Commissioner of Income-Tax, West
Bengal Vs. Calcutta National Bank Limited [1959] INSC 40 (20 April 1959)
SINHA, BHUVNESHWAR P.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION: 1959 AIR 928 1959 SCR Supl. (2) 660
CITATOR INFO :
D 1960 SC1016 (20) D 1988 SC 460 (5,11)
ACT:
Excess Profits Tax-Rental income-Banking
Company letting out a Part of its own premises-Liability-Excess Profits Tax
Act, 1940 (XV Of 1940), S. 2(5), Sch. I, r. 4(4).
HEADNOTE:
The respondent was a banking company and the
question was whether it was liable to pay excess profits tax on a sum of Rs.
86,000 received by it as rent in respect of the major part of a six-storeyed
building owned and constructed by it, which it had let out, the rest being
occupied by its headquarters in Calcutta. The Department and the Income-tax
Appellate Tribunal found against the respondent but the High Court, on a
reference under s. 66(1) of the Income Tax Act, reversed their decision. The
Memorandum of Association of the Company provided as one of its objects as
follows," (e) To purchase, take on lease or in exchange or otherwise
acquire any moveable or immoveable property.................
which the company may think necessary or
convenient for the purpose of its business, and to construct, maintain and
alter any buildings or works necessary or convenient for the purpose of the
Company. " The question referred to the High Court for decision wag
whether the said income was part of the business income taxable under S. 2(5) read
with r. 4(4) of the Sch. I to the Excess Profits Tax Act, 1940. The High Court
held that although the income was derived from the holding of property, since
the functions of the assessee company did not consist wholly or mainly in the
holding of investments or other property as required by the first proviso to S.
2(5) Of the Act, no question of the application of r. 4(4) could arise.
Held, (Per Sinha and Hidayatullah, jj.,
Kapur, J., dissenting), that the question must be answered in the affirmative.
Per SINHA, J.-The High Court was
fundamentally in error in overlooking the main provision Of S. 2(5) of the Act,
for even though the first proviso might not apply, that by itself would not
render the main provision of the definition, which was wider than that under
the Indian Income-tax Act inapplicable.
Commissioners of Inland Revenue v. Desoutter
Bros. Ltd., (1945) 29 T. C. 158, applied.
661 The term 'business' was of wide import
and each case had to be determined with reference to the particular kind of activity
or occupation of the person concerned. Though, ordinarily it implied a
continuous activity in carrying on a particular trade or avocation, it might
also include an activity which might be called ' quiescent '.
The Commissioners of Inland Revenue v. The
South Behar Railway Co., Ltd., (1923) 12 T. C. 687 and Commissioners of Inland
Revenue v. The Korean Syndicate, Ltd., (1921) 12 T.
C. 181, referred to.
The Memorandum of Association of a company
provided the key to its business objects and the relevant clause in the instant
case clearly showed that the managing of property and realisation of rents there
from were within the objects of the company, and, therefore, such rents must be
included in calculating its profits under r. 4(4) of the Sch. I to the Act.
It was not correct to suggest that the rule,
in substituting, the word " partly " for " mainly "
occurring in the first proviso to S. 2(5) exceeded the provisions of the
statute. Rule 4(4) did not derive its operative force from that proviso, limited
to an incorporated body of a particular type, and was of wider application as
evident from its own terms as also from the second proviso to S. 2(5) of the
Act.
Punjab Co-operative Bank Ltd. v.'
Commissioner of Income tax, Punjab, (1940) A.C. 1055; [1940] 8 I.T.R. 636 and
Sardar lndra Singh and Sons, Ltd. v. Commissioner of Income tax, West Bengal,
[1954] S.C.R. 167, referred to.
It was not correct to say that if rental
income were to be covered by the main clause of s. 2(5), the first proviso to
that section would become redundant.
Commissioners of Inland Revenue v. The Tyre
Investment Trust, Ltd., (1924) 12 T. C. 646, referred to.
Nor was it correct to say that "
business " could not be said to include rental income.
The United Commercial Bank Ltd., Calcutta v.
The Commissioner of Income-tax, West Bengal, [1958] S.C.R. 79, held
inapplicable.
Per KAPUR, J.-The word 'business' could
either mean what was contained in the main provision of S. 2(5) or have the
extended meaning given by the first proviso to that section.
In either case it was inapplicable to the
case of the respondent whose essential function was to deal in money and
credit, letting out of property being neither wholly or even partly its
business. The income received by the respondent, therefore, by way of rent, did
not fall within the definition of the word 'profits' contained in s. 2(19) of
the Act and was not chargeable to excess profits tax under S. 4 Of the Act.
Salisbury House Estate Ltd. v. Fry, (1930) 15
T. C. 266, 662 Mellows v. Buxton Palace Hotel Ltd., (1943) 25 T.C. 507 and
Commissioners of Inland Revenue v. Buxton Palace Hotel Ltd.
(1948) 29 T.C. 329, referred to.
In construing the first proviso, effect must
be given to every word used. If the mere owning of immoveable property and the
letting out of what was not needed for its own use by a company was intended to
be covered by the definition, the use of the words wholly " or "
mainly " would be wholly redundant.
Rule 4(4) Of the first Schedule to the Act
did not modify the definition of business' so far as it related to holding of
property and before it could apply, the functions of the company, which meant
the activities appropriate to its business, must fall within the definition of
'business' as given in the Act.
Per HIDAYATULLAH, J.-The rents realised by
the respondent must be regarded as profits from property held as investment and
included in the computation of profits under r. 4(4) Of the first schedule.
There was undeniably a difference between the
wording of the schedule and the Act and the tendency of the schedule was to
widen the definition of business so as to include letting of property for
earning rents. It could not, therefore, be said that the definition contained
in the Act, wholly controlled the Schedule and r. 4(4) must be given effect to.
Inland Revenue Commissioners v. Gittus,
(192O) 1 K. B. 563, applied.
Gittus v. Commissioners of Inland Revenue,
(1921) 2 A.C. 81, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 4 of 1956.
Appeal by special leave from the judgment and
order dated June 10, 1953, of the Calcutta High Court in Income-tax Reference
No. 39 of 1952.
K. N. Rajagopal Sastri, R. H. Dhebar and D.
Gupta, for the appellant.
B. Sen, P. K. Ghosh and P. K. Bose, for the
respondent.
1959. April 20. 'The following Judgments were
delivered SINHA, J.-The question for determination in this appeal by special
leave, is whether the assesses, the Calcutta National Bank Ltd. (in
liquidation), is liable to Excess Profits Tax in respect of Rs. 86,000/-, which
it realised by way of rent of the building at its headquarters in Calcutta,
during the accounting period 663 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 s. 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 6th 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-r. (4) of r. 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-r. (2) of r. 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 its investments in immovable property, is included in its business
income, even though it was not chargeable to income-tax under s. 10 of the
Income-tax Act.
Income from securities, like shares and
properties., is chargeable to income-tax under ss. 8, 9 and 12 of the Act;
but that head of income is chargeable under
the Act as business profits. He also pointed out that the assessee had itself
included the value of these assets in the computation of itscapital, 664 for
claiming standard profits. This had been done in If the previous years, and the
assessee bank had accepted the basis and the computation of capital assets
during the previous years. On a further appeal by the respondent to the Appellate
Tribunal, the Tribunal held that there was no doubt that the premises were
built with a view partly to housing the head office of the company, and partly
for the purpose of being let out to tenants, and that it was an investment by
the Bank in immovable property. The Tribunal also found that this was within
the terms of the Memorandum of Association of the respondent company. Hence, by
its order dated March 22, 1951, the Tribunal held that the letting out of so
much of the building as was not occupied by the company itself for its own
business, was a part of its business, and the rental income was, thus, liable
to tax under the Act. It made a particular reference to sub-r. (4) of r. 4 of
Sch. I to the Act, though the Department appears to have also relied upon
sub-r. (2) of r. 4, aforesaid.
Thereupon, the respondent got the Tribunal to
state the case to the High Court, and the following question was accordingly
referred to the High Court under s. 66(1) of the Income-tax Act:" Whether
in this case the rental income from immovable property is part of the business
income taxable under section 2(5) read with rule 4(4) of 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 665 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 (s.
2(4)). Section 2 (19) of the Act defines
" profits " as follows :" I profits' means profits as determined
in accordance with the First Schedule." Section 2 (20) defines "
standard profits " as follows:" Standard profits means standard
profits as computed in accordance with the provisions of Section 6". And
the charging section, s. 4 of the Act, provides that in respect of any business
to which the Act applies, excess profits, that is, profits during any
chargeable accounting period, exceeding the standard profits, shall be charged,
levied and paid. Section 5 of the Act provides as follows:" 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 (1) or sub-clause (ii) of clause (b) of subsection (1)
of Section 4 of the Indian Income-tax Act, 1922, or of clause (c) of that sub-section
:
Provided that this Act shall not apply to any
business the whole of the profits of which accrue or arise without British
India where such business is carried on by or on behalf of a person who is
resident 84 666 but not ordinarily resident in British India unless the
business is controlled in India;
Provided further that where the profits of a
part only of a business carried on by a person who is not resident in British
India or not ordinarily so resident accrue or arise in British India or are deemed
under the Indian Income-tax Act, 1922, so to accrue or arise, then, except
where the business being the business of a person who is resident but not
ordinarily resident in British India is controlled' in India, this Act shall
apply only to such part of the business, and such part shall for all the
purposes of this Act be deemed to be a separate business;
Provided further that this Act shall not
apply to any business the whole of the profits of which accrue or arise in an
Indian State; and where the profits of a part of a business accrue or arise in
an Indian State, such part shall, for the purposes of this provision, 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-r. 4 of
r. 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 promises 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 667 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, securities or properties ; the acquiring, holding, issuing and dealing
with investment of all kinds; the managing of properties " (c) To
purchase, take on lease or in exchange or otherwise acquire any moveable or
immoveable property which the Company may think necessary or convenient for the
purpose of its business, and to construct, maintain and alter any buildings or
works necessary or convenient for the purpose of the company." Apparently,
the bank constructed the six-storeyed building not only for its own use and
occupation, but also, according to the finding of the Appellate Tribunal, for
the major part, for the purpose of realising rent from tenants. Where land in a
big city, like Calcutta, is taken for building purposes, it is common knowledge
that erecting a multistoreyed building, is by itself an investment, besides
affording accommodation for the bank to carry on and advertise its business,
and house its head-office and records.
The High Court answered the question referred
to, in the negative on the ground that though the income was derived from the
holding of property, the fuilctions of the assessee-company did not consist
wholly or mainly in the holding of investments or other property, as required
by the proviso to s. 2(5) of the Act. Since the requirement of the first
proviso to s. 2(5) of the Act, was not satisfied, no question of the
application of sub-r. (4) of r. 4, could arise; and even if such a question
could arise, the word " business " in that sub-rule, must take its
colour from the main provisions of the section. This conclusion was reached by
668 the learned Chief Justice, who delivered the opinion of the Court, by
starting with the premise that for determining the nature of the income of the company,
it was not necessary to consider the provisions of the definition of "
business ", contained in the main clause of s. 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 I 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 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 (s. 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 the functions of the assessee company
such that the holding of the building in question or buildings or other
property and investments in general must be deemed to be its business for the
purposes of the Excess Profits Tax Act under the first 669 proviso to section
2(5) ? In order that question may be answered in favour of the Revenue, it is
necessary that the holding of investments or other property should be the only
or the principal function of the assessee company. As I have said, the assessee
company, is a banking company in a large way of business. It is hardly
disputable, and indeed it was not disputed before us, that the holding of
investments or other property was not its sole or primary occupation, much less
the holding of the particular building in question".
In my opinion, the aforesaid conclusion of
the High Court suffers from two fundamental errors, namely,(1) that the main
clause of the definition section is out of the way in determining the present
controversy, and (2) that it was the proviso only which had to be considered in
order to answer the question referred. In the first instance, the learned Chief
Justice is not entirely correct in observing that the definition of the term
"business" follows the definition of the same term in the Indian
Income-tax Act.
As already observed, the definition under the
Act, is wider than that under the Income-tax Act, in so far as it includes
certain types of profession or vocation. The scheme of the Act, as compared to
that of the Income-tax Act, will have to be considered presently, but it is
enough to point out that the connotation of the term " business "
under the Act, is wider than that of the same term under the Income-tax Act.
The learned Chief Justice set aside, from his
consideration, the provisions of the main clause of s. 2(5), and did not
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 670
assume that the holding of investments or other proproperty, 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. (1). In that case,
sub-s. (4) of s. 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 I
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 observed that the language only extends to the profits
arising from I any trade or business'. Sub-section (4) says I Where the
functions of a company or 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
section to be a business carried on by the company or society " I should
have thought that the objects of that Sub-section were manifest. In my view it
was intended, and quite clearly intended, to bring into the net a type of
corporation which otherwise would or might have escaped it.
The commonest type of corporation with which
the Sub-section is dealing is what may be called a trust investment company,
whose business is the holding of investments and deriving income from them.
Such a corporation would not be said to be carrying on a 'trade or business'
within the meaning of (1) (1945) 29 T.C. 155, 160.
671 Sub-section (1). Anyhow, if it were not
absolutely clear, Sub-section (4) makes it quite certain that type of
corporation is to be included, and its operations are to be regarded as the
carrying on of a trade or business. That seems to me to be the real and sole object
of Sub-section (4)." " The argument really amounted to this: by
implication the profits from investments or property held by any other type of
corporation is excluded. I cannot begin to see the shadow of a foundation for
any such argument. In my opinion it breaks down completely once the real
significance of Subsection (4) is appreciated." I respectfully adopt the
reasoning and the conclusion arrived at by the Court of Appeal, extracted
above. It follows that the first proviso to s. 2(5) does not determine the
controversy arising in this case. This conclusion completely displaces the
ratio of the opinion of the High Court, but it does not answer the question
referred to it.
It has, therefore, to be considered whether
the main definition clause in s. 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 delimiting 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 I quiescent'. This is illustrated by the case which went up to the House
of Lords in The Commissioners of Inland Revenue v. The South Behar Railway Co.,
Ltd. (1). In that case, the facts were these.
Dowri 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 (1) (1923) 12 T. C. 657.
672 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 pound 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 share-holders. It
was held by the House of Lords that the Company was carrying on a trade or
business, and was, therefore, liable to Corporation Profits Tax. The House of
Lords, while affirming the decision of the Court of Appeal, observed that the
finding of the Commissioners, which was reversed by the Court of Appeal., was
not a finding of pure fact, but was an inference of law, derived from the
specific facts found in the case, and that, consequently, the decision was open
to review. The House of Lords, in upholding the decision of the Court of
Appeal, observed that by the agreement of 1906, the Company's income, which
previously was a fluctuating income derived from the share of the profits, had
been converted into a fixed annuity irrespective of the earnings of the
Railway;
and that the new arrangement did not
materially affect the position of the Company as a business concern. The House
of Lords approved of the decision in the case of the Commissioners of Inland
Revenue v. The Korean Syndicate, Ltd. (1). In that case, a Syndicate was
registered in 1905 as a Company for the purposes of acquiring and working
concessions and turning them to account, and of investing and dealing with any
moneys not immediately required. In 1905, the Syndicate acquired part of a
right to a concession in Korea, which included a gold mine, but in 1908, it
assigned its rights to another Company under an agreement of lease in
consideration of certain royalties, but which were really a percentage of the
profits in working the property.
In 1911, the Syndicate placed in deposit at a
bank, certain sums of money received from the sale of shares which had (1)
(1921) 12 T.C. 181.
673 been obtained by the Syndicate in
exchange for other shares.
During the relevant period, the Syndicate's
activities were confined to receiving bank interest and royalties and
distributing that income amongst its shareholders. Rowlatt, J. held that the
Company was not carrying on a business. 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-r. (4) of r. 4, quoted above.
But it has been contended that the words " wholly or partly " in the
Rule, are in excess of the provisions of s. 2(5), where, in tile first proviso,
the words are " wholly or mainly ".
The suggestion is that the rule, in so far as
it substituted " Partly " for It 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 lncome-tax Act,
r. 4(4) does not necessarily derive its operative force from the first proviso
to the main clause of the definition in s. 2(5).
The proviso, as already observed, is limited
to an incorporated body of a particular type, and has reference to the "
holding of investments or other property ". Rule 4(4) is of a more general
application to 85 674 a " business which consists wholly or partly in the
letting out of property on hire ". In the rule, a reference to s. 9 of the
Indian Income-tax Act, also makes it clear that the rule is concerned with
" property ". It is also clear that the basis for taxation of
property under s. 9 of the Incometax Act, is different from the basis of
taxation under the Act, in respect of income from property, and the latter is
irrespective of whether income from property has been the subject-matter of
charge under the Income-tax Act. In this connection, a reference to the second
proviso is also relevant in so far as it implies that a person may carry on
businesses of different kinds, and all those different lines of business have,
for the purposes of the Act, to be treated as one business. Thus, the Bank may
be carrying on the business of holding deposits, securities and property, as
also lending money on different kinds of securities. Its income from all those
activities, would have to be taken into account in order to determine its total
business profits. A similar question arose in the case of Punjab Cooperative
Bank, Ltd. v. Commissioner of Income-tax, Punjab (1), which went up to the
Judicial Committee of the Privy Council. In that case, the question arose
whether the realisation of higher values by sale and purchase of shares and
securities by the Bank, could be said to be business profits, and thus,
taxable, under the Indian In., come-tax Act. On behalf of the Bank, it had been
contended throughout, without success, that the realisation of higher values by
the sale of shares and securities, was not a separate business of the Bank, but
was in the way of its business as a banking corporation 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 (I) (1940) A C. 1055 ; [1940] 8 I.T R.
635.
675 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 Privy Council,
this Court decided in the case of Sardar Indra Singh and Sons Ltd. v.
Commissioner of Income-tax, West Bengal (1)
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 course of dealing
which, by itself, would amount to the carrying on of a business. In that case,
the assessee company had, as one of its objects to carry on the business of
financiers, and to purchase and sell stock, shares, business concerns and other
undertakings. In carrying out that objective, the company held a large number
of shares in other companies, and was realising its holdings and acquiring new
shares. In the background of those facts, it was held by a Bench of five Judges
of this Court, that the profits made from the sale of investments and the
making of fresh investments, were assessable to income-tax. In the course of
his judgment, Patanjali Sastri, C. J., speaking for the Court, made the following
very pertinent observations:,, The principle applicable in all such cases is
well (1) [1954] S.C.R. 167, 170,171.
676 settled and the question always is
whether the sales which produced the surplus were so connected with the
carrying on of the assessee's business that it could fairly be said that the
surplus is the profits and gains of such business. It is not necessary that the
surplus Should have resulted from such a course of dealing in securities as by
itself would amount to the carrying on of a business of buying and selling
securities. It would be enough if such sales were effected in the usual course
of carrying on the business or, in the words used by the Privy Council in
Punjab Cooperative Bank Ltd. v. Income Tax Commissioner, Lahore (1), if the
realisation of securities is a normal step in carrying on the assessee's
business. Though that case arose out of the assessment of a banking business,
the test is one of general application in determining whether the surplus
arising out of such transactions is a capital receipt or a trading
profit." But the learned counsel for the Respondent Bank argued that in
the present case, the earning of rental income by the Bank could not come
within s. 10 of theIncome-tax Act, and the definition of " business "
in the Act and in the Incometax 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 s. 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 s. 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 s. 7 ; (2) interest on securities, and the manner of
charging the tax is laid down in s. 8 (3) income. from property, to be taxed in
(1) (1940) A. C. I055 ; [1940] 81. T. R. 635.
67 accordance with the provisions of s. 9;
and (4) profits and gains from business, profession or avocation, to be taxed
in accordance with the provisions of s. 10. The fifth and the sixth heads of
income may be omitted from the present discussion. On the other band, 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 s. 5. Under the Act, the ambit of the term "
business " covers the fourth head, though not the whole of it, as also the
second and the third heads, set out above, again though not, perhaps, the whole
of them. It is not, therefore, correct to say that what would not come within
the ambit of s. 10 of the Income-tax Act, would also not come within the ambit
of the Act. On a proper construction of the provisions of the Act, it has got
to be held that what has been covered by ss. 8, 9 and 10, at least in parts, of
the Income-tax Act, comes within the purview of the Act.
This is not intended to be a complete
statement of the comparative ambits of the two Acts, but it is enough to
dispose of the argument that business, as understood tinder the Act, is
completely covered by the provisions of s. 10 of the Income-tax Act.
In this connection, another argument advanced
by the learned counsel for the respondent, as an additional reason for not
treating rental income as Coming within the purview of the Act, may now be
considered. It was argued that the first proviso to s. 2(5), set out above,
would become redundant if rental income were to be covered by the main clause
of the definition. This argument again ignores some of the crucial words of the
proviso. It speaks only of " holding of investments or other property
", which is not the same thing as dealing with shares, investments or
other property. This proviso was, perhaps, inserted out of abundant caution to
repel arguments, like those advanced in the case of The Commissioners of Inland
Revenue v. The Tyre Investment Trust Ltd. (1) In that case, the Respondent
Company was incorporated in 1917, with the (I) [1924] 12 T.C, 646.
678 main objects of acquiring and holding
shares, etc., and was formed mainly with a view to acquiring shares in two
foreign companies and selling them to an English Company which was likely to be
interested in them. After 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 The United Commercial Bank Ltd., Calcutta v.
The Commissioner of Income-tax, West Bengal,
(1) with special reference to the observations at p. 97 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 rental income by the assessee
Bank, was in the course of its business in (1) [1958] S.C.R. 79.
679 prosecution of one of the objects in its
Memorandum it was, therefore, liable to be included in its business profits,
and thus, was assessable to Excess Profits Tax. The appeal must, therefore, be
allowed with costs here and below.
KAPUR, J.-I have read the judgment prepared
by my learned brother Sinha, J., but I respectfully disagree with it and my
reasons are these:
The sole question for decision is whether a
sum of Rs. 86,000/received by the respondent during the chargeable accounting
period ending March 31, 1946, as rent of its building at Calcutta can be
included in the profits of its business for the purposes of Excess Profits Tax.
The respondent-the assessee-was a banking company which at one time did considerable
banking business but it has gone into liquidation. it owned a six storeyed
building in a commercial locality of Calcutta. During the relevant period it
was occupying the ground floor and a portion of the sixth floor and had let out
the rest to tenants for which it received the sum of Rs. 86,000/as rent, which
is the amount Dow in controversy The liability of this sum to Excess Profits
Tax depends upon the interpretation of the relevant provisions of the Excess
Profits Tax Act XV of 1940) (which for the sake of brevity will hereinafter be
termed the Act). The object of the Act was to impose a tax on excess profits
which as the very name implies must have reference to and be the result of a
business activity. Such profits for the purposes of the Act were to be computed
in the manner provided by the Act. The scheme of the Act is as follows: Section
2 is the definition section ; s. 4 the charging section and s. 5 deals with the
application of the Act.
Section 6 is a provision for determining 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 680 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 s. 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 (s. 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 charge. able accounting period exceed the profits during
the standard period (s. 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 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 consists 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 681 this definition
to be a business carried on by such company or society:
Provided further that all business 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 " in
the main section, i.e., s. 2(5) is analogous to the definition of "
business " as given in s. 2(4) of the Income Tax Act; but proviso (1) to
s. 2(5) of the Act enlarges the scope of the word " business" in the
case of companies and societies incorporated under any enactment. The "
words " deemed to be ". make something " business which
otherwise it would not have been. In the case of an incorporated company
therefore business under tile Act is not merely any trade, commerce or
manufacture or any adventure in the nature of trade, commerce or manufacture
but also that which is deemed to be business under proviso (1) which makes the holding
of investments or other property by an incorporated Society or company business
if one of the following two conditions is fulfilled, e.g., (1) If its functions
consist wholly or mainly in the holding of investments; or (2) If 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 s. 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 s. 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 (1) held that the heads of
income mentioned in s. 6 of the Income-tax Act are mutually exclusive, each
head being specific to cover the item (1) [1958]S.C.R. 79.
86 682 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
s. 8 of the Income-tax Act and not as business profits under s. 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 there from. 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., s. 2(5) but it is the proviso which makes it clear that
type of a, company is included and its operations are to be regarded as
carrying on of 'a " business ". See also Commissioners of Inland
Revenue v. Desoutter Bros., Ltd.
(1). Another such company or society would be
a housing society or company which owns houses for the purpose of letting on
rent. Such a company or society also cannot be said to be carrying on business
within the definition in the main sub-s. (5) of s. 2. Under proviso (1) however
that class of company or society would also be deemed to be carrying on "
business ". In both these cases their profits would be chargeable to
excess profits tax. The word " profits " in s. 2(19) of the Act means
,,profits as determined in accordance with the First Schedule" which
provides the method of computation of" profits", Rule 4 of this
Schedule deals with income from investments and is as follows:
"(SEE SECTION 2(19) ) Rules for the
computation of profits for purposes of Excess Profits Tax
1.........................
2.........................
3...........................
4.(1) ,Income received from investments shall
be included in the profits in the cases and to the (1) (1945) 29 T.C. 155, 160.
683 extent provided in sub-rules (2), (2A)
and (4) of this rule and not otherwise.
4(2). In the case of the business of a building
society, or of a money lending business, banking business, insurance business
or business consisting wholly or mainly in the dealing in or holding of
investments, the profits shall include all income received from investments,
whether or not such income is included in the profits charged under section 10
of the Indian Income Tax Act, 1922, or is charged under any other section of
that Act, or has been subjected to deduction of tax at source or is free of or
exempt from income-tax ".
(2A). In the case of a business part of which
consists in banking, insurance or dealing in investments, not being a business
to which sub-rule (2) of this 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 credit. Such a company has
always to keep cash or realizable 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, Punjab (1). See
also s. 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 s. 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' (1) [1940] 8 I.T.R. 635 (P.C.).
684 Calcutta building which was not required
by the respondent for its own purposes and let out on hire profit within s.
2(19) and chargeable under s. 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 out of property
the income from that property was profit within the Act.
In support of the first submission it was
argued that one of the objects in Memorandum of Association was the acquisition
of immoveable property which the company may think convenient for the purpose
of its business and therefore the construction of a multistoreyed building
would itself be an investment. Reference was made to cl. (e) of the Memorandum
of Association which relates to acquisition of moveable and immoveable
property. This clause is as follows:" (e) To purchase, take on lease or in
exchange or otherwise acquire any moveable or immoveable
property.....................
which the Company may think necessary or
convenient for the purpose of its business, and to construct, maintain and
alter any building or works necessary or convenient for the purpose of the
Company ".
Now this argument loses sight of the fact
that the Legislature has chosen to use two words " investments " and
" other property " with a disjunctive " or " in between. To
both these words a meaning must be assigned because it cannot be said that one
or the other of them is redundant or they mean the same thing.
"Investments" has been defined thus: " something acquired as a
result of laying out money is an investment: Commissioners of Inland Revenue
v.' Rolls Royce Ltd. (1) but this general test as a test was not accepted in a
later case, Commissioners of Inland Revenue v. Desoutter Bros. Ltd. (2) at p.
161 where Lord Greene said:" Speaking for myself, I am always disinclined
to (I) (1941) 29 T. C. I4.
(2) (1945) 29 T. C. 155, 160.
685 accept any general definition or test for
the purpose of solving this type of question. The question whether or not a
particular piece of income is income received from an investment must, in my
view, be decided on the facts of the case".
In every case the facts have to be
ascertained and then the question 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 Incometax Act would fall under ss. 8 and 12. See also s. 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 immoveable
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 or 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 there from chargeable to excess profits tax even if otherwise they 686
would not have been so chargeable. The two enactments are in pari materia and are
intended to charge tax on income, profits and gains only the Act is confined to
" profits " of " business" as therein defined and
income-tax is chargeable on all incomes, profits and gains. If the mere owning
of immoveable property and letting out that portion which was not needed for
its own use by a company was intended to be covered by the definition then the
use of the word wholly or mainly would be wholly redundant. In construing the
proviso effect has to be given to every word used.
The word " functions " is defined
in the dictionary to mean " activities appropriate to any business"'
and if that is substituted in the proviso to s. 2(5) it would read " where
the activities appropriate to any business......... consist wholly or mainly in
the holding Of investments or other property ". So read, can it be said
that the activities appropriate to the business of a banking company consists
wholly or mainly in the holding of a multi-storeyed building or such other
property for the purpose of letting out the unused portion on hire. Obvious
answer to this question would be in the negative. It is manifest that rents
received from the multi-storeyed property are not income received from a "
business " within the Act. It is not a trading receipt in the case of banking
company. Under the Income-tax Act it falls under s. 9 and there is nothing to
indicate in the definition of the word " business " as given in the
main portion of s. 2(5) of the Act that it has a different complexion there. In
the case of hotel proprietors it has been held that compensation paid by the
Crown for requisitioning, during the war, of hotel premises is not its trading
profits. Salisbury House Estate Ltd. v. Fry (1) ; Mellows v. Buxton Palace
Hotel Ltd. (2 ). 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.
(3).
(1) (I 930) 15 T.C. 266. (2) (1943) 25 T.C.
507.
(3) (1948) 29 T.C. 329. 333.
687 But it was urged that sub-r. (4) of r. 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
r. 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 Schedule I is confined to computing
of profits and has relation to s. 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 has been assessed under s. 9 of the Income
Tax Act. It is a far step from saying that the definition of " business
" has been modified by sub-r. (4) of r. 4. It relates to a business of
letting out of property. The word " business " can either mean what
is contained in the main provision in s. 2 (5) or the extended meaning given by
the first proviso of that section. In either case it is inapplicable to the
case of the respondent. It cannot be said that letting out of property is
either wholly or even partly " business of the respondent.
In my view the income received from rents of
the portion of the building let out on hire, i. e., Rs. 86,000/-, does not fall
within the word " profits " as used in the Act and is not chargeable
to Excess Profits Tax. The judgment of the High Court is therefore sound and I
would dismiss this appeal with costs.
688 HIDAYATULLAH, J.-I have had the advantage
of reading the judgments of my learned brothers, Sinha and Kapur, JJ. I agree
with Sinha, J., that the appeal must be allowed with costs here and below.
The question which was referred for the
opinion of the Calcutta High Court was whether in this case rental income from
immovable property was part of the business income taxable under s. 2(5) read
with r. 4 (4) of Sch. I attached to the Excess Profits Tax Act, 1940. In my
opinion, the question must be answered in the affirmative for the following
reasons.
The Calcutta National Bank, Ltd. (in
liquidation) hereinafter called the Bank, was doing business as a, bank prior
to going into liquidation. Its income, it appears, was also subject to excess
profits tax in the past, and we are concerned in the present case with the
chargeable accounting period ending March 31, 1946. The Bank had constructed a
six-storeyed building, of which it occupied the ground and the top floors. The
rest of it was rented out, and in the chargeable accounting period, rents
totaling Rs. 86,000/were received by the Bank. The question was, as already
stated, whether this rental income was chargeable 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 I 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 ?or the purpose of this definition to
be a business carried on by such company or society." 689 The charging
section is s. 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, "I
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, r. 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 I business' and the rule above quoted is that while the
former mentions that the business must be wholly or mainly holding of
investments or other property, the rule says that if the business consists
wholly or partly of letting out of property, the income of the property shall
be included in the profits.
Kapur, J., is of the opinion that the
business of the Bank being quite different, the rule cannot be made applicable,
because the definition requires that the assessee's business should be wholly
or mainly the holding of investments or other property. He also thinks that
there is neither holding of an investment nor of property as investment.
The definition of the term I business' in the
Act is helpful where it applies, but not being an exhaustive one., it cannot
shut out something which can be appropriately described as a business. Even the
opening words of the definition show that it is meant to cover most of the
activities designed to produce income or profits or gain.
Under the Memorandum of Association, the Bank
can acquire property, just as it acquires investments for purposes of its
business and even otherwise. Clause (e) enables the Bank to purchase, take on
lease or in exchange or otherwise acquire any moveable or immoveable property,
which the Bank 87 690 may consider necessary or convenient for the purpose of
its business and to construct, maintain and alter any buildings or works
necessary or convenient for the purpose of the Bank. The acquisition of a
sixstoreyed building was, therefore, within the terms of the Memorandum, and the
only question is whether the income from such building, if rented out, can be
taken as profits of the Bank for purposes of excess profits tax.
The definition mentions the holding of
investments or other property, and the words " other property " must
necessarily 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 I
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 Sch. 1, r. 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 I 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 f 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
691 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 property for earning
rents. The rule to be applied was stated by Lord Sterndale, M. R., in Inland
Revenue Commissioners v. Gittus (1) in the following words:
" It seems to me there are two
principles or rules of interpretation which ought to be applied to the
combination of Act and schedule. If the Act says that the schedule is to be
used for a certain purpose and the heading of the part of the schedule in
question shows that it is prima facie at any rate devoted to that purpose, then
you must read the Act and the schedule as though the schedule were operating
for that purpose, and if you can satisfy the language of the section without
extending it beyond that purpose you ought to do it. But if in spite of that
you find in the language of the schedule words and terms that go clearly
outside that purpose, then you must give effect to them and you must not
consider them as limited by the heading of that part of the schedule or by the
purpose mentioned in the Act for which the schedule is prima facie to be used.
You cannot refuse to give effect to clear words simply because' prima facie
they seem to be limited by the heading of the schedule and the definition of
the purpose of the schedule contained in the Act. " In my opinion, the
second of the. two propositions laid down by Lord Sterndale, M. R., applies to
the exposition of the Schedule, with which we are concerned. It may be pointed
out that the decision of Lord Sterndale, M. R., was accepted by the House of
Lords without question in Gittus v. Commissioners of Inland Revenue(1) in an
appeal from the decision of the Court of Appeal in the earlier case.
Though the heading of the Schedule and the
definition of the word 'profits' show that the Schedule is designed to assist
in the computation of profits, the mention of other kinds of businesses in r.
4, taken with an incomplete definition of the term in the Act, clearly (I)
(1930) 1 K.B. 563. 576.
(2) (1921) 2 A. C. 81.
692 shows that the legislature was defining
the term business' as and when necessary, as it laid down the rules for
calculation of profits of a business. It was including different kinds of
businesses within the Act and indicating how in those cases the profits had to
be calculated. I do not think that the definition given in the Act can be said
to control everything in the Schedule, in spite of the definition of I profits'
and the heading given to the Schedule. As I have said above, the second of the
two alternatives is really applicable to the present case.
For these reasons and those given by my
brother, Sinha, J., I hold that this appeal should be allowed with costs here
and below.
BY THE COURT.-In accordance with the judgment
of the majority, the decision under appeal is set aside and the appeal is
allowed with costs here and below.
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