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TMI Blog1976 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assistant Commissioner, the Income-tax Officer levied additional super-tax at 50% of the net distributable balance available with the appellant by applying the provisions of section 23A(1) of the Act. Aggrieved by this order, the appellant took the matter in appeal to the Appellate Assistant Commissioner, who acceding to the contention of the appellant and following an order dated April 6, 1963, of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mainly in the holding of investments " appearing in section 23A of the Act as amended by the Finance Act, 1955, means a company whose income is derived from investments in contradistinction to the income received from manufacturing or processing or trading operations and the word " investments " in the context in which it occurs not being a term of art with a defined and technical meaning should be understood i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [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. " In Inland Revenue Commissioners v. Desoutter Bros. Ltd. [1945] 29 TC 155, 160,161 ; [1946] 1 All ER 58, 59, 60 (CA), Lord Greene, while construing the word " investment " occurring in the expression " income received from investment " in section 12(1)(4) of the English Finance (No. 2) Act, 1939, and Schedule 7, Part I, Paragraphs 6(1) and (2) thereof, held that it is not a word of art and it has to be interpreted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting, 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 wholly or mainly in dealing in or holding of investments. In all those cases the investments would be investments acquired by the laying out of money...... Businesses consisting wholly or mainly in dealing in or holding investments would, as a general rule, be businesses where money, and nothing but money, is laid out in acquiring the investments. " Thus the position that emerges from the above-mentioned decisions is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the net income. In other words, the Income-tax Officer was empowered to treat not only that part of the net undistributed income of the company which would be equivalent to the statutory percentage but to regard the whole of it to have been distributed amongst the members in accordance with their shares in the company and included in their total income. The Income-tax Officer was, however, permitted to refrain from making such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 undistributed profits in excess of 2, 000. A corporation is a personal holding company if (i) at least 80 per cent. (or 70 per cent. in certain cases where a corporation was a personal holding company in a prior year) of its gross income for the taxable year is 'personal holding company income', and (ii) at any time during the last half of the taxable year more than 50 per cent. in value of its outstanding stock is owned, directly or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out 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 distributed in excess of the statutory percentage in earlier years against the shortfall of distribution in the accounting year. In 1957, the law was again amended by section 7 of the Finance (No. 2) Act, 1957 (26 of 1957), with effect from first April, 1957. The provisions authorising ad hoc fixation of the statutory percentage for each company and the right of appeal to the board of referees were eliminated. The statutory percentage was fixe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is significant that even in this Act, the restricted definition of the expression " investment company " as appearing in section 372(11) of the Companies Act, 1956, was not adopted by the legislature. By the Finance Act, 1966, which came into force with effect from April 1, 1966, the meaning of the term " investment company " was clarified by amending clause (ii) of section 109 and providing therein that investment company meant a com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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