JUDGMENT 1. This is a Reference under section 66 (1)of the Indian Income-tax Act. The assessee is a private limited company. It closes its account on the Rath Jatra day every year, and the accounting years in respect of the assessment years 1963-54 and 1954-55 were years ending on the 23rd June 1952 and the 12th July, 1953. 2. In the year ending upon June 23, 19152, the assessee's Profit and Loss Account disclosed a profit of Rs. 2,38,570/ -. In arriving at that profit, the following items of expenses were written off through the revenue accounts: (1) Air-conditioning Rs . 2,69,000/- (2) Furniture Rs . 1,65,000/- (3) Electric lift Rs . 29,089/- (4) Motor Car Rs . 18,413/- (5) Sundry and other capital expenses. Rs . 30,015/- Total Rs. 5,11,517/- In returning the income to the Income-tax Officer, the assessee company added these amounts to the disclosed profit and returned an income of Rs. 12,75,466/ -. In the accounting year ending upon July 12, 1953, the assessee's Profit and Loss Account disclosed a profit of Rs. 8,17,017/ -. This profit was arrived at by writing off certain expenses under the following heads: (1) Furniture Rs. 22,799/- (2) Motor Car Rs. 14,655/- (3) Electric Lift Rs. 32,728/- (4) Sundry and other capital expenses Rs. 23,760/- Total Rs. 93,942/- In this year also in returning the total income, the assessee added these amounts to the disclosed profit according to the accounts. 3. The Appellate Tribunal held that, the correct revenue profit according to the assessee's account books, would be as follows: for the Accounting year ending upon June 23, 1952. Profit as per assessee's accounts Rs. 2,38,570/-Add capital expenses. . Rs. 5,11,518/-Rs. 7,50,088/- Add provision for income-tax Rs. 6,00,000/-Rs. 13,50,088/-For the Accounting Year ending upon July 12, 1953. Profit as per books. Rs. 8,17,017/-Add capital expenses. . Rs. 93,942/-Rs. 9,10,959/-Add provision for income-tax Rs.7,25,000/-Rs. 16,35,959/- 4. Thereafter, deducting the approximate tax payable on the income for the first accounting year, the Tribunal found that the balance of profit would be Rs. 7,50,088/- and similarly, for second accounting year, Rs. 9,10, 959/ -. For the accounting year ending upon June 23, 1952, the assessee passed a resolution in the annual general meeting. The Resolution runs as follows: -Assessment year 1953-54. 7,50,088/- and similarly, for second accounting year, Rs. 9,10, 959/ -. For the accounting year ending upon June 23, 1952, the assessee passed a resolution in the annual general meeting. The Resolution runs as follows: -Assessment year 1953-54. "that in respect of the profits for the accounting year 2008 -2009 Sambat (1951-52) an amount equivalent to sixty per cent, of the income of the company of that year assessable to income-tax, but as reduced by the amount of income tax and super-tax payable by the company in respect thereof, be distributed as dividend amongst the shareholders proportionately to the paid up amount of each share, and that pending the ascertainment of the assessable income by the Income-tax Officer a sum of Rs. 3,30,003/- be so distributed as interim dividend, as recommended by the Directors, at the rate of Rs. 66/- per ordinary share and at the rate of 21/2 p. c. per annum per preference share, free of tax. " 5. Similarly, in the accounting year ending upon July 12, 1953, a resolution was passed in the annual general meeting on the same lines. In the first accounting year, as stated above, the ascertained dividend declared was Rs. 3,30,003/-; and in the second accounting year, Rs. 5,00,000/ -. 6. The total income of the assessment year 1953-54 relevant for the first accounting year was taken by the Income tax Officer at Rs. 24,17,831/-, and the tax determined was Rs. 9,41,187/- leaving a surplus of Rs. 14,76,644/ -. For the assessment year 1954-55 relevant for the second accounting year, the Income-tax Officer determined the total income at Rs. 20,75,535/- and tax at Rs. 9,47,907/-, leaving a balance of Rs. 11,27,628/-Counting upon these surpluses as the divisible profits, the Income-tax Officer held that the assessee did not distribute a dividend of 60 p. c. of the assessable income less tax and therefore, he applied the provisions of section 23a of the Indian Income-tax Act in respect of the company's income. The Appellate Assistant Commissioner cancelled the order of the Income-tax Officer under section 234. The Appellate Assistant Commissioner cancelled the order of the Income-tax Officer under section 234. Before the Tribunal the assessee's contentions were, (1) inasmuch as 60 p. c. of the assessable income had in fact been declared as dividend in terms of the Resolution passed in the general meeting ; the conditions laid down under section 23a (1) had been satisfied and that no order under section 23a should have been passed ; (2) Capital expenses and the expenses disallowed by the Income-tax Department and loss in speculation business could not be regarded as money that was actually at the disposal of the company for distribution as dividend. The capital expenses in question had necessarily to be incurred for properly conducting the! business of the company and in the circumstances, the amount spent therefor should have been treated reasonably not being available for distribution of dividend ; and (3) it is only the accountable profits after meeting other essential requirements of the company and not the assessable income composed partly of the accounting profits and partly of notional income, coming in either as disallowed items of expenditure or as income computed on same artificial basis, that should be the basis for consideration of reasonableness of dividend. 7. The Tribunal held that, the accounting profit as disclosed by the assessee in its accounts should be the basis for consideration whether dividend has been paid to the extent of 60 per cent. It, however, held that the accounting profit disclosed by the assessee should be the revenue profit and it should not be reduced by writing off the capital expenses and on this basis it adjusted the divisible surplus in each of the accounting years relevant for the two assessment years under consideration and held that in the first accounting year, the divisible surplus should be Rs. 7,50,088/- and in the second accounting year, Rs. 9,10,959/ -. It further found that the assessee paid a sum of Rs. 3,30,003/- in the first year as dividend and Rs. 5,00,000/- in the second year as dividend. Therefore, it held that dividend had not been paid to the extent of 60 per cent of the divisible profits, that is the accounting profits less tax thereon. 8. 9,10,959/ -. It further found that the assessee paid a sum of Rs. 3,30,003/- in the first year as dividend and Rs. 5,00,000/- in the second year as dividend. Therefore, it held that dividend had not been paid to the extent of 60 per cent of the divisible profits, that is the accounting profits less tax thereon. 8. Regarding the assessee's contention that it had virtually paid 60 p. c. of the assessable profit, the Tribunal held that the first part of the Resolution was very vague ; it did not propose to declare any dividend for an exact amount; and it only proposed that a particular amount of dividend would be payable depending upon the assessment result of the company's income. It held that the dividend to be declared must be a precise sum of money and it could not be an amount dependent upon the determination of the assessable income. It held that the actual dividend declared was Rs. 3,30,003/- in the first year and Rs. 5,00,000/- in the second year. (So far as the Tribunal's construction of the assessee's resolutions is concerned, we pointed out to Mr. S. Roy, learned counsel for the applicant, that we were inclined to agree with the Tribunal. Mr. Roy did not advance any further arguments on this point. From the above facts and circumstances of the case, the following question of law has been referred to us for opinion: - "whether on the facts and in the circumstances of the case the Income Tax Officer was justified in passing an order under section 23a of the Indian Income Tax Act?" Strictly speaking, we are concerned not with the order of the Income Tax Officer but with the order of the Appellate Tribunal. Our answer to the question will be with reference to the Tribunal's Order. 9. Our answer to the question will be with reference to the Tribunal's Order. 9. Now, the relevant portion of section 23a (1) at the material time 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 up to the end of six months after its accounts for that previous year are laid before the company in general meeting are less than 60 p. c. of the assessable income of the company of that previous year as reduced by the amount of income tax or super-tax payable by the company in respect thereof, he shall, unless he is satisfied that having regard to the losses incurred by the company in earlier years or to the smallness of the profits 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 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, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income. " 10. Discussing the object of this section, the Supreme Court in (1) Sardar Baldeo Singh v. Commissioner of Income Tax, 40 I. T. R. 605 at pages 616 and 617 has observed: "it is further quite clear that in the absence of a provision like section 23a, it is possible so to manipulate the affairs of a company of this kind as to prevent the undistributed profits from ever being taxed, and experience seems to have shown that this has often happened. The following passage from Simon's "income Tax", 2nd edition, volume III, page 341, fully illustrates this situation, 'generally speaking, surtax is one only on individuals, not on companies or other bodies corporate. The following passage from Simon's "income Tax", 2nd edition, volume III, page 341, fully illustrates this situation, 'generally speaking, surtax is one only on individuals, not on companies or other bodies corporate. " Various devices have been adopted from time to time to enable the individual to avoid surtax on his real total income of on a portion of it, and one method involved the formation of what is popularly called a 'one man company'. The individual transferred his assets in exchange of shares of a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his control. The balance of the income which was so distributed remained with the company to form in effect, a fund of savings accumulated from income which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings, he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation. " "the section prevents the evasion of tax by, amongst others, the means mentioned by Simon. " 11. The effect of this section appears to be that, a company to which it applies should accumulate not more than 40 per cent. of its profits to build up reserves or to lay out on capital expenditure, and after the reserves had reached a certain level the company is not allowed to accumulate any part of its current profits. The scope for avoidance of super-tax by using the cloak afforded by company law is now very restricted, and the members of a private limited company are in a little more advantageous position than the partners of a firm: (Vide Kanga and Palkhiwala's "law and Practice of Income Tax", 1950 edition, pages 477 and 478. 12. The scheme of section 23a, therefore, is to prevent evasion of taxation in certain circumstances. 12. The scheme of section 23a, therefore, is to prevent evasion of taxation in certain circumstances. The Supreme Court, in Commissioner of Income Tax, Bombay City v. Bipin Chandra Magan Lai, (2) 41 I. T. R. 290, has explained the scope and applicability of section 23a at pages 294 and 286 in these words:- "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 p. c. 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. . . . . . . . "a company normally distributes dividends out of its business profits and not out of its assessable income. 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 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 profits, 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. " The Supreme Court, it appears, has approved of the decisions of the Bombay High Court in Sir Kasturchand Ltd. v. Commissioner of Income tax, Bombay City, (3) (17 I. T. R. 493) and in Commissioner of Income-tax, Bombay City 1 v. . F. L. Smidth and Co. (Bombay) Ltd. (4) (35 I. T. R. 182) as well as the decision of this court in Ezra Proprietary Estates Ltd. v. Commissioner of Income-tax, West Bengal, (5) (18 I. T. R. 762. There are also decisions of this court in Indra Singh and Sons Ltd. v. Commissioner of Income tax, West Bengal (6) (33 I. T. R. 341) and of the Bombay High Court in New Mahaluxmi Mills Ltd. v. Commissioner of Income-tax, Bombay City 1 (7) (37 I. T. R. 423. In considering "smallness of profit made" in section 23a (1) the Income-tax Officer, according to the Supreme Court, must look to the business profits adjudged in the light of commercial principles. The Bombay High Court describes it as "actual profits from a commercial point of view or "commercial profits" and this court calls it "accountable profits of the company actually at its disposal. " now, what is "business profit" or "actual profit" or "accountable profit" adjudged in the light of commercial principles? This is the question we have to answer in this reference confining ourselves to capital expenditure. " now, what is "business profit" or "actual profit" or "accountable profit" adjudged in the light of commercial principles? This is the question we have to answer in this reference confining ourselves to capital expenditure. But before I proceed to answer the question stated above, it would be relevant to discuss in the context of the facts of the present case what "capital expenditure" is. Capital expenditure may be described as an outlay resulting in the increase or acquisition of an asset or increase in the earning capacity of a business. Certain expenses are recognised as being of a capital nature, although no tangible property may have been acquired as a result. One of such expenses is on additions to property and other assets: vide Pickles cm "accountancy", Second Edition, pp. 197 and 198. In other words, capital expenditure is all expenditure incurred in acquiring fixed assets or in placing the business in a position in which it is able to commence or continue operations: (See Spicer and Pegler's "book Keeping and Accounts", Fourteenth Edition, page 4, Article 4. 13. In the present reference, as I have set out earlier in this judgment from the statement of the case, certain expenses were incurred by the assessee during the two accounting years in question, 'which the Tribunal wanted to add to the profits shown in the respective profit and loss.- accounts. It was admitted by the assessee before the Tax Authorities that these were capital expenses. In any event, most of the items to which our attention has been drawn in the statement of the case, appear to be items of capital expenditure. The point is, whether the Tribunal was justified in including these items to assess the business profits or actual profits or accountable profits of the applicant. I have already said that these profits, however they may be described, have to be considered in the light of commercial principles. What is "capital expenditure", we have already seen. The distinction between capital and revenue expenditure is, broadly, analogous to that between fixed and current assets. Revenue expenditure is incurred in the purchase of goods for resale, in selling those goods, and in administering and carrying on the business: Vide "spicer and Pegler's Book-Keeping and Accounts", 14th edition, Article 4 at page 4. The distinction between capital and revenue expenditure is, broadly, analogous to that between fixed and current assets. Revenue expenditure is incurred in the purchase of goods for resale, in selling those goods, and in administering and carrying on the business: Vide "spicer and Pegler's Book-Keeping and Accounts", 14th edition, Article 4 at page 4. According to the principles of accountancy, revenue expenditure (or loss) constitutes a charge against the profits, and must be debited to profit and loss account, whereas capital expenditure (or loss) is treated as a capital charge, and is shown on the assets side of the Balance Sheet: See Pickles on "accountancy", 2nd Edition, page 197. 14. IN English Crown Spelter and Co. Ltd. v. Baker (8) 5 T. C. 324, the appellant company carried on a business of zinc smelting, and for that purpose required large quantities of "blend". To supply "blend", a new company was formed, which from time to time received assistance from the appellant company in the form of advances or loan. The new company, proving unsuccessful and going into liquidation, the amount due from it to the appellant company was written off as a bad debt. It was held by the King's Bench Division that, the advances to it were investments of capital and that the loss is not deductible in arriving at the profits of the company for assessment. The observations of Bray, J. at page 337 are interesting. These are as follows: - "the question, or one of the questions at all events, therefore, to be determined is,-Is this, properly speaking, capital expenditure? If capital expenditure, you have not to go and see where the money was before it was expended. It does not matter whether it is lying at the bankers or where it is. What you have to see is whether, in common parlance, it is capital expenditure, that is to say an expenditure on account of capital-an expenditure which on the ordinary profit and loss account would not appear as a debit at all, but would appear as a debit when you are dealing with assets. " The Supreme Court, in Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax. " The Supreme Court, in Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax. west Bengal, (9), reported in 27 I. T. R., 34, quotes with approval Certain observations of the Lahore High Court in re: Benarasi Das v. Jagannath, (10) 15 I. T. R., 185, which were as follows: -"it is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between capital and revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us, for each case has been decided on its peculiar facts. Some particular principles can, however, be deducted from what the learned Judges have laid down from time to time. They are as follows: 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. . . . . . . . . . If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment is equally to be regarded as a business expense, but if the lamp sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if Labour saving machinery was acquired the cost of such acquisition cannot, be deducted out of the profits by claiming that it relieves the annual Labour Bill, the business has acquired a new asset, that is, machinery. 15. The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3. 15. The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3. In this case, however, we are not troubled with whether the assets that were acquired were of a permanent character, or gave enduring benefit to the company. The company itself admitted before the Income Tax authorities that the expenses that were incurred were capital expenses. It is dear, however, from the authorities cited above that, according to commercial principles, the company cannot deduct capital expenditure from its profits, as shown in the profit and loss account. There is no exception in this respect, and the Tribunal, in our judgment, was right in adding to the profits shown in the profit and loss account the capital expenses of the company during the relevant accounting years for the purpose of determining its business profits or actual profits or accounting profits out of which dividends had to be declared. There is no doubt that the Income Tax authorities can go behind the profit and loss account for the purposes of their investigations under section. 23a (1). If any authority is needed, we may cite the case of Gobald Motor Service Ltd. v. Commissioner of Income Tax, Madras, (11) reported in 47 I. T. R., at page 825. The Madras High Court has held that, where the Income-tax Officer seeks to apply section 23a to a company and makes a distribution order thereunder, in considering whether owing to the smallness of the "profit made" a larger distribution of dividend by the company would be unreasonable, if he finds that there, has been a suppression of profit he is entitled to add the amount of suppressed profit to the book profit to arrive at the final figure of profit. Similar principles would also apply to a case like this where it is necessary to add to the profit disclosed in the Profit and Loss Account the capital expenses incurred by the company. 16. Mr. S. Roy, learned counsel for the applicant, argued various other points and relied on different authorities in support of his propositions. But having regard to the view that we have taken, I consider it unnecessary to deal with those arguments. There is one point, however, taken by Mr. Roy which ought to be mentioned. 16. Mr. S. Roy, learned counsel for the applicant, argued various other points and relied on different authorities in support of his propositions. But having regard to the view that we have taken, I consider it unnecessary to deal with those arguments. There is one point, however, taken by Mr. Roy which ought to be mentioned. He has. said that, assuming that the tax authorities had the right to add back capital expenses as they have done in the instant case, they had a further duty imposed on them by section 23a. They had to be satisfied whether, having regard to the smallness of the profit made (after taking into account the capital expenses), it would be unreasonable to distribute larger dividend than the dividend actually declared. There is no evidence, Mr. Roy has argued, in the present case that, the Income-tax Officer or the Tribunal made any such enquiries in order to be satisfied in terms of the section. Mr. Roy placed reliance on the observations of the Supreme Court in Commissioner of Income-tax v. Bipinchandra Magan lal and Co. Ltd., (2) (41 I. T. R. 290 at 294). This is a point which certainly deserves careful scrutiny. But upon close consideration of the statement of the case, it appears to me that this point does not affect the respondent at all. In this case the whole question was whether the notional income (that is capital expenditure) formed a part of business profits or actual profits or accountable profits. The parties proceeded on the footing that if the notional income was part of profit, distribution of a larger dividend was reasonable. That was the assumption which both the parties made and arguments were advanced on that basis. Since the tax authorities came to the conclusion, and in our opinion rightly, that the notional income should be added to the profit appearing in the Profit and Loss Account, there was no scope, on the facts of this case, for a further enquiry as to whether owing to the smallness of profit made, it would be unreasonable to distribute dividend larger than the dividend actually declared. I find support for the view that I have taken also in the resolutions passed by the company for the two accounting years in question regarding declaration, of dividends. I find support for the view that I have taken also in the resolutions passed by the company for the two accounting years in question regarding declaration, of dividends. The company in fact wanted to declare "an amount equivalent to 60 per cent of the income of the company of that year assessable to income tax, but as reduced by the amount of income tax and super tax payable by the company in respect thereof". The assessee also submitted to the Appellate Tribunal that in view of the resolutions the; conditions laid down. under section 23a (1) had been satisfied. The contention of Mr. Roy, therefore, is overruled. 17. In the premises the answer to the; question framed is in the affirmative. The applicant will pay to the respondent the costs of this reference, certified for counsel.