TMI Blog1976 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... whose business consists wholly or mainly in the dealing in or holding of investments ? The facts material for our present purpose are : The assessee-appellant is a private limited company incorporated under the Indian Companies Act, 1913, its shares being held by the members of the Nawn family. For the assessment years 1955-56, 1956-57,1957-58 and 1959-60 corresponding to the financial years ending on March 31, 1955, March 31, 1956, March 31, 1957, and March 31, 1959, respectively, the Income-tax Officer being of the view that since the rents accruing to the appellant from lands and house properties held by it formed a major part of its income, it was a company whose business consisted mainly in holding of investments as envisaged by sub-section (1) of section 23A of the Act and Explanation 2(i) thereto and since it had declared more than 60% but less than the prescribed statutory 100% of its total income as reduced by taxes referred to in clauses (a), (b) and (c) of the aforesaid sub-section as dividends, it was liable to super-tax on the undistributed balance of the distributable profits at the prescribed rate of 50%. Accordingly, with the previous approval of the Inspecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing moneys in house properties and its major income every year has been derived from those properties. The controversy revolves only round the meaning of the expression " holding of investments " in the context of section 23A of the Act and Explanation 2(i) thereto. Mr. Mukherjee, counsel for the appellant, has strenuously urged that the expression not having been defined in the Act must necessarily take its colour from and be given the same technical meaning as borne by the expression " investment companies " as used in section 87(f) of the Indian Companies Act, 1913 (which was in operation when the Indian Income-tax Act, 1922, was enacted), or as used in section 372(11) of the Companies Act, 1956, which followed it and thus has to be confined to such companies whose principal business is the acquisition and holding of shares, debentures, stocks or other securities. According to Mr. Mukherjee, the appellant cannot in this view of the matter be deemed to be a company falling within the purview of the aforesaid expression. Mr. Ahuja, counsel appearing on behalf of the revenue, has on the other hand, contended that the expression " a company whose business consists wholly or ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up for interpretation for it is now well-settled that on analogous provisions, fundamental concepts, and general principles unaffected by the specialities of the English income tax statutes, English authorities can be useful guides. See the decision of this court in Commissioner of Income-tax v. Vazir Sultan Sons [1959] 36 ITR 175 (SC). In Commissioners of Inland Revenue v. Gas Lighting Improvement Co. Ltd. [1923] 12 TC 5Q3 (HL), Viscount Cave L.C., while construing the word " investment " in rule 8 of Part I of the Fourth Schedule to the Finance (No. 2) Act, 1915, observed at page 534 as under : " That they (i.e., the shares and debentures held by the respondent-company in a Belgian and two Rumanian oil producing companies) are investments in the ordinary sense of the term, probably no one would deny. They are money put out in the shares and securities of undertakings other than the undertaking of the appellant-company itself, with the expectation of receiving dividends or interest upon them ; and they satisfy any one of the definitions quoted by the Master of the Rolls from well-known dictionaries and any other definition of an investment which I am able to conceive. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from the kinds of securities which are quoted on the stock exchange, and he would, I think, regard as income from investment a profitable rent from a sub-lease of office premises, or the like ........... " In Commissioners of Inland Revenue v. Rolls Royce Ltd. [1944] 2 All ER 340 at 341 ; 29 TC 137 at 140, Macnaghten J. observed as follows : " The word 'investment', though it primarily means the act of investing, is in common use as meaning that which is thereby acquired ; and the primary meaning of the transitive verb 'to invest' is to lay out money in the acquisition of some species of property ; consequently, letters patent, which are undoubtedly a species of property, may properly be described as an investment ......... Some light on the true interpretation of the word 'investment' in the Finance (No. 2) Act, 1939, Schedule VII, Paragraph 6(1), may, I think, be obtained from consideration of the provisions of sub-paragraph (2). The income which is to be included in the profits under sub-paragraph (1) is, it will be observed, income received from investments in the case of a building society, of a banking business, assurance business and a business concerned whol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not distributed. Because of the inclusion of the element of motive, which is difficult of ascertainment as held in David Carlaw Sons Ltd. v. Commissioners of Inland Revenue [1926] 11 TC 96, 120, section 23A(2) virtually remained a dead letter as only one order was passed under section 23A(2) between 1930, when the section was introduced, and 31st March, 1936, when the Income-tax Inquiry Committee submitted its report. By the Amendment Act VII of 1939, the law was recast and the element of motive as also of current needs and possible future requirements of the company for expansion was dropped. Instead, a simple test was adopted by means of section 23A, namely, whether a certain minimum percentage of the distributable income, 60 per cent. generally and 100 per cent. in certain cases, referred to as the statutory percentage, had or had not been distributed as dividends. In case of non-distribution, the section invested the Income-tax Officer with power to make an order levying additional super-tax on the entire undistributed balance of the net income of the company and not merely on so much of it as was necessary to bring up the distribution to the statutory percentage of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable profits of such companies ought to be required to be distributed. 34. The foreign practice on this point also shows that the Indian law is unduly lenient towards such investment companies. In the U.K., investment companies (companies the income whereof consists mainly of 'investment income' ) are treated on special lines in respect of their investment income (i.e., income which, if the company were an individual, would not be earned income) ; such income is automatically deemed to be the income of the members of the company according to their interests, while the estate or trading income of such a company is treated in the same manner as the income of non-investment companies. (Section 262 of the U. K. Income-tax Act, 1952). 35. Very stringent regulations have been laid down in the income-tax law of the U.S.A. in respect of the distribution of earnings of 'personal holding companies'. A special surtax is payable by them upon their undistributed profits, subject to certain adjustments, in addition to the regular corporate normal tax and surtax. This surtax is at the rate of 75 per cent. of the undistributed profits up to 2,000 and 85 per cent. of the amount of undistri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder to other members of the public, (iii) the affairs of the company, or the shares carrying more than 50 per cent. of the total voting power (in the case of an industrial company more than 60 per cent.) were controlled or held by at least six persons (an individual with his relatives, and a nominator and his nominee being treated as one single person), and (iv) such dispersal of control and voting power was present throughout the previous year. In addition, instead of treating the undistributed income as having been distributed as dividends and making the shareholders liable for the additional tax in the first instance, the Amendment Act made the company itself liable to pay the additional super-tax straightaway, at a flat rate of four annas on each rupee of the undistributed income (after permitted deductions). Power was also given to the company to apply to the Commissioner for fixing the statutory percentage of distribution at a reduced level on the ground of current and future needs of the company and a right of appeal was provided to the board of referees from the order of the Commissioner. The 1955 Amendment also provided for set-off of the amounts distribute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 11 of the Act. Excepting these three classes of companies, all other companies were brought within the scheme of additional super-taxation. The expression " profits and gains distributed by any company " appearing in section 104 was not confined to companies deriving income from business. The expression " distributable income " was defined in section 109(i) as meaning the " total income " of a company as reduced by certain items. The " total income " of any assessee under the Act comprised not merely business or professional income, but income under the various heads of income enumerated in section 14. Consequently, the scheme for levy of additional super-tax was also made applicable to a company whose income arose wholly or in part from property (section 22), or securities (section 18), or capital gains (section 45), or other sources (section 56). An " investment company " was defined in section 109(i) of the Act as meaning a company whose business consisted wholly or mainly in the dealing in or holding of investments. The statutory percentage in the case of an investment company (whether Indian company or not) was fixed at 90 per cent. by section 109(iii)(1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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