1971 (2) TMI 27 - HC - Income Tax

Explanation 2 to section 23A applicability - Income from Business - wholly or mainly in the Dealing or holding of Investments

Issues Involved:
1. Applicability of Section 23A of the Indian Income-tax Act, 1922.
2. Definition and interpretation of the term "investment" in the context of the assessee's business.
3. Whether the assessee's business consists wholly or mainly in the dealing in or holding of investments.

Issue-wise Detailed Analysis:

1. Applicability of Section 23A of the Indian Income-tax Act, 1922:

The judgment revolves around the applicability of Section 23A, which empowers the Income-tax Officer to assess companies to super-tax on undistributed income in certain cases. The provision mandates that a company must declare dividends at the appropriate statutory percentage of the total income after taxes. The statutory percentage varies depending on the type of company, with a company "whose business consists wholly or mainly in the dealing in or holding of investments" required to declare 100% of the distributable balance as dividends. The Income-tax Officer levied super-tax on the balance of the distributable profits, as the assessee declared more than 60% but less than 100% of its income as dividends.

2. Definition and Interpretation of the Term "Investment":

The court examined the term "investment" in the context of the assessee's business. It was observed that the word "investment" should be understood in its ordinary popular sense as used by businessmen, rather than as a term of art with a defined or technical meaning. The court cited several English cases to support this interpretation, including:

- Inland Revenue Commissioners v. Desoutter Bros. Ltd.: The term "investment" was interpreted in a popular sense, not as a technical term.
- Commissioners of Inland Revenue v. Gas Lighting Improvement Co. Ltd.: Investments were understood as money put out in shares and securities with the expectation of receiving dividends or interest.
- Inland Revenue Commissioners v. Broadway Car Co. (Wimbledon) Ltd.: The court held that rents from leases could be considered as income from investments.
- Commissioners of Inland Revenue v. Tootal Broadhurst Lee Co. Ltd.: Investments were defined as income-yielding property in the vernacular of a business man.

Based on these precedents, the court concluded that laying out money in houses and immovable properties with a view to earning income regularly could be regarded as investments.

3. Whether the Assessee's Business Consists Wholly or Mainly in the Dealing in or Holding of Investments:

The court scrutinized whether the assessee's business consisted mainly in holding investments. The assessee's main source of income was from properties assessed under Section 9 of the Act. The tax authorities found that the assessee's major income every year was derived from house properties, indicating that its main activity was investing in house properties and earning incomes from them. The court noted that the assessee's memorandum of association included objectives such as the purchase and leasing of lands and buildings, reinforcing the notion that the assessee's business involved holding investments in house properties.

The court rejected the assessee's argument that dealing in or holding of investments should be limited to shares, securities, debentures, loans, or bonds. It was held that the term "investment" in Section 23A should not be interpreted in a technical sense but in its popular sense, as supported by English case law.

Conclusion:

The court concluded that the assessee was a company whose business consisted mainly in the holding of investments in house properties. Therefore, Explanation 2(1) to Section 23A was applicable, and the assessee was required to declare 100% of the distributable balance as dividends to avoid the super-tax. The court answered the reference question in the affirmative, in favor of the department, and held that each party would bear its own costs.

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