9911796707
TMI Blog1959 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... tember 27, 1954. The facts of this case are short and simple. The assessee was a banking company in a large way of business. It owns a six-storeyed building where its offices are located on the ground-floor and a part of the sixth floor, while the rest of the building is let out to tenants. The annual rental income derived from the portion let out is about Rs. 86,000. The Tribunal found that the portion let out is about four to five times the floor area of the portion of the building occupied by the assessee for the purposes of its own business. By an order dated March 31, 1949, the Excess Profits Tax Officer assessed the respondent on the said rental income in respect of the accounting period ending March 31, 1946, under sub-rule (4) of rule 4 of Schedule I to the Excess Profits Tax Act, 1940 (XV of 1940) (which hereinafter will be referred to as the Act). On appeal by the respondent, the Appellate Assistant Commissioner, by his order dated January 3, 1950, upheld the assessment on the basis of sub-rule (2) of rule 4 of Schedule I to the Act. He pointed out that the assessee carries on banking business which includes holding investments and thus the rental income in respect of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts : Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investment or property shall be deemed for the purpose of this definition to be a business carried on by such company or society : Provided further that all businesses to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act. " The definition of " business " under the Act is wider than the definition of that term under the Income-tax Act [section 2(4)]. Section 2(19) of the Act defines "profits" as follows : " 'profits' means profits as determined in accordance with the First Schedule. " Section 2(20) defines " standard profits " as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess whether or not it has been charged to income-tax under section 9 of the Indian Income-tax Act, 1922, or under any other section of that Act." Having set out the relevant provisions of the Act, the first question that arises for consideration is whether the letting out of the premises in question can be said to be a business of the assessee bank. The definition of " business " is only an inclusive one, and includes any sort of trade, commerce, or manufacture. Can it be said that realization of income from its investments which may be either in shares, securities or in immovable properties, is not a part of the business of a banking corporation? In my opinion, it will be taking a very narrow view of the functions of a bank to hold that such activities are not within the ambit of the business activities of a bank. In the memorandum of association of the assessee bank, the objects of the company are stated to be : " (a) To carry on all kinds of banking business that are generally carried on by joint stock banks. . ." " (b) To carry on the business of banking in all its branches and departments, including borrowing, raising or taking up money, the lending or advancing money, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, and bring it within the ambit of that kind of business to which the Act applied. The learned Chief Justice rightly pointed out that the first proviso is limited to incorporated bodies and had no reference to individuals. Then the learned Chief Justice observed : " It is to be noticed that in the contemplation of this proviso, property is something different from investments, for it speaks of 'investments or other property.' It is also to be noticed that if the requirements of the proviso are satisfied, the holding of investments or other property shall be 'deemed to be a business,' which implies that it is not really a business and, but for the special provisions made by the proviso, would not be within the general definition contained in the main clause." It is doubtful whether these observations are entirely correct, but, as will presently appear, we are not so much concerned with the proviso as with the main provisions of the definition clause [section 2(5)]. The conclusion of the learned Chief Justice may better be stated in his own words, as follows : " It appears to me that the first matter to which we must address ourselves in answering the question before us is : are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition is out of the way. I will assume that the holding of investments or other property is not the whole or main business of the respondent company. That assumption will put aside the first proviso aforesaid, but that does not by itself lead to the inference that the main provision of the definition clause cannot be applied to the respondent. An argument on these lines was advanced, and was repelled by Lord Greene, M. R., in the case of Commissioners of Inland Revenue v. Desoutter Bros. Ltd. In that case sub-section (4) of section 12 of the Finance (No. 2) Act, 1939, which deals with excess profits tax, was under consideration by the Court of Appeal. The learned Master of Rolls considered the question, and made the following observations which apply with full force to the arguments which found favour in the High Court : " The first argument is based on the language of section 12(4) of the Finance (No. 2) Act, 1939, which deals with excess profits tax. The first sub-section speaks of the profits 'arising in any chargeable accounting period from any trade or business to which this section applies'. It is in respect of those profits that the tax is exigible. It will be obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the particular kind of activity and occupation of the person concerned. Though ordinarily "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include an activity which may be called "quiescent". This is illustrated by the case which went up to the House of Lords in Commissioners of Inland Revenue v. South Behar Railway Co. Ltd. In that case, the facts were these. Down to 1906, the South Behar Railway was held by the respondent company and worked by another company on behalf of the Secretary of State for India, the respondent company being entitled to a share in the profits in consideration of its having supplied funds and materials for the construction of the Railway. In 1906 the respondent company relinquished possession of the Railway to the Secretary of State, on the stipulation that until the option to purchase was exercised, a fixed annuity of pounds 30,000 should be paid to the company in lieu of the share of profits so far paid. After that arrangement in 1906, the company did nothing but receive and distribute the said annuity to its shareholders. It was held by the House of Lords that the company was carrying on a trade or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realisation of rents therefrom was within the objects of the company, if it found it necessary and convenient for carrying on its business. It may be that this line of business activity may not be the main part of its business, but even so, if realisation of rent is one of the sources of business income to the company, it has got to be included in the computation of its profits for the purposes of the Act. This becomes clear on a reference to sub-rule (4) of rule 4, quoted above. But it has been contended that the words " wholly or partly " in the rule are in excess of the provisions of section 2(5), where, in the first proviso, the words are " wholly or mainly ". The suggestion is that the rule, in so far as it substituted "partly" for "mainly", is in excess of the provisions of the statute. In my opinion, this argument is based on an assumption which is not well-founded. As will presently appear from an examination and comparison of the provisions of the Act and the Income-tax Act, rule 4(4) does not necessarily derive its operative force from the first proviso to the main clause of the definition in section 2(5). The proviso, as already observed, is limited to an incorporated bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company, and the profits thus realised were liable to income-tax. Their Lordships of the Judicial Committee also observed that it was not necessary to establish that the bank had been carrying on a separate business of buying and selling shares and investments in order to make profits thus made taxable. Once it is found that such transactions were entered into by the bank not merely with a view to realisation or change of investments, but with a view to carrying on a business in the sense of earning profits, the bank was really carrying on a business within the meaning of the Income-tax Act. Following this decision of the Privy Council, this court decided in the case of Sardar Indra Singh and Sons Ltd. v. Commissioner of Income-tax that the question whether a certain income is profit from business and not an appreciation of capital arising from a change of investment, depends upon the answer to the further question whether that income was so connected with the carrying on of the assessee's business that it could fairly be said that it is the profits and gains of the business in its normal working. It was not necessary further to show that the income had resulted from a cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. The Income-tax Act has brought within its taxing ambit, not only income from what is ordinarily called business, but income from several other sources. Sections 3 and 4 of the Income-tax Act render liable to tax " all income, profits and gains from whatever source derived ", and section 6 of the Income-tax Act classifies the different heads of income, profits and gains into (1) salaries, and the manner of charging the same is laid down in section 7 ; (2) interest on securities, and the manner of charging the tax is laid down in section 8 ; (3) income from property, to be taxed in accordance with the provisions of section 9 ; and (4) profits and gains from business, profession or vocation, to be taxed in accordance with the provisions of section 10. The fifth and the sixth heads of income may be omitted from the present discussion. On the other hand, under the Act in question, only tax on excess profits, arising out of certain businesses, has been imposed. The Act is not concerned with all kinds of income, but only with profits, if made beyond a certain standard laid down under the Act, from business described in section 5. Under the Act, the ambit of the term " business " cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held in the King's Bench Division that the principal business of the company consisted of making investments, and was, therefore, liable to excess profits duty. In support of the second branch of his argument that rental income was not included in "business", the learned counsel for the respondent called our attention to the decision of this court in United Commercial Bank Ltd. v. Commissioner of Income-tax, with special reference to the observations at page 87 to the effect that various heads of income, profits and gains, under the Income-tax Act, must be held to be mutually exclusive, each head having been meant to cover income from a particular source. The case before their Lordships was concerned with the question of set-off of the carried-over loss of the previous year. That case was not in any way concerned with the provisions of the statute now before us. It was concerned only with the scheme of the Income-tax Act, with particular reference to the classification of income into different heads. That case does not throw any light on the interpretation of the term " business ". In view of the considerations set forth above, it must be held that the realisation of renta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act is section 4, the relevant portion of which is : " Charge of tax.---(1) Subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits...." Thus the Act applies to every business, any part of the profits of which are chargeable to income-tax (section 5) and in respect of any business to which the Act is applicable, excess profits tax shall be chargeable on the amount by which the profits during the chargeable accounting period exceed the profits during the standard period (section 4). It is in respect of those profits that the tax is exigible. In order to determine whether income received during a chargeable accounting period is for the purposes of the Act " profits " arising out of " business " or not it becomes necessary to examine what these words, i.e., " business " and profits mean. Section 2(5) of the Act defined " business " as follows : " 'Business' includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Income-tax Act and would not be business within the Act. This court in United Commercial Bank Ltd. v. Commissioner of Income-tax, held that the heads of income mentioned in section 6 of the Income-tax Act are mutually exclusive, each head being specific to cover the item arising from a particular source and, therefore, even if securities are held as trading assets or dealt with in the course of a business by a banker or a dealer in securities the interest must be charged and computed under the head " Interest on securities " under section 8 of the Income-tax Act and not as business profits under section 10 of that Act. This wider connotation of the word " business " in the Act was clearly intended to bring within its net those incorporated societies and companies which otherwise would or might have escaped it. One such company would be a trust investment company whose business is the holding of investments and getting profit therefrom. Such a company cannot be said to be carrying on business, i.e., any trade, commerce or manufacture within the meaning of the main provision, i.e., section 2(5), but it is the proviso which makes it clear that that type of a company is included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealisable securities and other realisable investments in order to meet withdrawals by depositors and the holding of such securities and other investments would be the holding of "investments" and that is its normal and main activity : Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax. See also section 277F of the Indian Companies Act which is now a part of the Banking Companies Act. Therefore the respondent qua the holding of investments of this kind was carrying on business under proviso (1) to section 2(5) of the Act but it is not that kind of business which is the subject-matter of controversy in this appeal. What we have to decide is was the income received as rents from the portion of the respondents' Calcutta building which was not required by the respondent for its own purposes and let out on hire profit within section 2(19) and chargeable under section 4 of the Act. Two arguments were addressed in favour of the contention that such income was profits of business within the Act : (1) that the laying out of money in a multi-storeyed building was itself an investment and (2) that even if the business consisted partly in letting of property the income from that prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t word but in the context it would not comprise investments ". If a banking company as in the present case constructs a multi-storeyed building used a part of it and lets out the rest it cannot be said to carry on "business" unless its main function is the holding of property and we have already seen that the main function of a banking company is dealing in money and credit and for that purpose it holds investments in the form of easily realisable securities. Merely because for the carrying out of its functions a banking company constructs a building its functions will not change from that of a banking company into one of a company engaged in the letting out of property on hire. As the excess profits tax is a taxing measure and the object of the Act also is to tax excess profits it is reasonable to say that the words " investment " and " property " as used in the case of a banking company are used in the same sense as they are used in the Income-tax Act but if their holding by the company is its sole or main function then they will be deemed to be business so as to make the income derived therefrom chargeable to excess profits tax even if otherwise they would not have been so c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be included in the profits of the business whether or not it has been charged to income-tax under section 9 of the Indian Income-tax Act, 1922, or under any other section of that Act. " But before this rule becomes applicable the functions of the company have to fall within the definition of " business " as given in the Act. The definition in Schedule I is confined to computing of profits and has relation to section 2(19) wherein it is mentioned. It cannot be used to affect the quality of the word " business " as used in the Act. It only means that when the functions of a company, i.e., " the activities appropriate to any business ", consist wholly or mainly in the holding of " other property " then in the case of that portion of the business which wholly or partly consists in the letting of property for hire the income from the property shall be included in " profits " in spite of the fact that the income had been assessed under section 9 of the Income-tax Act. It is a far step from saying that the definition of " business " has been modified by sub-rule (4) of rule 4. It relates to a business of letting out of property. The word " business " can either mean what is conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this definition to be a business carried on by such company or society." The charging section is section 4, and it, shortly, provides that the charge is laid on the amount by which the profits in a chargeable accounting period exceed the standard profits of a business. According to another definition, " profits " mean profits as determined in accordance with the First Schedule of the Act. In the Schedule which is enacted as part of the Act, rule 4(4) to which reference has been made in the question, reads as follows : " In the case of a business which consists wholly or partly in the letting out of property on hire, the income from the property shall be included in the profits of the business whether or not it has been charged to income-tax under section 9 of the Indian Income-tax Act, 1922, or under any other section of that Act. " The difference between the definition of " business " and the rule above quoted is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty" within the meaning of the definition, in addition to the investments which it is the normal business of the bank to hold. In my opinion, the income from the property would be regarded as profits from property held as investment, and the profits will have to be calculated, as laid down in Schedule I, rule 4(4). The only difficulty is in the change of language between the definition and the rule, inasmuch as the former speaks of the business which is wholly or mainly the holding of investments or other property, and the latter speaks of a part of the business being the letting out of property. Kapur, J., is of the view that the section defining the word "business" must prevail, because the Schedule is enacted only for the purpose of computing the profits, as laid down in the definition and as the heading of the Schedule shows. That there is a difference between the Schedule and the Act is not to be denied, and the question that naturally falls for consideration is whether the Schedule should be given effect to independently in the circumstances of the case. The Schedule really tends, for the purposes of collection, to widen the definition of a business to include any letting of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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