1980 PLP 138 (PTD)

S. 23‑A‑Company‑Profits available for dividend‑Capital expendi ture‑held, not deductible for computation of "commercial profits". Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 34 ; Banarsidac Jagannath: In re (1947) 15 I T R 185 ; Commissioner of Income‑tax v. Bipinehandra Maganlal & Co. Ltd. (1961) 41 I T R 290 ; Commissioner of Income‑tax v. Smith (F. L.) & Co. (Bombay) Ltd. 0959) 35 I T R 183 ; English Crown Speltex Co. Ltd. v. Baker (1908) 5 Tax Cas. 327 ; Ezra Proprietary Estates Ltd. v. Commissioner of Income‑tax (1950) 18 I T R 762 ; Gobald Motor Service Ltd. v. Commissioner of Income‑tax (1963) 47 1 T R 825 ; Indra Singh & Sons Ltd. v. Commissioner of Income‑tax (1958) 33 I T R 341 ; Kasturchand Ltd. v. Commissioner of Income‑tax (1949) 17 I T R 493 ; New Mahalaxmi Silk Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 423 and Sardar Beldev Singh v. Commissioner of Income‑tax (1961) 3 Taxation 53 (S C) ref. These two applications are conveniently consolidated as the same question arises from similar sets of facts. 2. By these applications presented on 2nd May 1960, the assesee requires the Appellate Tribunal to refer to the High Court certain ques tions of law which are said to arise out of the order of the Appellate Tribunal in I. T. As. Nos. 7429 and 9161 of 1959‑60 dated 24th January 1960. Inasmuch as in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court under section 66(1) of the Indian Income tax Act. 3. The assessee is a private limited company. It closes its accounts on the Rath Jatra day every year and the accounting years in respect of the assess ment years 1953‑54 and 1954‑55 were years ending on 23rd June 1952 and 12th July 1953. 4. In the accounting year ending upon 23rd June 1952, 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. Rs. (1) Air‑conditioning 2,69,000 (2) Furniture 1,65,000 (3) Electric lift 29,089 (4) Motor car 18,413 (5) Sundry and other capital expenses 30,015 Total 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. 12,75,4". 5. In the accounting years ending upon 12th July 1953, the assessee's profit and loss account disclosed a profit of Rs. 8,17,017. This profit was arrived at by writing of': certain expenses under the following heads: Rs. (1) Furniture 22,799 (2) Motor car 14,655 (3) Electric lift 32,728 (4) Sundry and other capital expenses 23,760 Total 93,942 In this year also in returning the total income, the assessee added these amounts to the disclosed profit according to the account. 6. On a perusal of these two years' accounts, the Appellate Tribunal held that the correct revenue profit according to the assessee' account books would be as follows:‑ For the accounting year ending upon 23‑6‑1952. Rs. Profit as per assessee's accounts 2,38,570 Add capital expenses 4,11,518 7,50,088 Add provision for income‑tax 6,00,000 Total 13,50,088 For the accounting year ending upon 12‑7‑1953. Rs. Profits as per books 8,17,017 Add capital expenses 93,942 9,10,959 Add provision for income‑tax 7,25,959 Total 16,35,918 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 the second accounting year, after deducting the approximate tax payable on the income, the balance of profit would be Rs. 9,10,959. 7‑ For the accounting year ending upon 23rd June 1952, the assessee passed a resolution in the annual general meeting. The resolution runs as follows: ‑ That in respect of the profits for the accounting year 2008/2009 Samvat year (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 Offices 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 % per annum per pre ference share, free of tax. 6 Similarly, in the annual general meeting in the same lines. In the first accounting year, however, the ascertained dividend declared was Rs. 3,30,003 whereas in the second accounting year, the ascertained dividend declared was Rs. 5,00,000. 8. The total income of the assessment year 193‑54 relevant for the first accounting year 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 a' Rs. 9,47,907 leaving a balance of Rs. 11,27,628. Counting upon these sur pluses as the divisible profits, the Income‑tax Officer held that the assessee did not distribute a dividend of 60 % of the assessable income less tax and, therefore, he applied the provisions of section 23‑A of the Indian Income‑tai: Act in respect of the company's income. The balance‑sheets and profit and loss accounts for the years ending 23rd June 1952, and 12th July 1953, are made parts of this case. The assessee undertakes to produce the accounts before their Lordships of the High Court at the time of hearing of the case in the High Court. The annexure are marked "A". 9. When the matter was brought in appeal before the Appellate Assistant Commissioner, the assessee was successful and the Appellate Assistant Commissioner cancelled the order under section 23‑A. Being dissatisfie.1 with this order of the Appellate Assistant Commissioner, the Income‑tax officer came up in appeal before the Appellate Tribunal before the Tribu nal the assessee's contentions were: (i) Inasmuch as 60% of the assess able income had in fact been declared as dividend in terms of the resolution passed in the general meeting, the conditions laid down under sec tion 23‑A(1) had been satisfied and that no order under section 23‑A should have been passed ; (2) Capital expenses and the expenses disallowed by the Income‑tax Department and loss in speculation business could riot 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 reasonable not being available for distribution of dividends; (3) It is only the accountable profit after meeting other essential requirements of the company and not the assessable income composed partly of the accounting profits and partly of national income, coming in either as disallowed items of expenditure of as income computed on some artificial basis, should be the basis for consideration of reasonableness of dividend. 10. The Tribunal held by its order which is made a part off this case as Annexure "B", that the accounting profit as disclosed by the assessee in its accounts should be the basis for consideration whether the dividend had been paid to the extent of 60 %. It, however, held that the accounting profit disclosed by the assessee should be the revenue profit and that 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 it should be 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 the divi dend had not been paid to the extent of 60 % of the divisible profit, viz., the accounting profit less tax thereon. 11. Regarding the assessee's contention that it had virtually paid 60% 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 compay's income. It held that the dividend to be declared must be a precise sum of money and 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. 12. From the above facts and circumstances of the case, the following question of law arises: Whether on the facts and in the circumstances of the case, the Income tax Officer was justified in passing an order under section 23‑A of the Indian Income-tax Act? 13. Copies of draft statement of the case were sent to the parties concerned. The Commissioner of Income‑tax has no suggestion. The assessee suggested a few alteration which do not appear to be of any consequence. It also suggested the referring of the fourth question framed by the assessee in the reference application. But in our mind the question now referred covers that the question. The draft statement is finalised. SANKAR PRASAD MITAR, J. ‑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 1953‑54 and 1954‑55 were years ending on the 23rd June, 1952 and the 12th July, 1953. In the year ending upon June 23, 1952, 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:‑ Rs. (1) Air‑conditioning 2,69,000 (2) Furniture 1,65,000 (3) Electric lift 29,089 (4) Motor‑car 18,413 (5) Sundry and other capital expenses 30,015 Total 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: Rs. (1) Furniture 22,799 (2) Motor‑car 14,655 (3) Electric lift 32,728 (4) Sundry and other capital expenses 23,760 Total 93,942 In this year also, in returning the total income, the assessee added these amounts to the disclosed profit according to the accounts. 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. Rs. Profit as per assessee's accounts 2,38,570 Add capital expenses 5,11,518 7,50,088 6,00,000 Add provision for income-tax 13,50,088 For the accounting year ending upon July 12, 1953. Rs. Profit as per books 8,17,017 Add capital expenses 93,942 Add provision for income-tax 7,25,000 16,35,959 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 the second accounting year Rs. 9,10,959. That in respect of the profits for the accounting year 2008/2009 Samvat (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 2 per cent. per annum per preference share, free of tax." 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 years, as stated above, the ascertained dividend declared was Rs. 3,30,003; and in the second accounting year Rs. 5,00,000. 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 sixty per cent of the assessable income less tax and, therefore, he applied the provisions of section 23-A 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 23-A. Before the Tribunal the assessee's contentions were, (1) inasmuch as 60 per cent of the assessable income had in tact been declared as dividend in terms of the resolution passed in the general meeting, the conditions laid down under section 23-A (1) had been satisfied and that no order under section 23-A 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 national income, coming in either as disallowed items of expenditure or as income computed on some artificial basis, that should be the basis for consideration of reasonableness of dividend. The Tribunal held that the accounting profit as disclosed by the assessee in its accounts should be the basis for consideration whether dividend has 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 sixty pr cent of the divisible profits, that is the accounting profits less tax thereon. Regarding the, assessee's contention that it had virtually paid sixty per cent. of the assessable profits, 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 23‑A 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. Now, the relevant portion of section 23‑A(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 com pany up to the end of six months after its account for that previous year are laid before the company in general meeting are less than 60 per cent 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 hat 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 shareholders 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." Discussing the object of this section the Supreme Court in Sardar Balder Singh v. Commissioner of Income‑tax (1960) 40 I T R 605, has observed: ‑‑‑ "It is further quite clear that in the absence of a provision like section 23‑A, 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 the situation 'Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate." Various devices have been adopted from time to time to enable the indi vidual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a 'one‑man company'. The individual transferred his asset in exchange for shares to .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 own 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 find in the character of capital by putting the company into liquidation. The section prevents the evasion of tax by, amongst others, the means w4mtioned by Simon." 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 rip 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 cry 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 Palkhivala Law and Practice of Income tax, 1950 Edn., pp. 477 and 478). The scheme of section 23‑A, therefore, is to prevent evasion of taxation in certain circumstances. The Supreme Court, in Commissioner of Income‑tax v. Bipin Chandra Magan Lal (1961) 41 I T R 290=(1961) 2 S C R 493, has explained the scope and applicability of section 23‑A at pages 294 and 296 in these words: "Clearly, by section 23‑A, 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 (c) the company has not distributed 60 percent of its assessable income of the previous year reduced by the Income‑tax and super‑tax payable, (ii) unless payment of a dividend, or larger dividend than that declared, having regard to (a) losses incurred by the company :n 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 ant 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 variety of artificial rules and takes into account several fictional receipts, deductions and allowances. In considering whether a larger distribution of dividend would be un reasonable, 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 25‑A 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 un reasonable 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 re ceiving 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 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 case in which companies may have to sell off their income producing assets. The Legislature has deliberately used the expression `smallness of profits' and not 'smallness of assessable income' and there is nothing in the context in which the expression 'smallness of profits' occurs which justifies equation of the expression 'profit' with `assessable income'. Smallness of the profit in section 23‑A 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 Kasturchand Ltd. v. Commissioner of Income‑tax (1949) 17 ITR 493 and in Commissioner of Income‑tax v. F. L. Smith & Co. (Bombay) Ltd. (2), as well as the decision of this Court in Ezra Proprietary Estates Ltd. v. Commissioner of Income‑tax (1950) 18 ITR 762. There are also decisions of this Court in Indra Singh & Sons Ltd. v. Commissioner of Income‑tax (1958) 33 ITR 341, and of the Bombay High Court in New Mahalaxmi Silk Mills Ltd. v. Commissioner of Income‑tax (1959) 37 ITR 423. In considering "smallness of profit made" in section 23‑A (1949) 17 ITR 493, 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 the 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 suiting 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 on Accountancy, Second Edition, pages 197 and 198. In other words capital expenditure is cell 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 & Accounts, Fourteenth Edition, page 4, Article 4). In the present reference, as I have set out earlier in this judgment com 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 as 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 current assets. Revenue expenditure is incurred in the purchase of goods for re‑sale, 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. 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, bur would appear as a debit when you are dealing with assets." The Supreme Court, in .4ssam‑Bengal Cement & Co. Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 34=(1955) 1 S C 972, quotes with approval certain observations of the Lahore High Court in In re: Benarsidas v. Jagannath (1947) 15 I T R 185, at p. 198 which were as follows: ‑ 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 lump 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 can not 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. The expressions `enduring benefit' or of a permanent character' were in troduced to make it clear that the asset or the right acquired must have enough durability to justify it being treated as a capital asset." 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 authori ties that the expenses that were incurred were capital expenses. It is clear however, from the authorities cited above that, according to commercial principles, the company cannot deduct capital expenditure from its profit as shown in the profit and loss account. There is no exception in the respect, and the Tribunal, in our judgment, was right in adding to the pro fits shown in the profit and loss account the capital expenses of the company during the relevant accounting yeas for the purpose of determining its busi ness 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 sec tion 23‑A(1). If any authority is needed, we may cite the case of Gobald Motor Service Ltd. v. Commissioner of Income‑tax (1963) 47 I T R 825. The Madras High Court has held that, where the Income‑tax Officer seeks to apply section 23‑A to a company and makes a distribution order thereunder, in consider ing whether owing to the smallness of the "profit made" a large 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 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. 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 23‑A. They had to he satisfied whether, having regard to the smallness of the profit made (after taking into account the capital expenses), it would be un reasonable 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 observa tions of the Supreme Court in Commissioner of Income‑tax v. Bipinchandra Maganlal & Co. Ltd. (1961)41 I T R 290. 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 pf 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. The company in fact wanted to declare "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". The assesses also submitted to the Appellate Tribunal that in view of the resolutions the conditions laid down under section 23‑A(1) had been satisfied. The conten tion of Mr. Roy, therefore, is overruled. 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. Question answered in the affirmative.