TMI Blog1959 (4) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ending March 31, 1946. The Department and the Income-tax Appellate Tribunal answered the question in the affirmative. On a statement of the case to the High Court under section 66(1) of the Income-tax Act, a Bench of the Calcutta High Court (Chakravartti, C.J., and Lahiri, J.) answered it in the negative, reversing the orders of the Department and the Tribunal. As the Bench refused to grant the necessary certificate of fitness, the appellant applied for, and obtained, special leave to appeal, by an order of this court dated September 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Schedule I attached to the Excess Profits Tax Act, 1940? " The matter was heard by the High Court with the result indicated above. Hence, this appeal by special leave. There is no doubt that excess profits are not chargeable under the Act unless the income falls within the ambit of business profits. Section 2(5) of the Act defines "business" as under : " 'business' includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but does not include 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of this proviso, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business." The First Schedule, which contains the rules for computation of profits, provides, in sub-rule (4) of rule 4, as follows : " (4) 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." 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 cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of " business " contained in the main clause of section 2(5), which was also assumed to be parallel to the connotation of the term " business " under the Indian Income-tax Act. Having thus excluded, without giving any reasons why they had to be excluded, the provisions of the main clause of the definition of " business ", as contained in the Act, the learned Chief Justice addressed himself to the question whether the first proviso to the definition clause, which was in the nature of an additional provision, could govern the facts of the case, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate his reasons for doing so. Ordinarily, the court has first to consider whether the main clause of the definition of the term "business" would govern the facts of the case. The question of the application of the first proviso, which, it is common ground, is in the nature of an additional provision which brings within its ambit certain types of income (to use a neutral term) which would not otherwise have come within the terms of the main clause of the definition, can arise only if the court first comes to the conclusion that the main clause of the 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 consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court, but it does not answer the question referred to it. It has, therefore, to be considered whether the main definition clause in section 2(5) can come into play in giving the answer to the question referred for the opinion of the High Court. The term "business" is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial decisions of high authority that it is neither practicable nor desirable to make any attempt at de-limiting the ambit of its connotation. Each case has to be determined with reference to 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. On appeal, it was held that the syndicate was carrying on a business, and that the profits derived therefrom were liable to excess profits tax. In order to ascertain the business of a company, its memorandum has to be looked into. The memorandum provides the key to what the business objects of the company are, and it has further to be ascertained whether those objects are still being pursued. In the present case, the relevant clauses of the memorandum of association have been set out, and there cannot be the least doubt that the managing of property and 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which had to deal with money and credit, and that the bank had always to have in its hands cash and easily realisable securities to meet any probable demands by its depositors. But it had been found as a fact that the bank had been selling shares and securities not only for the purpose aforesaid, but also for augmenting its reserve funds. It was held by the Judicial Committee that it had been rightly decided by the Department and by the High Court, on a reference, that the purchase and sale of shares and securities were a part of the banking business of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rental income by the bank could not come within section 10 of the Income-tax Act, and the definition of " business " in the Act and in the Income-tax Act, in so far as they are relevant to the present case, must be the same. In other words, it was contended that as realisation of rents from house property of the bank could not come within the purview of section 10 of the Income-tax Act, it could not also come within the purview of the Act we are now concerned with. In my opinion, there is a fallacy in this argument. The scheme of the two Acts is not the same. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the respondent company had purchased the shares, it took an active interest in the affairs of those two companies, and in 1920 negotiations were proceeding for the sale of those shares. The company was assessed to excess profits duty. On appeal, the Special Commissioners accepted the argument on behalf of the company that it was not carrying on a trade or business within the meaning of the taxing statute, and that it was only a holding company and stood in the same position as an individual who had acquired and held investments. On appeal by the Revenue, it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standard profits and their computation. Excess profits tax was chargeable on the excess of profits during the chargeable accounting period over the standard profits, i.e., profits during the standard period. Section 5 of the Act provides : " This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub-clause (i) or sub-clause (ii) of clause (b) of sub-section (1) of section 4 of the Indian Income-tax Act, 1922. . ." The charging section under the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its functions consist wholly or mainly in the holding of other property. It is manifest from this that in the absence of the proviso (1) to section 2(5) of the Act the word " business " would comprise no function beyond what it comprises under the Income-tax Act and such functions as the holding of investments or the holding of other property would escape the operation of the Act. The heads of income falling under sections 6(ii), 6(iii) and 6(v) of the Income-tax Act, i.e., of interest on securities, and income from property and income from other sources, are not business 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rule applies, the profits shall include all income received from investments held for the purpose of that part of the business, being income to which the persons carrying on the business are beneficially entitled. " Sub-rule (1) deals with business which consists wholly or mainly in the dealing in or holding of investments in the case of various kinds of companies mentioned and sub-rule (2A) deals inter alia with banking business. The respondent being a banking company its business essentially consists in dealing with money and or edit. Such a company has always to keep cash or realisable 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 controv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion can be determined whether the profits arising from a particular function are business profits within the Act or not. As above stated the essential function of a banking company consists in money and credit and to carry on such functions it has to hold investments which under the Income-tax Act would fall under sections 8 and 12. See also section 277F of the Companies Act of 1913, which is now incorporated in the Banking Companies Act. Property is a word of wide connotation and includes moveable and immovable properties, all interests therein and even investments would fall within that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Palace Hotel Ltd. Even under the enactment imposing profits tax corresponding to our excess profits tax it was held not to be income receivable from "investments or other property". Commissioners of Inland Revenue v. Buxton Palace Hotel Ltd. But it was urged that sub-rule (4) of rule 4 of Schedule I lays down a different method of computation and qualifies the qualities of a business when it relates to holding of property. Sub-rule (4) of rule 4 is 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. " 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to excess profits tax under the Act. According to Kapur, J., the renting out of a building was not the business of the bank within the definition of " business " in the Act. This income, therefore, was not properly assessable to excess profits tax. Sinha, J., holds the contrary view. Under the Act, the charge of tax is laid on any business to which the Act applies. The Act does not define " business " exhaustively, but shows what may be included in it. The definition follows to a point the definition given in the Indian Income-tax Act, but by a proviso which enlarges its scope, provides as follows : " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take their colour from what precedes, that is to say, "investments". The holding of other property must itself be investment for earning profits ; otherwise the definition does not apply. The word "investments" is a word of large import. In one sense, every mode of application of one's money intended to yield a return by way of interest, income or profit is investment. When the bank builds a building more than necessary to house itself and with a desire to earning rents from it, it cannot but be stated that the building was constructed as an investment, or, in other words, the bank was holding "other property" 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 lett ..... X X X X Extracts X X X X X X X X Extracts X X X X
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