TMI Blog1994 (11) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company was dealing in dyes and chemicals manufactured by others. Apart from the business income from this source, it had also income from dividends, income from subletting of premises and property income. In addition to this, it had also earned long-term capital gains on sale of certain shares held by it as investment. The gross income of the assessee for the above assessment year stood as below: Rs. Business income 8,99,324 Property income 16,268 Income from other sources 7,98,917 Long-term capital gains on the sale of movable assets 2,52,289 -------------------- 19,66,798 -------------------- Out of the above income of Rs. 19,66,798, a sum of Rs. 10,67,474 happened to form the income from house property, other sources and capital gains. The Income-tax Officer held the company to be an investment company within the meaning of section 109(ii) of the Income-tax Act, 1961, on the basis that the income from these sources was more than 50 per cent. of its gross total income. He, therefore, estimated the net distributable income of the assessee-company for the year at Rs. 8,93,503 and the amount to be distributed as dividends at Rs. 8,04,153. As against this, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dends actually distributed, if any, within the said period of twelve months." The expressions "distributable income" and "statutory percentage" are defined, respectively, in clauses (i) and (iii) of section 109. These clauses, so far as relevant, read: "(i) 'distributable income' means the gross total income of a company as reduced by-- (a) the amount of income-tax payable by the company in respect of its total income, but excluding the amount of any income-tax payable under section 104;.... (iii) 'statutory percentage' means,-- (1) in the case of an investment 90 per cent.; company other than an investment company which falls under sub-clause (3) of this clause (2) in the case of an Indian company 45 per cent.; 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 (3) in the case of an Indian company (not being an Indian company which falls under the provisions of clause (a) of sub-section (4) of section 104), a part only of whose gross total income consists of profits and gains attributable to the business of construction of ships or of manufacture or proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is income falling under other heads that is determinative of the real character of a company. The decisive factor is the nature of the activities of the company which give rise to the income. A company engaged mainly in business or industrial activities cannot be held to be an investment company merely because in a particular year its income from such business or industrial activity is insignificant or a negative figure and most of the income of that year turns out to be income from investment, income from securities, capital gains, etc. The definition nowhere says that if "in any assessment year" the income of the assessee which is chargeable under any of the heads specified in clause (ii) is not less than 51 per cent. of the amount of its gross total income, it will have to be treated as "investment company" for that assessment year. Had that been the intent, the Legislature would have said so in specific terms as has been done in the Explanation to sub-section (4) of section 104 of the Act (as it stood at the material time) which provides that for the purposes of clause (a) thereof "the business of a company shall be deemed to consist mainly in the construction of ships or in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefrom. In addition to that, the assessee also derives income from dividends, sub-letting of premises and properties. In the previous year relevant to the assessment year 1972-73 to which this relates, the assessee derived income also by way of long-term capital gains. The business income of the assessee during this year was Rs. 8,99,324 as against income of Rs. 10,66,798 from house property, other sources and capital gains. The income from sources specified in clause (ii) of section 109, thus being more than fifty per cent. of the total gross income for that year, the Income-tax Officer held the assessee to be an investment company. On appeal, the Commissioner of Income-tax (Appeals) did not approve of the above approach of the Income-tax Officer. He was of the opinion that on a reading of the definition of "investment company" in clause (ii) of section 109 of the Act, it would not be proper to hold the assessee to be an investment company only because in one, two or three years its income from business fell short of fifty per cent. of the gross total income. According to him, to determine whether a company's income "mainly" comprised income from house property, etc., it was ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fifty-one per cent. of its total income. The question that arises for consideration is whether merely on that account, it can be held to be an "investment company" within the meaning of clause (ii) of section 109 of the Act. The answer in clear terms has to be in the negative. Because from a perusal of the activities of the company and its income pattern since 1950-51, it is evident that its gross total income mainly consists of income from business and not income from securities, house property, capital gains and other sources. The company is, therefore, not an investment company. It cannot be held to be so in a particular year merely because its income from non-business sources specified in clause (ii) of section 109 in that year happens to exceed its business income. We are, therefore, of the clear opinion that under the facts and circumstances of the case, the Tribunal was justified in taking an overall view of the functioning of the company instead of confining its attention to the income of the year under consideration for the purpose of determining whether the assessee-company was an "investment company" within the meaning of clause (ii) of section 109 of the Act and o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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