW — CLUSTERED BY ISSUE
Cluster C-1 : Computation of distributable income — commercial profits, not assessed income
Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC).
Facts: A company in which the public were not substantially interested distributed dividends below the statutory measure. The dispute turned on the figure against which the shortfall (and the question of 'smallness of profit') was to be tested — the assessed total income, or the company's real, commercial profits. The assessable income had been swollen by notional and statutory adjustments (for example the balancing charge brought to tax on the sale of depreciable assets, and the disallowance of expenditure actually incurred), so that the income exigible to tax substantially exceeded the profit a businessman would regard as available for distribution.
Issue: Whether, for the purpose of section 23A of the 1922 Act, the 'smallness of profit' and the reasonableness of the dividend are to be judged by reference to the assessed income or by reference to the company's commercial (accounting) profits.
Held: The Supreme Court held that the 'smallness of profit' must be adjudged in the light of commercial or accounting profits, and not the assessable income. In arriving at the assessable profits the Income-tax Officer may disallow many expenses actually incurred and may, in computing income, include many items on a notional basis; profits assessed for tax are therefore not the same thing as the commercial profits out of which alone a dividend can in fact be paid. It is the latter that govern the reasonableness enquiry.
Ratio / why it matters: Commercial profits — not the assessed total income — are the touchstone for testing 'smallness of profit' and the reasonableness of a dividend under the undistributed-profits regime. This is the foundational proposition later carried into the working of section 104.
Relevance to this section: Directly governs section 104 (and the definition of 'distributable income' in section 109): the additional-tax enquiry begins from real, distributable commercial profit, not from the assessment figure.
Source: Supreme Court of India · (1961) 41 ITR 290 · verified via Indian Kanoon / CaseMine.
Commissioner of Income-tax v. Gangadhar Banerjee & Co. (Private) Ltd. (1965) 57 ITR 176 (SC).
Facts: A private limited company declared a modest dividend for the relevant accounting year. The Income-tax Officer, taking the view that a larger dividend could and should have been declared, invoked section 23A and levied the additional super-tax on the shortfall in distribution.
Issue: What is the correct standard for deciding whether the payment of a dividend (or a larger dividend) would be 'unreasonable'; what profits and circumstances the officer must weigh; and how the tax liability of the company is to be treated in arriving at the distributable surplus.
Held: The Supreme Court laid down that the Income-tax Officer, in deciding whether the declared dividend is unreasonable, must put himself in the position of a prudent businessman or a director of the company and deal with the matter from the businessman's point of view and not that of the tax-gatherer. He is to take an overall view of the company's financial position — losses of earlier years, the present profits, the reasonable requirements of the business and like commercial considerations. Where the regular assessment has been completed, the actual tax assessed (not the estimated tax or the figure in the balance-sheet) is to be deducted in computing the commercial/distributable profits. The provision operates as a burden and the onus lies on the Revenue to establish that its conditions are satisfied before an order is made.
Ratio / why it matters: The reasonableness of a dividend under the undistributed-profits regime is a businessman's question answered on the company's commercial profits and overall financial picture; assessed tax is deductible in arriving at distributable profit; and the onus is on the Revenue.
Relevance to this section: The leading authority on the working of section 104 — it supplies the 'prudent businessman' test, the overall-circumstances enquiry and the rule for deducting assessed tax that section 109's 'distributable income' computation presupposes.
Source: Supreme Court of India · (1965) 57 ITR 176 · verified via Indian Kanoon.
Commissioner of Income-tax (Central), Calcutta v. Asiatic Textiles Ltd. (1971) 82 ITR 816 (SC).
Facts: The company, carrying on business as selling agents, was assessed on a total income that left a distributable balance of about Rs. 91,116; yet its profit and loss account disclosed a net commercial loss of about Rs. 11.6 lakh, the loss being attributable to a Rs. 12 lakh fall in the value of shares it held in another mill. The Income-tax Officer levied additional super-tax under section 23A(1) on the distributable surplus thrown up by the assessment.
Issue: Whether the non-declaration of dividend was 'unreasonable' where the company, though showing an assessed distributable surplus, had in commercial terms sustained a heavy loss.
Held: The Supreme Court held that where the directors of a company had reasonable grounds for not declaring any dividend it is not open to the Income-tax Officer to constitute himself a 'super-director'. In considering whether the payment of a dividend would be unreasonable, the officer does not assess any income to tax — he only does what the directors should have done, putting himself in their place; and though the object of the section is to prevent avoidance of tax, the provision must be worked not from the standpoint of the tax-collector but from that of a businessman. The substantial commercial loss was a relevant and, on the facts, decisive consideration.
Ratio / why it matters: The Income-tax Officer is not a 'super-director'; reasonableness is judged commercially and a genuine capital/commercial loss is a legitimate ground for withholding dividend, notwithstanding a positive assessed surplus.
Relevance to this section: Applies the Gangadhar Banerjee / Bipinchandra principle to a stark fact-pattern under section 104's predecessor; squarely relevant to the 'smallness of profit / losses' proviso to section 104.
Source: Supreme Court of India · (1971) 82 ITR 816 · verified via CaseMine.
Commissioner of Income-tax v. Williamson Diamonds Ltd. (1959) 35 ITR 290 (PC).
Facts: A Privy Council appeal concerning a provision analogous to section 23A, where the assessing authority sought to charge additional tax on undistributed profits and the company resisted on the ground of losses and the smallness of distributable profit.
Issue: Whether, in judging the 'smallness of profit' and the reasonableness of the distribution, the authority is confined to the commercial profit of the year in question or may take into account losses and the company's overall financial position.
Held: The Privy Council took the view that the smallness-of-profit and reasonableness enquiry is not confined to the bare commercial profit of the relevant year; losses and the broader financial position of the company are legitimately to be weighed. The decision is repeatedly relied upon in the Indian section 23A / section 104 jurisprudence (it is among the authorities considered in Gangadhar Banerjee) for the proposition that a comprehensive, businessman's view of the company's affairs is required.
Ratio / why it matters: In testing 'smallness of profit', the assessing authority may look beyond the current year's profit to losses and the company's overall position — a comprehensive rather than a single-year enquiry.
Relevance to this section: Persuasive Privy Council authority underpinning the proviso to section 104 (losses of earlier years / smallness of profit). Cited here as a widely-followed authority; the precise report should be consulted before being relied upon in argument.
Source: Judicial Committee of the Privy Council · (1959) 35 ITR 290 · widely cited in s.23A/s.104 jurisprudence (existence confirmed; full text to be verified from the ITR report before citation).
Cluster C-2 : Validity and object of the definitional scheme (cross-referenced from section 104)
Sardar Baldev Singh v. Commissioner of Income-tax, Delhi & Ajmer (1960) 40 ITR 605 (SC).
Facts: The reach and validity of section 23A were in question where the undistributed profits of a company controlled by a group were sought to be brought to charge, the assessee challenging the provision and its application.
Issue: Whether section 23A — the direct predecessor of Chapter XI — is constitutionally valid, and on what basis the assessing authority's satisfaction must rest.
Held: The Supreme Court upheld section 23A as a valid measure directed against the avoidance of personal taxation through the device of withholding distribution in companies controlled by a group. The provision was held to be a legitimate exercise of the taxing power; the officer's satisfaction was to be founded on objective material, and the statutory conditions and safeguards observed before the charge could be imposed.
Ratio / why it matters: The undistributed-profits charge is intra vires and anti-avoidance in object; it must be applied on objective satisfaction and within the statutory safeguards.
Relevance to this section: The foundational authority on the object, validity and character of the charge that section 104 re-enacted; it underpins the entire Chapter and the computation provisions of section 109.
Source: Supreme Court of India · (1960) 40 ITR 605 · leading authority on the validity of section 23A (added in the June 2026 revision; practitioners should confirm the precise report before citation).
D. PRACTITIONER'S NOTE
(1) Start from commercial profit, deduct tax actually assessed. The computation of 'distributable income' presupposes the commercial-profits measure and the deduction of the tax actually assessed (Gangadhar Banerjee; Bipinchandra).
(2) Classification drives the percentage. Whether the company was an 'investment company' fixed the statutory percentage; in any residual matter, settle the classification before computing the shortfall.
E. SOURCES & CITATIONS
Statutory composition verified against the Income-tax Act, 1961 (Bare Act as amended by the Finance Act, 2025), Chapter XI, which records: “[Chapter XI omitted by the Finance Act, 1987, w.e.f. 1-4-1988. While sections 95 to 103 were omitted by the Finance Act, 1965, w.e.f. 1-4-1965, sections 104 to 109 were omitted by the Finance Act, 1987, w.e.f. 1-4-1988.]” The marginal headings and omission notes quoted in Part B are reproduced verbatim from that source.
Finance Act, 2026: the in-house Finance Act 2026 Amendment Tracker records no item touching sections 104 to 109 or Chapter XI; the chapter having been omitted in 1988, the Finance Act, 2026 effects no change.
Case citations: the eight load-bearing authorities (Gangadhar Banerjee, Bipinchandra Maganlal, Asiatic Textiles, Williamson Diamonds; Raghuvanshi Mills, Jubilee Mills, East Coast Commercial, Sahu Jain) were web-verified (June 2026) against publicly reported sources (Indian Kanoon, CaseMine, CourtKutchehry and the Income Tax Reports as cited) and recur across the section files by design. The authorities added in the June 2026 revision (Sardar Baldev Singh; and, as analogous principle for the machinery sections, S.S. Gadgil, K.M. Sharma, Chhugamal Rajpal and Sirpur Paper Mills) are well-established Supreme Court decisions cited from their ITR/AIR reports; the precise report should be confirmed before filing.
Caveat: this material is treatise-style commentary for practitioners and academic use on a historic, omitted Chapter; it is not legal advice. Section 104 and its predecessor section 23A produced a large body of authority — the decisions selected are the leading and representative ones. Nothing here is invented; where a particular section number generated no distinct reported corpus, that is stated plainly.