TMI Blog1967 (7) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutory percentage applicable will be 60 and that has a material effect on the tax liability of the assessee. The assessee was incorporated on 11th October, 1941, and its original subscribed and paid up capital was Rs. 2,00,000. It appears that at some point of time prior to 20th May, 1957,--the exact date does not appear on the record--the subscribed and paid up capital was increased and during the relevant account years, it was Rs. 18,00,000. Soon after its incorporation in July, 1942, the assessee promoted a new company called New India Industries Limited and the assessee was appointed managing agent of that company under an agreement dated 24th July, 1942. The assessee was also appointed managing agent of another company called Cotton Fabrics Private Limited which was floated earlier by the same group of persons who floated the assessee and that was done under an agreement dated 22nd April, 1943. The managing agencies of both the companies continued to subsist in the relevant account years. The assessee held a considerable number of shares of the managed companies during the relevant years of account and according to the finding of fact recorded by the Trlbunal, these shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------- 4. Income from interest. 4,595 3,358 15,276 23,611 -------------------------------------------------------------------------------------------------------------------------------------------------- The statement containing the particulars of shares held by the assessee during the relevant account years disclosed the following figures : -------------------------------------------------------------------------------------------------------------------------------------------------- Assessment year. -------------------------------------------------------------------------------------------------------------------------------------------------- 1957-58 1959-60 1960-61 1961-62 -------------------------------------------------------------------------------------------------------------------------------------------------- I. Shares of managed companies treated by the income-tax department as investments not forming part of the business of dealing in shares. (1) New India Industries Ltd. 6,91,084 6,96,883 6,96,883 6,96,883 Baroda. (2) Cotton Fabrics Ltd. (i) Ordinary shares. 3,69,283 3,69,285 3,69,285 3,69,285 (ii) Preference s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of section 23A of the Income-tax Act, 1922 ? (2) Whether the Tribunal was justified in law in holding that while determining the undistributed balance of the total income for charging super-tax under the provisions of section 23A of the Act, no deduction can be allowed in respect of the expenses actually incurred by the assessee-company but disallowed for the purposes of computing its assessable income ? " The second question was not pressed by Mr. Kaji, learned advocate appearing on behalf of the assessee and, therefore, we have not considered it necessary to state any facts bearing upon that question. The first question was the only question which formed the subject-matter of controversy between the parties and we shall presently examine the rival arguments bearing upon it, but before we do so, it is necessary to point out that the question as framed does not bring out properly the real controversy between the parties. There is no expression like an " investment company " used in section 23A or for the matter of that in any other part of the Act and the use of that expression is, therefore, not appropriate in the Question. The real controversy between the parties is whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are prescribed depending on the nature of the business carried on by the company. It may be that in the case of a company carrying on a particular type of business, it may be necessary that some profits and gains must be ploughed back in the business and the company should not be compelled to distribute the entire profits and gains whereas, in the case of another company carrying on a different kind of business, it may not be necessary to retain any profits and gains and the entire profits and gains can be distributed without any detriment to the business. The Legislature, therefore, provided different statutory percentages in Explanation 2 to the section and that Explanation runs as follows : " Explanation 2.-For the purposes of this section, statutory percentage means (i) in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments ... 100% (ii) in the case of an Indian company whose business consists wholly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power ... 45% (iv) in the case of any other company not referred to in the preceding clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken together for the purpose of answering the requirement of that clause. We cannot accept this contention. It is plainly contrary to the language of the clause. The clause starts by saying " a company whose business consists wholly or mainly in " and then sets out the subject-matter which is governed by the proposition " in ". What must be the whole or main part of the business of the company is denoted by the words " dealing in or holding of investments " and obviously it may be one or the other or both. This construction receives support if we compare the language of clause (i) with that of clause (ii). Clause (ii) talks of an Indian company whose business consists wholly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power. There are three genuses of business activities specified in clause (ii). One is the manufacture or processing of goods ; the other is mining ; and the third is generation or distribution of electricity or any other form of power. Each of the first and the third genuses comprises two or more business activities of an allied nature. On a plain grammatical construction of its lang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investors Ltd. v. Commissioner of Income-tax. The decision of the Calcutta High Court in East India Prospecting Syndicate v. Commissioner of Excess Profits Tax clearly lays down that mere holding of investments or property would not be business within the meaning of the term as used in the Income-tax Act. But it is not necessary to make any detailed reference to this decision since we find that the same proposition has been affirmed by the Supreme Court in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax. The company which came before the Supreme Court in this case was admittedly not a dealer in shares and it merely held investments for the purpose of earning dividends. The question arose whether the dividends on the investments were assessable under section 10 or section 12. Section 12(1A) was not in the Act at the relevant time and, therefore, if the holding of investments by the company could be said to be carrying on business, dividends would be taxable under section 10 : otherwise they would be taxable under section 12. The company which was interested in bringing the dividends under section 10 contended that it was carrying on business of holding investments and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us that in the case of an individual to acquire and hold shares with the object of receiving dividends is to carry on business. We are unable to hold that if a company does the same, it carried on business within section 10 of the Act. " No doubt, the specific question in this case was whether the dividends were assessable under section 10 or section 12, but for the purpose of deciding that question it was necessary to find whether the company was carrying on business and the Supreme Court said in no uncertain terms that a company which is merely holding investments for the purpose of earning dividends cannot be said to be carrying on business. It may be noted that the word " business " is not given any special meaning under section 10. That word has been used in section 10 in its ordinary natural connotation and the decision of the Supreme Court cannot, therefore, be explained away by saying that in that case the Supreme Court was merely considering the question in the context of section 10. The decision of the Supreme Court must, therefore, be taken as laying down that a company which is merely holding investments for the purpose of earning dividends cannot be said to be car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llity by the draftsman's unskilfulness or ignorance of law." The same principle was reiterated by Lord Justice Mackinnon in Sutherland Publishing Co. v. Caxton Publishing Co. (No. 2), when he said : " When the purpose of an enactment is clear, it is often legitimate, because it is necessary, to put a strained interpretation upon some words which have been inadvertently used, and of which the plain meaning would defeat the obvious intention of the Legislature. It may even be necessary, and therefore legitimate, to substitute for an inapt word or words that which such intention requires. " If the legislative intent is expressed with sufficient clarity and there is no doubt as to what the Legislature intended to accomplish, it would not be right on our part to defeat the intention of the Legislature merely because of technical inappropriateness of language used by the Legislature. The duty of the court, as pointed out by Viscount Simon L. C. in Rex v. General Commissioner of Income tax for the City of London : ex parte Gibbs " in construing a statute such as this is to find out what the Legislature must be taken to have really meant by the expressions which it has used, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits Tax, as " some real, substantial and systematic or organised course of activity or conduct with a set purpose ", namely, gaining income from the investments. It is only if the holding of investments is a part of such course of activity or conduct pursued with the set purpose of earning income from the investments that it would be a business of holding investments as understood by the Legislature in clause (i). Suppose a company which is carrying on business of running a textile mill has surplus fund and it invests in shares, the company would undoubtedly be holding investments, but can it be said that its business consists in holding of investments ? Take another case, the case of an insurance company, which was given by my learned brother in the course of the arguments. Such a company in the course of its business would necessarily make large investments of its moneys with a view to earning interest. But on that account, would it be correct to say that its business consists in holding of investments ? The holding of investments would not be a business of the company in either case ; the business of the company would be manufacturing textile goods in the first case and insura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , apart from the shares of the managed companies, there were no other shares held by the assessee as investments. Now, as the finding of fact recorded by the Tribunal shows, the shares of the managed companies were held by the assessee for the purpose of safely retaining the managing agencies of the managed companies which were assets productive of income. These shares were investments made for the purpose of holding the managing agencies and they represented as it were the monies required to be invested for the purpose of holding and retaining the managing agencies. These shares were not held as part of a business activity of holding investments and it would be stretching the words to their breaking point to say in these circumstances that the assessee had the " business " of holding investments. The revenue relied strongly on certain clauses in the memorandum of association of the assessee for the purpose of showing that holding of investments was within the objects clause contained in the memorandum of association and, therefore, the investments held by the assessee constituted the business of the assessee. Now, it is undoubtedly true that it is within the power of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were not held by the assessee as part of any such business. If this is the correct position as we conceive it to be, the shares of the managed companies held by the assessee cannot be taken into account for the purpose of determining whether the business of the assessee consisted mainly in dealing in or holding of investments. The only activity of the assessee which can be taken into account for this purpose is the activity of dealing in shares and it is by reference to that activity alone that we must determine whether the requirement of clause (i) is satisfied. Can it be said that the business of the assessee consisted mainly in carrying on activity of dealing in shares ? That immediately brings us to the question as to what is the test to be applied for the purpose of determining as to when an activity can be said to constitute mainly the business of a company and what is the precise connotation of the word " mainly ". The word " mainly ", it must be noted, does not stand alone : it is used in close connection with and as an alternative to " wholly " and it must receive colour from the context. Moreover, in interpreting this word, we must not lose sight of the reason and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s discharged the burden of showing that the business of the assessee consisted mainly in the dealing in shares or, in other words, the dealing in shares constituted the main business of the assessee ? The argument on behalf of the revenue was that even on the view taken by us, this burden is discharged, for, the income from shares held as stock-in-trade was far in excess of the income by way of managing agency commission and, therefore, if a comparison were to be made between the two businesses, the one of dealing in shares was substantially larger than that of managing agency. This argument invited us to leave out of account the income by way of dividend on shares of managed companies for the purpose of deciding whether the business of dealing in shares constituted the main business of the assessee and the premise on which the argument was based was that the shares of the managed companies were not held as part of any business and, therefore, the income by way of dividend on those investments did not form part of income from business so as to constitute an item to be taken into account. This argument in our view is without force for it fails to take into account the fact that on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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