War Profits Tax Commissioner, Madhya
Pradesh, Indore Vs. M/S. Rinodram Balchand of Ujjain  INSC 108 (20 April
20/04/1966 SIKRI, S.M.
CITATION: 1967 AIR 246 1966 SCR 224
Gwalior War Prifits Tax Ordinance, Samvat
2001, as amended by Amendment Ordinances of Samvat 2002 and Samvat 2004, First
Schedule, r. 3(1) and (2) and Explanation-Explanation, if retrospective-If
applies to r. 3(1).
The assessee was the managing agent of a
Textile Mill in Ujjain. In 1944, the Gwalior State promulgated the Gwalior War
Profits Tax Ordinance. In 1946, by the Gwalior War Profits Tax (Amendment)
Ordinance, an Explanation was added after r. 3(2) of the First Schedule to the
Ordinance of 1944. In 1947, another Amendment Ordinance was promulgated whereby
a comma was inserted in the Explanation. In July 1944. the assesses received
about Rs. 11 lacs as dividend on its shares in the Textile Mill. The War
Profits Tax Officer included the amount in the assessee's taxable income, and
the order was upheld by the Appellate Assistant Commissioner and the
Commissioner. On the question: whether the dividend income was chargeable to
war profits tax, the High Court held, on a reference, that the Explanation
applied and that under the Explanation the dividend income was not liable to be
included in the assessee's taxable income.
In appeal to this Court, it was contended
that the Explanation was not applicable, because, (i) it was not retrospective;
and (ii) it was only an Explanation to r. 3(2) and not to r. 3(1) which was the
rule applicable to the assessee.
HELD: The Explanation applies to the
computation of the profits of the chargeable accounting period, because: (i)
the Ordinance of 1947 expressly assumes that the Explanation was in existence
from the date when the War Profits Tax Ordinance came into force in 1944; and
(ii) on the language of the Explanation it was meant to be an Explanation not
only to r. 3(2) but also to r. 3(1). By the words "in r.
3(2) the following shall be added", in
the amending Ordinance of 1946, all that was meant was that the Explanation
should be added below r. 3(2). [228 H-229 E]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 225 of 1965.
Appeal by special leave from the judgment and
order dated September 6, 1962 of the Madhya Pradesh High Court in Misc.
Civil Case No. 108 of 1958.
I.N. Shroff, for the appellant.
S.T. Desai, S. N. Andley, Rameshwar Nath, P.
L. Vohra, and Mahinder Narain, for the respondent.
225 The Judgment of the Court was dilevered
by Sikri, J. This appeal by special leave is directed against the judgment of
the High Court of Madhya Pradesh in a reference made to it under s. 46 of the
Gwalior War Profits Tax Ordinance, Samvat 2001-hereinafter called the
Three questions were referred to the High
Court by the War Profits Tax Commissioner, but we are only concerned with
question No. 1, which reads as follows: "Whether the dividend income of
11,09,332/received from the Binod Mills was
chargeable under the War Profits Tax?" When the reference was first heard
by the High Court three contentions were raised by M/s Binodram Balchand of
Ujjain, respondents before us, hereinafter referred to as the assessees. They
"(1) The assessees did not deal in
shares and their holdings in the Binod Mills Limited were purely in the nature
of investments, having no connections with their business as defined in Section
2(5) read with Rule 1 of Schedule 1, of the Gwalior War Profits Tax Ordinance.
The business of the secretaries, treasurers and agents of the Binod Mills
Limited, which was carried on by them did not require any holding of the shares
of the company and was not dependent on their investment in the said company.
(2)The dividend income accrued or arose from
the profits of the Binod Mills Limited, and as the Ordinance applied to the
business carried on by this company, the dividends were excluded under the
explanation to Rule 3(1) of Schedule 1.
(3)The dividend income should be considered
as income of the full accounting period, i.e., from Diwali of 1943 to Diwali of
1944 and should be apportioned on that basis".
The High Court by its judgment dated April
19, 1957, accepted the first contention of the assessees and accordingly
answered the question in their favour. It did not deal with contentions Nos. 2
and 3. The Commissioner appealed to this Court and this Court by its judgment
dated December 20, 1961, set aside the judgment of the High Court and answered
the first contention in relation to question No. I against the assessees and
remanded the case to the High Court for the consideration of the other two
contentions with reference to that question. The High Court on remand accepted
the second contention of the assessees and answered question No. 1, set out above,
in favour of the assessees. The Commissioner having obtained special leave, the
appeal is now before us for disposal.
226 A few facts may be given in order to
appreciate the point that has. been argued before us. The assessees were, at
the relevant time, the Managing Agents of the Binod Mills Ltd., Ujjain, which
was a private limited company carrying on the business of manufacturing and
selling textile goods in 1944.
The Ruler of the Gwalior State promulgated
the Gwalior War Profits Tax Ordinance, Samvat 2001, for the purpose of imposing
tax on excess profits arising out of certain businesses. The Ordinance came
into force on July 1, 1944, and applied originally to the counting period
falling within the period commencing on July 1, 1944, and ending on June 30,
1945. By virtue of a notification the period was extended to June 30, 1946.
The assessees carried on the Managing Agency
business during the aforesaid period in Gwalior State and being liable to be
assessed to war profits submitted a return for the period commencing from July
1, 1944, to October 16, 1944. It appears that Rs. 11,09,332/was received by the
assessees on July 5, 1944, on account of dividend on shares of the Binod Mills
for the year 1943. The assessees inter alia contended before the War Profits
Tax Officer that this sum was not liable to be charged. The War Profits Tax
Officer, however, by order dated July 9, 1951, in.; clouded this sum of Rs.
11,09,132/in the taxable income and his view was upheld in appeal by the
Appellate Assistant Commissioner and the Commissioner. As stated above, the
Commissioner, at the instance of the assessees, referred three questions,
including the one with which we are concerned, to the High Court.
It appears that before the High Court the
learned counsel for the Commissioner did not seriously dispute the contention
of the assessees that the dividend income which the assessees had received was
exempted by the Explanation to r. 3 of Schedule 1 of the Ordinance. The rule as
it existed originally was as follows: "3(1) Income received from
investments shall be included in the profits of a business liable to the War
Profits Tax, unless it is proved to satisfaction of the War Profits Tax Officer
that the investments have no connection whatever with the business.
(2)In the case of business which consists
wholly or mainly in the dealing in or handling of investments, income received
from investments shall be deemed to be profits of that business, and in the
case of a business, a specific part only of which consists in dealing in
investments, the income received from investments held for the purposes of that
part of the business shall be deemed to be profits of that part of the
227 By s. 2 of the Gwalior War Profits Tax
(Amendment) Ordinance, Samvat 2002-hereinafter referred to as, Ordinance 2002,
r. 3 of the First Schedule to the Ordinance was amended as follows: "In
rule 3(2) of the First Schedule to Ordinance the following shall be added,
namely: Explanation-"The income from investments to be included in the
profits of the business under the provisions of this rule shall be computed
exclusive of all income received by way of dividends or distribution of profits
from a company carrying on a business to the whole of which the Section of the
Ordinance imposing the War Profits Tax applies", This Ordinance was
promulgated on February 28, 1946.
Another Ordinance called the Gwalior War
Profits Tax (Amendment) Ordinance, Samvat 2004-hereinafter referred to as
Ordinance 2004-was promulgated on September 6, 1947.
This Ordinance amended the Explanation to
sub-rule (2) of rule 3 of Schedule 1 as follows "In the explanation of
sub-rule (2) of Rule 3 of Schedule 1 of the Gwalior War Profits Tax Ordinance,
Samvat 2001 a comma is added after the words "from a company carrying on a
business" and before the words "to the whole of which" and shall
be always deemed to be there from the date from which the said Ordinance came
The High Court felt no difficulty in holding
that the explanation applied, and that on its plain terms the dividend income
which the assessees received from the profits of Binod Mills Ltd. was not
liable to be included in the taxable income. The High Court observed: "The
language of the explanation is very plain, and it means that if income is
received by way of dividends or profits from a company carrying on a business,
to the whole of which the section of the Ordinance imposing the War Profits Tax
applies, then the income has to be excluded in the assessment to War Profits Tax
of the assessee receiving that income. The object of the explanation is clearly
to avoid double taxation. Here it is not disputed that the dividend income
which the assessee received was from the profits of the Binod Mills Limited and
the Mills were subject to the burden of the War Profits Tax under the
Ordinance. That being so, the explanation in terms applies to the case, and the
assessee is entitled to claim that the dividend income of Rs. 11,09,332/received
from Binod Mills could not 228 be included in the computation of its profits
for the purposes of War Profits Tax and was consequently not chargeable under
the War Profits Tax Ordinance. Learned AdvocateGeneral appearing for the State
did not dispute this position".
Mr. Shroff, the learned counsel for the
Commissioner, contends, first, that the explanation was not in existence at the
relevant time, and, therefore, cannot be taken into consideration; secondly,
that the explanation is an explanation to r. 3(2) and not to r. 3(1) and,
therefore, cannot be used to explain r. 3(1). Mr. Shroff complains that the
High Court was wrong in thinking that the explanation formed part of Ordinance
2001, as it was originally promulgated. The High Court seems to have been under
this impression because in the order refusing leave to appeal to this Court the
High Court observed:"There was no omission at all on our part to consider
the question whether the explanation was prospective or not. Indeed, this
question was never raised by the learned AdvocateGeneral, appearing for the
Department and it was rightly not raised as the Explanation was not added
subsequent to the promulgation of the Ordinance and the very basis of the
assessment of the income of the assessee was that rule 3 of Schedule 1 of the
Ordinance together with the Explanation applied to the income received by the
assessee during the period from 1st July 1944 to 16th October 1944".
It seems that Ordinance 2002 and Ordinance
2004 were not placed before the High Court and for this reason it assumed that
the explanation was not added subsequent to the promulgation of the Ordinance.
But even if it was added subsequently, in our
opinion, the explanation applies to the computation of the profits of the
chargeable accounting period July 1, 1944 to October 16, 1944. If we read
Ordinance 2002 and Ordinance 2004 together the legislative intention to make
the explanation retrospective becomes clear. Apart from Ordinance 2004, it
would have been very arguable that the explanation inserted by Ordinance 2002
was retrospective because it dealt with the computation of profits and would
apply to all computation of profits made by the Taxing authorities after
February 28, 1946. But we need not go into this question because Ordinance 2004
expressly assumes that the explanation was in existence from the date when the
Ordinance came into force and no other meaning can be given to s. 2 of
Ordinance 2004 because by deeming that the comma shall be deemed to be there
from the date from which the Ordinance came into force it expressly assumes
that the explanation was also in force from that date. Accordingly we are not
inclined to 229 accept the first contention of Mr. Shroff and we must hold that
the explanation applies to the computation of profits of the chargeable
accounting period July 1, 1944 to October 16, 1944.
Regarding the second contention, Mr. Shroff
says that Ordinance 2002 expressly provides that the explanation shall be added
in r. 3(2) of the First Schedule to the Ordinance. He further says that this
explanation is referred in Ordinance 2004 as "explanation of sub-rule (2)
of rule 3 of Schedule 1". There is no doubt that Ordinance 2002 did
purport to add this explanation to r. 3(2) but it seems to us that if we look
at the language of the explanation it was meant to be an explanation not only
to r. 3(2) but to r. 3(1) also.
First, the words "the income from
investments to be included in the profits of the business under the provisions
of this rule" are comprehensive and include income from investments both
under r. 3(1) and r. 3(2). Secondly, there is no reason why any distinction
should have been made between investments mentioned in r. 3(1) and investments
mentioned in r. 3(2). Rule 3(1) is general and deals with all investments from
profits of all businesses and would include investments mentioned in r. 3(2).
Rule 3(2) deals with investments of a certain business, i.e., business which
consists wholly or mainly in the dealing in or holding of investments. We have
not been able to appreciate why, if Mr. Shroff is right, was it necessary to
distinguish between income from investments mentioned in r. 3(1) and income
from investments mentioned in r. 3(2). At any rate, the language of the
explanation is quite clear and it seems to us that by the words "in rule
3(2) of the First Schedule to the Ordinance, the following shall be added"
what was really meant was to add the explanation below r. 3(2).
In the result we agree with the High Court
that the answer to the question referred should be in the negative. The appeal
accordingly fails and is dismissed with costs.