This appeal by department relates to assessment year 1977-78. T h e assessee is private limited company. According to ITO, distributable income of assessee was Rs. 5,12,473, which included Rs. 2,97,747 being capital gains arising out of sale of shares, which were held as investments. Since assessee was investment company, ITO held that assessee ought to have distributed Rs. 4,61.226 as dividends, being 90 per cent of above distributable income. assessee had distributed Rs. 2,50,000 as dividends. Hence, ITO levied additional tax of Rs. 1,31,236 being 50 per cent of amount of shortfall under section 104 of Income-tax Act, 1961 ('the Act'). Commissioner (Appeals) has cancelled that order on ground that capital gains of Rs. 2,97,747 were not liable to be included for calculating distributable income and that if that amount were excluded, 90 per cent of balance would not be more than dividend declared. department has not come in appeal before us and ground raised is that Commissioner (Appeals) had erred in cancelling said order. 2. contention of learned departmental representative is that amount representing capital gains is includible in calculation of distributable income in circumstances of present case, while contention on behalf of assessee is that it is not so includible. Both sides have relied on certain decisions to which we shall presently refer. 3. There is no legal prohibition for distribution of capital gains as dividend, except where it is forbidden by memorandum and articles of company - Factors (P.) Ltd. v. CIT [1975] 98 ITR 105 (Mad.) In present case, it is not articles of company which forbids assessee-company to declare dividend out of capital gains. Consequently, we have to fall back upon general principles applicable. 4. Section 104(2) lays down circumstances in which order under section 104(1) shall not be made by ITO. One of them is 'smallness of profits'. It is now well settled that 'profits', referred to therein, are 'accounting profits', as distinguished from 'assessable profits' - CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176 (SC). 5. It follows that ITO has to determine commercial profits before making order under section 104(1). Again, commercial profits that are to be taken into account are real commercial profits, while computing commercial profits, regard must be had to commercial principles from businessman's point of view. In this context, mode of preparation of profit and loss account or determination of profits by assessee cannot be taken to be final and conclusive and quantum of commercial profits has to be ascertained with reference to true nature of receipts. 6. We shall apply these well established principles to facts of this case. amount of Rs. 2,97,747 represents capital gains arising out of sale of shares which has been held by assessee as capital assets. Those shares were not stock-in-trade. year with which we are concerned was second year. There were no capital gains either in first year or in subsequent years. remaining shares continued to be held as capital assets. Thus, gains that had arisen came under category of non-recurring capital gains. Since assessee was am investment company, amount realised would, normally, be employed in other investments. In these circumstances, directors of business experience would not distribute amount in question as dividend. amount would be reserved for purpose of replacement of assets sold so as to carry on business of company in normal manner. In circumstances of this case, we are of opinion that in considering reasonableness of dividends declared by assessee, capital gains should not be included for calculating distributable income. 7. We are supported in this view of matter by decision of Bombay High Court in CIT v. Gannon Dunkerley & Co. Ltd. [1971] 79 ITR 637. It was laid down therein that except in exceptional cases, ITO would not be justified in considering amounts, received by way of capital return and capital gains as forming part of profits of assessee-company, while exercising powers under section 23A of Indian Income-tax Act, 1922, which is in pari materia with section 104 of 1961 Act. 8. learned departmental representative contended that present case should be considered as 'exceptional case', as envisaged in above decision, inasmuch as assessee in investment company and capital gains are short-term capital gains. We are unable to accept this contention. We have already set out facts in previous paragraphs and we find that there are not such exceptional circumstances as to render broad principle, laid down in above decision of Bombay High Court, inapplicable. 9. Reliance was placed on behalf of department on two decisions, viz., CIT v. N. Guin & Co. (P.) Ltd. [1979] 116 ITR 475 (Cal.) and CIT v. Amalgamations (P.) Ltd [1977] 109 ITR 115 (Mad.). In Calcutta High Court decision, all available decisions of Supreme Court and High Courts were analysed and it was held that in determining reasonableness of quantum of dividend, it would be in exceptional cases, that amount of capital gains can be taken into account by ITO. principle is same as laid down by Bombay High Court in case already discussed. exceptional case mentioned in Calcutta High Court decision is case where directors decide to treat capital gains as part of profits of company and amount is put back in profit and loss account and, thereafter, only part of such gains is distributed as dividends. In that case, it would be open to ITO to go into question whether greater proportion of such gains should be distributed. It is made clear in that decision that where entire surplus is channelled into reserves, it is not for ITO to lay down that it should have been treated as profits. 10. Now, let us analyse facts of this case in light of principle laid down in said decision of Calcutta High Court. As already stated, capital gains amount is Rs. 2,97,747 and amount transferred to general reserve is Rs. 2,60,000. contention of department is that since entire amount is not transferred to general reserve, this case comes under exception to which Calcutta High Court decision has referred. We are unable to accept this contention. As explained by learned counsel for assessee, balance of Rs. 37,747 is included in amount of Rs. 2,69,000, shown as provision for taxation in balance sheet. Consequently, this case would not come in category of exceptional cases. Besides, as laid down in said decision, question still remains whether amount transferred to general reserve out of capital gains should be distributed as dividend. For that purpose, all surrounding circumstances shall have to be considered. We have already considered them and we find that dividend declared out of profits, other than capital gains, was reasonable. 11. In decision of Amalgamations (P.) Ltd.'s case (supra) Madras High Court has observed that where company itself has included capital gains, derived by sale of investments, in profits and loss account and distributed same as dividend, no question can arise as to whether it was commercial profit available for distribution as dividend. 12. In present case, assessee has not distributed capital gains as dividend and, as such, second condition mentioned in said decision for including capital gains in commercial profits has not been satisfied and, as such, it cannot be said that capital gains in present case constituted commercial profits. 13. As regards inclusion of amount in profit and loss account, we may point out that Part II of Schedule VI of Companies Act, 1956, lays down rules regarding profits and loss account of company and in clauses 2(b) and 3(xii), it has been mentioned that profit and loss account should disclose every material feature, including receipts of non-recurring nature, and also profits and losses on investments to extent not adjusted from any previous provision or reserve. On account of these provisions, if amount of capital gain is shown in profit and loss account, that, by itself, would not convert it into commercial profits, when, in reality, it does not come within ambit of commercial profits in circumstances of case. We have to see real nature of these receipts of technical consideration should not be taken into account to come to different conclusion. In this view of matter, decision of Madras High Court is of no assistance to revenue. 14. Considering all circumstances, we agree with conclusion of Commissioner (Appeals) to effect that in considering question whether assessee has distributed reasonable dividend out of distributable income, amount of capital gains should not be taken into account because they do not form part of commercial profits. If capital gains are so excluded, there is no dispute that there would not be any shortfall in distribution of dividends. It follows that this was not fit case for levy of additional tax under section 104(1) and Commissioner (Appeals) was justified in cancelling order of ITO. 15. In result, appeal fails and is dismissed. *** INCOME TAX OFFICER v. PRAMOD JHAVERI (P.) LTD.