COMMISSIONER OF INCOME TAX, GUJAR4T v. DISTRIBUTORS (BARODA) (P) LTD. September l 6, 1971 [K. S. HEGDE AND A. N. GROVER, JJ.J Jndian Income.Jax Act, 1922, s. 23A-"ln the case of a co111pany
lVhose business consists wholly or mainly in the dealing in or holding of jnvesunent", nzeaning of-Whether holding share of only flVo atnnpanies of ·which it is the Managing Agent is an 'investment company' lrithin the scope of the section.
The assessee is a private limited company and was the Nfanaging Agent of two other companies. All the shares held by the assessee com- pany as its investments were the shares of those two companies.
The Income·tax authorities held that the assessee company was an 'investment company' within the scope of s. 23A of the Act and ordered the company to pay super tax as provided under s. 23A( I). The High Court in refer- ence held in favour of the assessee.
Dismis~ing the appeals, HELD: (I) In the facts and circumstances of the present ease, the a~cssee company cannot be said to be an 'investment company· corning within the scope of s. 23A of the Aet.
The meaning of the expression ''in the case of" a comp.any \.\·hose busi- ness consists wholly or mainly in the dealing in or holding of investments'' both in the main s. 23A and in the Explanation concerns itself with a
con1pany whose business consists "wholly or mainly in the dealing in or holding of investments''. The \.\'Ord '·malnly" must necessarily take its colour from the word "wholly" preceding that word.
Jn other words the ~ompany \.\'hich comes \Vithin the scope of those provisions· must be a company \\'hose primary business is in the dealing in or holding: of invest 4 ments and only in such cases, s. 23A applies.
And the expression 'busi- -ness of holding of investments' in the said section refers to a real, substan- tial and systematic or organised course of activity of investment carried on by an assess« for a set purpo'e such as earning profits. [730 H, 731 DJ AH the shares held by the assessee company as its investments \Vere the shares of the two companies of which it was the Managing Agent. These investments were made for a collateral purpose viz., to have a firm grip over its Managing Agency business.
The investments made by the ~st!8see ~ompany in the shares of the ruaLJaged companies are essentially linked \\'Jth illi ?vianaging Agencies and not with the dealing of that com- pany in shares of other co1npanies.
·111e company's total income from dividend income of the shares of the managed companies and the Manag- ing Agency commission together is much more than the income earned by the company from its sha're dealings.
Further the assets of the com- pany used in its share dealings are not more that its other assets. There- fore, it cannot be said that the assessee company's business consisted wholly or main!; . in the dealing in investments. f7.B FJ
Bengal Assam Investors Ltd. v. C.l.T., West Bengal, 54 l.T.R. 547 and Narain Swadesh Weaving Mills v. Commissioner of Excess Profits Tax, 26 l.T.R. 765, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2350 to
2353 qf 1968 and 1313 to 1316 of 1971. c c.1.T. v. DISTRIBUTORS (P) LTD. ·(Hegde, !.) 727 Appeals by certificate from the judgment and order dated July 7, 1967 of the Gujarat High Court in Income-tax Reference No. 22 of 1965.
S. C. Manchanda, R. N. Sachthey 311.d B. D. Sharma, for the appellant (in all the appeals). S. T. Desai and /. N. Shroff, for the respondent (in all the appeals). The Judgment of the Court was delivered by
Hegde, J. These are some of the appeals where the appel- lant unfortunately had to file two different appeals in respect of the same matter. Civil Appeals Nos. 2350-2353 of 1968 were
brought on the strength of the certificates granted by the High Court of Gujarat. No reasons were given in support of those certificates. Hence those certificates must be considered as\ hav-
ing not been properly granted. The resulting position was that the appeals brought on the strength of those certificates beca.me unsustainable. To get over that difficulty, the Commissioner _of
Income-tax, Gujarat invoked our jurisdiction under Art. 136 of the Constitution to appeal against the judgment of the High Court. Civil Appeals Nos. 1313-1316 of 1971. The assessee is a Private Limited Company and the concerned assessment years are 1957-58, 1959-60, 1960-61 and 1961-62. The only question for decision in these appeals is whether the assessee company comes within the scope of s. 23-A of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act) ? The assessee company was incorporated on October 11, 1941. The object clause in the memorandum of associ.ation contains the usual string of objects.
Confining ourselves to the objects ~ele vant for our present purpose. we get in Clause (3) of the m@o- randum power "to acquire and hold shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business irr British India".
Sub-cl. (p) of that Clause empowers the com- G _pany •toftah_kebpa~t in the form~tion,f management, supervdisioakn. or contro o t e us1.ness or opera!!on o any company or un ert _mg and for that purpose to appoint and remunerate any directors, accountants or other experts or agents''.
Clause ( q) provides power to carry on all or any of the following businesses : "Agents, Chief agents or licensed agents of any u company ….. . W<;, are not c.oncerned with the other objects mentit>ned i1). ,the: mem,orandum:
[1972 J l S.C.R. In July 1942, the assessee company promoted a company known as New India Industries Ltd. By an agreement dated July 24, 194 2, the assessee company was appointed as managing agents of the said New India Industries Ltd.
In 1956, the said managing agency was renewed for a period of five years in view -0f the provisions of the Companies Act, 1956. The group of persons who had floated the assessee company
had earlier in the year 1940 floated a company called the Cotton Fabrics Private Ltd. By an agreement dated April 22, 1943, the assessee company was appointed the managing agent of the said Cotton Fabrics Private Ltd.
In 1956, the said managing agency agreement was also renewed for a period of five years for the very reason referred to earlier. We have already noted that the assessee company is a Private ·Company.
As such it is not a company in which the publjc is substantially interested. The Income-tax Officer was of the opinion that as during the ·company's income from its business activity "in the dealin!\ in or holding of investments" was very much more than that its income from its managing agencies and further as it had used a very large portion of its assets in the former activity, it must be considered as an "investment , conipany"-an expression not found in the Act. Basing himself on that finding, he reasoned thus :
Statutory percentage of profits to be declared as dividends by ·such a company under s. 23A was 100 per cent in the first two assessment years and 90 per cent in the remaining two assessment years.
The dividends declared by the assesssee company fell much below that percentage. Hence it was liable under s. 23A to pay super tax at the rate of 50 per cent on the undistributed balance of the total income reduced as provided in s. 23A(l). He ordered accordingly.
In appeal this decision was affirmed by the Assistant Appellate Commissioner excepting in regard to cer- tain deductions with which we are not concerned. Aggrieved by the order of the Assistant Appellate Commis-
sioner, the assessee took up the matter in second appeal to the Income-tax Appellate Tribunal. The Tribunal agreed with the conclusions reached by the Assistant Appellate Commissioner. Thereafter at the instance of the assessee, the following two ques- tions were referred to the High Court under s. 66(1) of the Act. "1. Whether on the facts and circumstances of the
case the Tribunal was justified in holding that the assessee company is an investment company for purposes .of section 23A of the Income-tax Act, 1922 ? -· . C.I.T. v. DISTRIBUTORS (P) LTD. (Hegde, J.)
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 s. 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 ?" Before the High Court, Counsel for the assessee did not pres& for an answer to the second question.
Hence the High Court did not consider that question. Nor are we called upon to consider that question. The High Court reframed the first question thus : "Whether on the facts and circumstances of the case
the Tribunal was justified in holding that the assessee company is a company whose business consists mainly in dealing in or holding of investments within the meaning of clause ( i) of the second Explanation to section 23A
of the Income Tax Act, 1922 ?" 1he High Court answered that question in the negative and in favour of the assessee. It is the correctness of that decision that is in issue before us.
We have now to consider whether the High Court was right in concluding that the assessee company did not come within the scope of s. 23A. In arriving at its conclusion the High Court had approached the question before it from three different angles vit (I) the objects of the company as mentioned in its memorandum of association; (2) the profits earned by the company during the relevant previous years from its various activities and
( 3) the assets used by the company in those years for the purpose of holding the shares of the managed companies, dealing with the shares of other companies and in conection with its other business activitie~.
Section 23A to the extent relevant for our present purpa&e reads: " ( 1) Where the Income Tax Officer is satisfied that in [espect of any previous year the profits and gains dis- tributed as dividends by any company within the twelve
months immediately following the expiry of that pre- vious year are less than the statutory percentage of the total income of the company of that previous year as reduced by- ( a)
(b) (c) The Income-tax Officer shall, unless he is satisfied that, having regard to the losses incurred by the com- pany, in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or
a larger dividend than that declared would be un- reasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section
23, be liable to pay super-tax at the rate of fifty per cent. In the case of a company whose business consists wholly or mainly in the dealing in or holding of investments and at the rate of thirtyseven percent, in the case of any other
company on the undistributed balance of the total income of the previous year. that is to say, on the total income as reduced by the amounts, if any referr~d to in clause (a), clause (b) or clause (c) and the dividends
actually distributed, if any …… " Explanation 2, to that section says : "For the purposes of this section, statutory percen- tage means: ( i) in the case of a company whose business con-
sists wholly or mainly in the dealing in or holding of investments 100% …. " We have now to see what exactly is the meaning of the expression "in the case of a company whose business "consists wholly or mainly in the dealing In or holding of investments" in the main s. 23A and the expression "in the case .of a company whose business consists wholly or mainly in the dealing in or hold- ing of investments" in cl. ( i) of Explanation 2 to s. 23A. The
Act contains many mind-twisting formulaes but s. 23A along with some other sections takes the_ place of pride amongst them. Section 109 of the 1961 Income-tax Act which has taken the place of old s. 23A of the Act is more understandable and Jess abstruse.
But in these appeals we are left with s. 23A of the Act. Clause (i) of Explamrtion 2 to s. 23A concerns itself with a company whose business consists "wholy or mainly in the dealing in or holding of investments".
The word "mainly" in that clause as well as in the main section 23A must necessarily take its colour from_the word "wholly" preceding that word in those provisions. In other words the company which comes within the scope of those provisions must be one whose prima~y business must be "in the dealing in or holding of investments". If a c;ompany
en~ages itself in two or more equally or nearly equally important busmess c C.J.T. v. DISTRIBUTORS (P) LTD. (Hegde, J.) activities, then it cannot be said that the company's business con- sists "wholly or mainly" in dealing in a particular thing. Further
even in cases where a company has more than one business acti- vity and one of its activity is more substantial than the others, unless that activity is the primary activity of the company, it can- not be said that that company is engaged in "wholly or mainly" in any one of its business activities.
Section 23A in our opinion applies only to cases where the primary activity of the company is c in 'the dealing in or holding of investments'. We shall presently see whether on the facts found by the Tribunal, it can be said that the assessee company's business in the relevant years consisted "of mainly m the dealing in or holding of investments" as it was not the case of the Revenue that it was wholly engaged in that business.
We next come across with another expression which is far more difficult to comprehend than the one that we were consider- ing till now. Section 23A speaks of the business of "holding of
investments''. Here comes the enigma. It is easier to under- stand when the section speaks of a company having the -business of dealing in investments, though to say that the company is deal- ing in investments may at first sight look somewhat incongruous. When the legislature spoke of dealings in investments, it meant dealing in shares, stocks and securities etc.
But when a person invests. in the share of some of the companies, it is difficult to say that his business is one of investing. In commercial circles investing is not considered as business.
An investor may feel perplexed if he is called a businessman. This Court in Bengal and Assam Investors Ltd. v. Commis- sioner of Income-tax, West Bengal (1); came to the conclusion that an individual who merely invests in shares for the purpose of earning dividend, does not carry on a business and that the only way he can come under s'. 10 of the Act is by converting the shares acquired by him into stock-i.n-trade i.e. by carrying on the business of dealing in. stocks and shares.
In that case this Court was con- sidering whether the dividend income of the assessee company therein could be consiaered as business income under s. 10 of the G Act. Therein this C<iurt was not considering the scope of s. 23A. But all the same in that case thi~ Court proceeded on the basis that no one. can make a business of investing.
But then s. 23A speaks of the business of "holding of investments".. V(e we~e told by the Counsel for the assessee that that expression 1s an mcon- gruous one and that we should, following the decision of this Court in Bengal and Assam Investors Ltd.(') hold that tbere is nothing like a business of "holding of investments".
We feel unablfl to accede to that contention. We cannot say that the (1) 59 I.T.R. 547. SUPllEME COURT REPORTS [1972] 1 S.C.ll. legislature did not know its own mind when it used that expres- sion in s. 23A.
We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignor- ed by saying that the legislature enacted the same not knowing what it was saying.
We must assume that the legislature delibe- rately used that expression and it intended to convey some mean- ing thereby. The expressio,n "business" is a well known expression in income-tax law. · It means as observed by this Court in Narain Swadesh Weaving Mills v.
Commissioner of Excess Profits Tax(') : ''.some real, substantial and systematic or organised course of activity or conduct with a set pu_rpose". c This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee.
We must, therefore, proceed on the basis that the legislature was aware of the meaning given by courts to that expression when it incorporated s. 23A into the Act in 1957. Hence we must hold
that when the legislature" speaks of the business of 'holding of investments', it refers to real, substantial and systematic or organis- ed course of activity of investment carried on by an assessee for a set purpose such as earning profits.
Now let us leave s. 23A and proceed to examine the facts of the case to find out whether the assessee company can be held to come within the scope of s. 23A in the light of our interpretation of that provision.
We have earlier referred to the objects clause i.n the memo- randum of association. The memorandum permits the assessee company to take up the management of the other companies, to invest in the shares of the other companies, and to deal in the shares of the companies.
Therefore it cannot be said that the assessee company was incorporated primarily with the object of carrying on the business of the "dealing in or holding of invest- ments". The objects of the assessee company are many fold.
The object of carrying on the business of "dealing in or holding of investments" is only one of them. Hence the memorandum of association does oot assist us in deciding whether the business of. the assessee company "consists of wholly or mainly in the dealing in or holding of investments."
We shall now take up the question of the profits earned by the assessee company during the relevant previous years. The :High Court has in its judgment set out a statement showing the pro.fits earned by the assessee company through its various activities. It would be convenient to set out _the same now :
(1) 26 I .. T.R. 765. c C.J.T. V, DISTRIBUTORS ( P) LTD. (Hegde, J.) ASSESSMENT YEAR 1957-58 1959-60 1960-61 1961-62 Rs. Rs. Rs. Rs. I. Managing Agency . 2,09,999 2,56,315 2,41, 705
1,96,384 2. Dividend on shares of managed companies 1,95,179 2,58,511 3,21,746 3,12,251 3. Income from shares held as stock-in-trade (i) interest on debentures (ii) Dividends 3,40,695
4,68,775 5,48,325 5,53,999 (iii) Dealing in shares 23,867 16,755 28,329 22,100 (iv) Share transfe: fee Total of Nos. (i) to (iv) 3,64,941 4,85,882 5,76,973 5,76,421 4. Income from interest
4,595 3,358 15,276 23,617 In order to find out the implications of this statement we have t<» first decide whether the asses.see company can be said to be a company engaged in the busil)ess activity of "holding of invest- ments."
The finding of the Tribunal on this point is stated thus : "We agree with the assessee that the shares in the managed companies were acquired with a view to safely hold th(l managing agencies, but we do not agree that
for that reason only those shares cannot be taken into account for the purpose of a business of• dealing in or holding of investments". All the shares held by the assessee company as its investments were the shares of the two companies of which it was a managing &gent. It invested in no other shares.
The Tribunal has found that the managed company's shares were acquired by the assessee company for the purp<ise of safeguarding its managing agency busine_ss. Therefore it is quite clear that those investments were
made not in the course of any business of investment but for the purpose of securing its managing agencies. Those investments were made for a collateral purpose viz. to have a firm grip over its managing agency busin~s. If we are correct in this finding- we think we are-then it follows that the dividend income from shares of the managed companies cannot be taken into considera- tion in finding out whether the assessee company's business "con- sisted wholly or mainly in the dealing in or holding of invest- ments".
The investments made by the assessee company in the shll!'es of the managed companies are essentially linked with its managillg agencies and not with the dealing of that company in '5hares of the other companies. In other words those investments form part of the assessee company's managing agency business ( 1972] l S.C.R.
activity. If we add the dividend income of the shares of the managed conipanies, to the managing agency commission, the total income from those two sources is much more than the income , earned by the assessee company from its share dealings, in each : one of the assessment years.
Hence viewed from the point of view of profits earned by the assessee company, it cannot be said that in the relevant previous years the assessee company's business consisted wholly or mainly in the dealing . in or holding of investments".
Now let us look at the question from the point of view of the assets employed by the assessee company. Here again we can take assistance from the schedule given in the judgment of the High Court setting out in details the assets used by the assessee company in its several business- activities.
That Schedule reads thus: "SHARES OF MANAGED COMPANIES Treated by the Income Tax Department as invest- ments not forming part of the business of dealing in shares. I. New India Industries
6,91,084 6,96,883 6,96,883 6,96,883 2. Cotton Fabris.s Ltd. (i) Ordinary shares 3,69,285 3,69,285 3,69,285 3,69,275 (ii) Proference shares 88,463 88,463 [90,483 90,483 Total 11,48,832
11,54,631 11,56,651 11,56.651 Shares of other companies : Treated by the Income- tax Department as held for dealing in shares (stock-in-trade) 25,Q?,969 30,13,518 29,88,946 36,07,063
Total investment as per balance sheet 36,56,801 41,68,149 41,45,597 47,63,714" It is true that the assets used by the assessee company in its share dealing are far more than that used by it for investment in the shares of the managed company.
But then we have to bear in mind that we do not exhaust the total assets of the company by merely referring to the tangible assets used by it. In addition, we have to take intQ consideration the value of the managing agencies held by the assessee company. Looked that way, it can- not be said that the assets of the company, used in its share deal' ings are far mo!'!! than its other assets.
At any rate on the basis of the assets used, it cannot be concluded that the assessee's business consisted "wholly or mainly" in the dealing in investments. c C.I.T. V, DISTRIBUTORS (P) LTD. (Hegde, I.)
It follows from the conclusions reached by us earlier, that our ahswer to the question before us must be the same as that given by the High Court. We not only agree with the conclusions
reached by the High Court but also with premises on the basis of which those conclusions were reached . . In the result Civil Appeals Nos. 1313 to 1316 of 1971 are dismissed on merits with costs-one set of fees and Civil Appeals Nos. 2350-2353 0f 1968 are dismissed as being not maintainable but without any order as to costs.
s.c. Appeals dismissed.