Nawn Estates (P) Ltd. Vs. C.I.T., West
Bengal [1976] INSC 246 (14 October 1976)
SINGH, JASWANT SINGH, JASWANT KHANNA, HANS
RAJ
CITATION: 1977 AIR 153 1977 SCR (1) 798 1977
SCC (1) 7
ACT:
Income Tax Act 1922--sec. 23A(1)--Expln. 2(1)
to Sec.
23A(1)--Meaning of investment Companies,
whether restricted to shares stocks and other securities or used in contradistinction
with manufacturing processing & trading operations--Indian Companies Act
1913--Sec. 87(f)—Companies Act 1956--Sec. 372(11).
Interpretation of statutes--Expressions not
being terms of art whether to be construed in technical sense or ordinary
popular sense as used by business men--Legislative history as guide to
construction---Genesis and development of law as key to interpretation--Whether
English decisions useful guides or construction of analogous provisions,
fundamental concepts and general principles.
HEADNOTE:
The appellant is a Private Limited Company
incorporated under the Indian Companies Act, 1913, its shares being held by the
members of the Nawn family. The object of the appellant Company inter alia was
purchase of land and buildings and letting out of lands and buildings in lieu
of appropriate consideration. The appellant at the relevant time was investing
monies in the house properties and its major income every year has been derived
from those properties.
The Income Tax Officer held that the
appellant was a Company whose business consisted mainly in holding of investments
as envisaged by section 23A(1) and explanation 2(i) thereto of the Income Tax
Act 1922 and that since it had declared dividend. which was less than the
prescribed statutory 100 per cent of his total income as reduced by taxes
referred to in clauses a, b and c of section 23A(1), it was liable to pay super
tax on the undistributed balance of the distributable profits at the prescribed
rate of 50 per cent. An appeal by the assessee before the Appellate Asstt.
Commissioner succeeded. The Tribunal. however, restored the order of the
Income-tax Officer. In a reference filed at the instance of the assessee, the
High Court answered the reference in favour of the Revenue and against the
assessee.
In an appeal by Special Leave, the appellant
contended :
That the appellant was not a company whose
business consisted wholly or mainly in holding of investments because the
meaning to be attributed to the said expression having not been defined by the
Income Tax Act, 1922, the technical meaning assigned to "investment
Companies" under section 87(f) of the Indian Companies Act, 1913, which
was in force when the Indian Income Tax Act, 1922 was enacted should be given,
or, in the alternative, the meaning given to it in section 372(11) of the
Companies Act,1956 should be given to the said expression. So construing only the
Companies whose principal business is the acquisition and holding of shares,
debentures, stocks and other securities would be covered by the Company whose
business consists wholly or mainly in holding an investment and that if it is
so construed the appellant would not be covered by section 23A(1).
The counsel for the respondent Revenue contended:
That the expression "A company whose business consists wholly or mainly in
the holding of investments" means a Company whose income is derived from
investments in contradiction to the income received from manufacturing or
processing or trading operations. The expression "investment" in the
context in which it occurs not being a term of art 799 with a definite and
technical meaning should be understood in its ordinary popular sense as
understood in business parlance.
Dismissing the appeal.
HELD:
1. The expression investment is not defined
in the Income-Tax Act but the Act also does not lay down that the terms and
expression not defined therein shall have the same meaning as given to them in
the Companies Act. [802A]
2. The legislative history-of the Income Tax
Act, 1922 right from its amendment in the year 1955 and thereafter as well as
the Legislative history of the Income Tax Act, 1961, clearly shows that
Legislature did not adopt the definition of investment Companies as given in
the Indian Companies Act, 1913 or in the Companies Act, 1956. [801H, 802A---B]
3. While enacting section 23A and explanation
2(i) thereto the Legislature intended to cover fields of activity wider than
those contemplated the provisions of the Companies Act, 1913 and 1956. [802--B]
4. The term 'investment' in the text in which
it occurs not being a term of art there is no warrant for giving it the
restricted meaning. The said expression has to be understood in the ordinary
popular sense as used by businessmen and so construed it would embrace within
its compass the appellant Company whose primary or principal income is
admittedly derived from house property which it leases out to tenants. [802C-D]
Commissioner of Sales Tax, M.P. Indore v. Jaswant Singh Charan Singh (19 STC
469) followed.
5. It is now well settled that on analogous
provisions, fundamental concepts and general. principles unaffected by the
specialities of the English Income Tax Statutes, the English Authorities can be
useful guides. [802-E]..
Commissioner of Income Tax v. Vazir Sultan
& Sons (36 ITR 175) followed.
Commissioners of Inland Revenue v. Gas
Lighting Improvement Co. Ltd. (1923) 12 T.C. 503; (1923) A.C. 723 (H.L.).
Inland Revenue Commissioners v. Desouttex
Bros Ltd. (1945) 29 T.C. 155, 160, 161; (1946) 1 All E.R. 58, 59, 60 (C.A.),
Inland Revenue Commissioners v. Broadway Car Co.
(Wimbledon) Ltd. (1946) 2 All E.R. 609, 610,
611; 29 T.C.
214, 220, 222 (C.A.). Commissioners of Inland
Revenue v. Tootal Broadhurst Lee Co. Ltd. (1949)29 T.C. 352, 373, Inland
Revenue Commissioners v. Rolls Royce Ltd. [1944] 2 All E.R. 340 and Commissioner
of Income-tax Gujarat v. Distributors (Baroda) P. Ltd. (83 ITR 377) approved.
6. The genesis and development of the law
relating to additional super tax on undistributed profits of certain Companies
also confirms the conclusion that the expression "A company whose business
consists wholly or mainly in the dealing in or holding of investments"
takes within its compass 'Companies which wholly or mainly derived their income
from house property. [804-D]
7. Even if it is assumed that the expression
has a legal character, it would not make any difference in the result of the
present appeal as the dictionary meaning of the expression "Investment
Companies" is Companies whose income consists mainly of investment income
i.e., income which in the hands of individual would not be earned income.
[810C] 800
CIVIL APPELLATE JURISDICTION :Civil Appeal
Nos. 1760--1963 1971.
(Appeals by Special Leave from the Judgment
and Order dated 9-2-1971 of the Calcutta High Court in Income Tax Reference No.
90/67).
N. Mukherjee and P.K. Mukherjee, for the
Appellant.
B.B. Ahuja and R.N. Sachthey, for the
Respondent.
The Judgment of the Court was delivered by
JASWANT SINGH, J.--These appeals by special leave are directed against the
judgment dated February 9, 1971 of the Calcutta High Court whereby the
following question referred to it under section 66(1) of the Indian Income-tax
Act, 1922 (hereinafter referred to as 'the Act') was answered in the
affirmative i.e. in favour of the Revenue and against the appellant :-"Whether
on the facts and in the circumstances of the case, the assessee is a company
whose business consists wholly or mainly in the dealing in or holding of
investments ?" The facts material for our present purpose are: The
assessee appellant is a private limited company incorporated under the Indian
Companies Act, 1913, its shares being held by the members of Nawn family. For
the assessment years 1955-56, 1956-57, 1957-58 and 1959-60 corresponding to the
financial years ending on March 31, 1955, March 31, 1956, March 31, 1957 and
March 31, 1959 respectively, the Income Tax Officer being of the view that
since the rents accruing to the appellant from lands and house properties held
by it formed a major part of its income, it was a company whose business consisted
mainly in holding of investments as envisaged by subsection (1) of section 23A
of the Act and Explanation 2(i) thereto and since it had declared more than 60%
but less than the prescribed statutory 100% of its total income as reduced by
taxes referred to in clauses (a), (b) and (c) of the aforesaid sub-section as
dividends, it was liable to super tax on the undistributed balance of the
distributable profits at the prescribed rate of 50%. Accordingly with the
previous approval of the Inspecting Assistant Commissioner, the Income Tax
Officer levied additional super tax at 50% of the net distributable balance
available with the appellant by applying the provisions of section 23A(1) of
the Act. Aggrieved by this order, the appellant took the matter in appeal to
the Appellate Assistant Commissioner, who acceding to the contention of the
appellant and following an order dated April 6, 1963, of the Income-tax
Appellate Tribunal in Income-tax Appeal No. 5490 of 1961-62 for the assessment
year 1958-59, held that 'the appellant was not a company whose business consisted
wholly or mainly in the dealing in or holding of investments', and remitted the
levy. Dissatisfied with the order of the Appellate Assistant Commissioner, the
Revenue took the matter to the Tribunal but could not persuade it to hold that
the appellant was a company whose business consisted wholly or mainly in the
dealing in or holding of investments. The Revenue then had the aforesaid 801
question referred under section 66( 1 ) of the Act to the High Court at
Calcutta which by its aforesaid judgment dated February 9, 1971, answered the
question in favour of the Revenue and against the appellant. It is against this
judgment that the present appeals are directed.
It would be seen that the expression 'company
whose business consists wholly or mainly in the dealing in or holding of
investments' consists of two parts viz. (1) a company whose business consists
wholly or mainly in the dealing in investments and (2) a company whose business
consists wholly or mainly in holding of investments, and what we are required
in these appeals is to find out the true meaning of the latter part of the
expression i.e. of 'a company whose business consists wholly or mainly in
holding of investments' in the context of sub-section (1) of section 23A of the
Act and Explanation 2(i) thereto and to determine whether the appellant is a
company whose business falls within the ambit of the said second part of the
expression.
Our task has been facilitated to some extent
because of the concession rightly and fairly made on behalf of the appellant
that the objects for which it was incorporated included inter alia (1 )
purchase of lands and buildings and (2) letting out of lands and buildings in
lieu of appropriate consideration and that during the years in question, the
appellant has been inter alia investing moneys in house properties and its
major income every year has been derived from those properties. The controversy
revolves only round . the meaning of the expression 'holding of investments' in
the context of section 23A of the Act and Explanation 2(i) thereto.
Mr. Mukherjee, counsel for the appellant, has
strenuously urged that the expression not having been defined in the Act must
necessarily take its colour from and to be given the same technical meaning as
borne by the expression 'investment companies' as used in section 87(f) of the
Indian Companies Act, 1913 (which was in operation when the Indian Income-tax
Act, 1922 was enacted) or as used in section 372(11) of the Companies Act, 1956
which followed it and thus has to be confined to such companies whose principal
business is the acquisition and holding of shares, debentures, stocks or other
securities. According to Mr. Mukherjee, the appellant cannot in this view of
the matter be deemed to be a company falling within the purview of the
aforesaid expression.
Mr. Ahuja, Counsel appearing on behalf of the
Revenue has, on the other hand, contended that the expression 'a company whose
business consists wholly or mainly in the holding of investments' appearing in
section 23A of the Act as amended by Finance Act, 1955 means a company whose
income is derived from investments in contra-distinction to the income received
from manufacturing or processing or trading operations and the word
'investments' in the context in which it occurs ,not being a term of art with a
defined and technical meaning should be understood in its ordinary popular sense
as understood in business parlance.
We have given our careful consideration to
the matter and are unable to persuade ourselves to accept the submission made
by 802 Mr. Mukherjee. It is true that the term 'investment' is not defined in
the Income-tax Act but it cannot be ignored that the Act does not lay down that
the terms and expressions not defined therein shall have the same meaning as
given to them in the Companies Act in a particular context. It may also be
noted in this connection that although the Legislature amended section 23A of
the Act in 1955 and thereafter, it did not adopt the definition of 'investment
companies' as given in section 87(f) of the Indian Companies Act, 1913 or
section 372(11) of the Companies Act, 1956. It appears that while enacting
section 23A of the Act and Explanation 2(i) thereto, the Legislature intended
to cover fields of activity wider than those contemplated by the aforesaid
provisions of the Companies Act, 1913 or 1956. The term 'investment' in the
context in which it occurs not being a term of Art, there is, in our judgment,
no warrant for giving it the restricted meaning as canvassed by Mr. Mukherjee.
We think, in a situation like the one with which we are confronted, resort
should be hard not to the technical meaning of the term but to its popular
meaning with reference to the context in which it occurs. (See decision of this
Court in Commissioner of Sales Tax, M.P. Indore v. Jaswant Singh Charan
Singh(1).
In the instant case, the aforesaid expression
has to be understood in the ordinary popular sense as used by businessmen, and
so construing it, it would, in our opinion, embrace within its sweep the
appellant company whose primary or principal income is admittedly derived from
house properties which it leases out to tenants. It will be profitable in this
connection to refer to some English cases where the term 'investment' occurring
in analogous provisions came up for interpretation for it is now well settled
that on analogous provisions, fundamental concepts, and general principles
unaffected by the specialities of the English Income tax statutes, English
authorities can be useful guides. (See decision of this Court in Commissioner
of Income Tax v. Vazir Sultan & Sons(2).
In Gas Lighting Improvement Commissioners
Inland Revenue v. Co. Ltd.(3) Viscount Cave L.C. while construing the word
investment in Rule 8 of Part I of the Fourth Schedule to the Finance (No. 2)
Act, 1915, observed at page 534 as under :"That they (i.e. the shares and
debentures held by the respondent company in a Belgian and two Rumanian oil
producing companies) are investments in the ordinary sense of the term probably
no one would deny. They are money put out in the shares and securities of
undertakings other than the undertaking of the appellant-company itself, with
the expectation of receiving dividends or interest upon them;
and they satisfy any one of the definitions
quoted by the Master of the Rolls from wellknown dictionaries and any other
definition of an investment which I am able to conceive." In Inland
Revenue Commissioners v. Desoutter Bros Ltd.(4) Lord Green while construing the
word 'investment' occurring in the (1) 19 S.T.C. 469. (2)'36 I.T.R. 175. (3)
(1923) 12 T.C. 503 @.534=[1923] A.C.723@ 729, 730 (H. L.) (4) (1945) 29 T.C.
155, 16061;[1946] 1 All. E.R. 58,59CP.
803 expression income received from
investment in section 12(1)(4) of the English Finance (No.
2) Act, 1939 and Schedule 7, Part I, Paragraphs
6(1) and (2) thereof held that it is not a word of art and it has to be
interpreted in the popular sense.
Again in Inland Revenue Commissioners v. Broadway
Car Co. (Vimbledon) Ltd.(1) which is a direct authority on the question in
hand), the Court of Appeal while construing the expression 'income received
from investments' occurring in the Finance (No. 2) Act, 1939, held that the
word 'investment' must be construed in the ordinary popular sense of the word
as used by businessmen and not as a term of art having a defined or technical
meaning and that it was impossible to say that the Commissioners had erred in
law in coming to the conclusion that rents from leases or under leases can
properly be comprised within the phrase 'income from investments.' At page 611,
Cohen L. J. observed:
"The expression is, therefore, not
limited to investments which you would buy on the advice of a
stock-broker--stock exchange investments. If you once go beyond that field, it
seems to me reasonably clear that rents from leases or under-leases can properly,
in suitable circumstances be comprised within the phrase 'income from
investments." Again in Commissioners of Inland Revenue v. Tootal Broadurst
Lee Co. Ltd.(2) Lord Normand while dealing with the question whether income
described as royalties received by the appellant company under three separate
agreements relating to patent rights and admittedly part of the appellant's
business profits was income from an investment within the meaning of Paragraph
6 of Part I of the Seventh Schedule to the Finance (No. 2) Act, 1939 observed
at page 373, as follows :"The meaning of 'investment' is not its meaning
in the vernacular of the man in the street but in the vernacular of the
businessman. It is a form of income-yielding property which the businessman
looking at the total assets of the company would single out as an investment
...... The businessman would nor limit income from investments to income from
the kinds of securities which are quoted on the stock exchange, and he would, I
think, regard as income from investment a profitable rent from a sub-lease of
office premises, or the like ........ " In Inland Revenue Commissioners v.
Rolls Royce Ltd(3) Macnaghten, J. observed at pages 341,342 as follows :-"The
word 'investment' though it primarily means the act of investing, is in common
use as meaning that which is thereby acquired; and the primary meaning of the
transitive verb 'to invest' is to lay. out money in the acquisition of some
species of property; consequently, letters patent, which (1) I1946] All. E.R.
609,610,611, 29 T.C.
214,220,222, (C. A.) (2) (1949) 29 T.C. 352,373.
(3) [1944] 2 All. E.R. 340.
804 are undoubtedly a species of property,
may properly be described as an investment .....
Some light on the true interpretation of the
word 'investment' in the Finance (No. 2) Act, 1939, Schedule VII, paragraph
6(1), may, I think, be obtained from consideration of the provisions of
subparagraph(2). The income which is to be included in the profits under
subpara. (1 ) is, it will be observed, income received from investments in the
case of a building society, of a banking business, assurance business, and a
business concerned, wholly or mainly, in dealing in or holding of investments.
In all those cases the investments would be investments acquired by the laying
out of money .... Business consisting wholly or mainly in dealing in or holding
investments would, as a general rule, be business where money, and nothing but
money, is laid out in acquiring the investments.
Thus the position that emerges from the above
mentioned decisions is that the aforesaid expression cannot be limited to
companies whose principal business is the acquisition and holding of shares,
debentures, stocks or other securities as contended on behalf of the appellant
but covers companies whose primary or principal source of income is house
property or capital gains as well. The decision in Commissioner of Income-tax
Gujarat v. Distributors (Baroda) P. Ltd. (1) on which reliance has been placed
by Mr. Mukherjee is not helpful to the appellant as it turned on the particular
facts of that case.
The genesis and development of the law
relating to additional super-tax on undistributed profits of certain companies
also confirms the conclusion reached by us that the expression 'a company whose
business consists wholly or mainly in the dealing in or holding of investments'
takes within its compass companies which wholly or mainly derive their income
from house property.
It appears that it was for the first time in
1930 that deriving an inspiration from the corresponding law in the U.K.
contained in the Finance Act of 1922 and the Acts that succeeded it a provision
for inclusion of undistributed income of a company controlled by five or less
members, in the total income of the members of the company was introduced in
the Indian Income Tax Act, 1922, by insertion of section 23A(2) by section 4 of
the Income-tax (Amendment) Act, 1930 (Act 21 of 1930). This section required
the Income-Tax Officer to pass an order including the undistributed income in
the total income of the shareholders, whenever he was satisfied-(i) that the
company's profits and gains were allowed to accumulate beyond its reasonable
needs, existing or contingent, .having regard to the maintenance and
development of its business, and (ii) that such accumulation or failure to
distribute was for the purpose of preventing the imposition of tax upon any of
the members in respect of their shares in the profits and gains so accumulated
or not distributed. Because of the inclusion of the element of motive, which is
difficult of ascertainment as held in David Garlaw & Sons Ltd. v.C.I.R.(1)
section 23A(2)) (1) 83 I.T.R. 377.
805 virtually remained a dead letter as only
one order was passed under section 23A(2) between 1930 when the section was
'introduced and 31st March, 1936, when the Income-tax Inquiry Committee
submitted its report.
By the Amendment Act VII of 1939, the law was
recast and the element of motive as also of current needs and possible future
requirements of the company for expansion was dropped. Instead a simple test
was adopted by means of section 23A, namely, whether a certain minimum percentage
of the distributable income, 60 per cent generally and 100 per cent in certain
cases, referred to as the statutory percentage, had or had not .been
distributed as dividends. In case of nondistribution, the section invested the
Income Tax Officer with power to make an order levying additional super tax on
the entire undistributed balance of the net income of the company and not
merely on so much of it as was necessary to bring up the distribution to the
statutory percentage but to regard the whole of it to have been distributed
Officer was empowered to treat not only that part of the net undistributed
income of the company which would be equivalent to the statutory percentage but
to regard the whole of it to have been distributed amongst the members in
accordance with their shares in the company and included in their total income.
The Income Tax Officer was, however, permitted to refrain from making such
order, if he thought it fit to do so, taking into consideration the past losses
of the company and its meagre income for the current year. Although the
Amendment Act, 1939 simplified the procedure, there still remained certain
defects to be remedied. It left the definition of 'a company in which the
public are substantially interested' untouched. Consequently, it remained
possible for a company, though substantially controlled by a group of persons
united together in interest, to escape the operation of section 23A by so
managing its affairs that on the last date of the accounting year its shares carrying
25% of the voting power were allotted to the members of the public which
included relations. The cumbrous procedure of ascertaining the quantum of the
additional super-tax payable by relating it to the rate applicable to the total
income of the shareholder after including the sum apportioned in his total
income, was also allowed to continue. These and some other defects were noticed
by the Mathai Commission its Report in paras 33 to 36 in the following words :-"33.
Application of 100 per cent clause to investment companies.--Section 23A of the
Indian Income-Tax Act does not make any distinction between investment
companies and trading or manufacturing companies; the requirement of 60 percent
distribution applies equally to all. The formation of 'private' investment
companies,or what may be termed as 'personal holding companies', enables rich
persons to escape tax liability, by transferring their assets (including house
property, stocks and shares) to such a company in exchange for the shares of
the company, (1) 1I T.C. 96,120 806 inasmuch as personal super-tax on 40 per
cent of the distributable income of the company is saved. Such companies
admittedly do not require funds for internal financing or capital formation as
the industrial or trading companies do. It has, therefore, been suggested that
the entire (100 per cent) amount of the distributable "profits of such
companies ought to be required to be distributed.
34. The foreign practice on this point also
shows that the Indian law is unduly lenient towards such investment companies.
In the U. K,, investment companies (companies the income 'whereof consists
mainly of 'investment income') are treated on special lines in respect of their
investment income (i.e., income which, if the company were an individual, would
not be earned income); such income is automatically deemed to be the income of
the members of the company according to their interests, while the estate or
trading income of such a company is treated in the same manner as the income of
non-investment companies. (Section 262 of the U.K. Income Tax Act, 1952).
35. Very stringent regulations have been laid
down in the income-tax law of the U.S.A.
in respect of the distribution of earnings of
'personal holding companies."A special surtax is payable by them upon
their undistributed profits, subject to certain adjustments, in addition to the
regular corporate normal tax and surtax. This surtax is at the rate of 75 per
cent of the undistributed profits upto $ 2,000 and 85. per cent of the amount
of undistributed profits in excess of $ 2,000. A corporation is a personal
holding company if (i) at least 80 per cent (or 70 per cent in certain cases
where a corporation was a personal holding company in a prior year) of its
gross income for the taxable year is 'personal holding company income' and (ii)
at any time during the last half of the taxable year more than 50 per cent in
value of its outstanding stock is owned, directly or indirectly, by or for not
more than five individuals. It has been specifically provided in section 503 of
the Internal Revenue Code that an individual is considered as owning the stock
owned not only by or for himself but also the stock owned, directly or indirectly,
by or for his family (brothers, sisters, spouse, ancestors and lineal
descendants) or by or for his partner. 'Personal holding company income' is
practically synonymous with income from investments or income from dealings in
investment. It 807 includes dividends and annuities, interests, royalities,
gains from stock, security and commodity transactions, rents and certain income
from estates and trusts, subject to certain qualifications.
"36. It will thus be seen that the
suggestion requiring investment companies in which the public are not
substantially interested to distribute 100 per cent of their distributable
profits is reasonable, and we accordingly recommend its incorporation in
section 23A." Accordingly following the recommendations of the Mathai
Committee the provisions of section 23A were tightened and recast by section 15
of Finance Act 15 of 1955 and certain incomes which were not being taxed were
brought into the net. The definition of 'a company in which public was
substantially interested' was widened so as to include a company owned by the
Government or a company in which the Government held 40% or more of the share
capital. In the case of non-Government companies, the definition made it
essential that-(i) at least 50 per cent of the voting power was in the hands of
the public (in the case of an industrial company i.e. a company engaged in the
manufacturing or processing of goods or in mining or m the generation or
distribution of electricity or any other form of power at least 40 per cent)
(ii) the shares of the company were at some time during the previous year dealt
with in any stock exchange in India, or were freely transferable by the holder
to other members of the public, (iii) the affairs of the company, or the shares
carrying more than 50 per cent of the total voting power (in the case of an
industrial company more than 60 per cent) were controlled or held by at least
six persons (an individual with his relatives, and a nominator and his nominee
being treated as one single person), and (iv) such dispersal of control and
voting power was present throughout the previous year.
In addition, instead of treating the
undistributed income as having been distributed as dividends and making the
shareholders liable' for the additional tax in the first instance, the
Amendment Act made the company itself liable to pay the additional super-tax
straightway, at a fiat rate of four annas on each rupee of the undistributed
income (after permitted deductions).
Power was also given to the company to apply
to the Commissioner for fixing the statutory percentage of distribution at a
reduced level on the ground of current and future needs of the company and a
right of appeal was provided to the Board of Referees from the order of the
Commissioner. The 1955 Amendment also provided for 808 set-off of the amounts
distributed in excess of the statutory percentage in earlier years against the
short-fall of distribution in the accounting year.
In 1957, the law was again amended by section
7 of Finance (No. 2) Act, 1957 (26 of 1957) with effect from first April, 1957.
The provisions authorising ad hoc fixation of the statutory percentage for each
company and the right of appeal to the Board of Referees were eleminated.
The statutory percentage was fixed at 100 per
cent for investment companies, 45 per cent for industrial companies and 60 per
cent for all other companies. In the case of non-industrial companies with
large accumulated profits, the statutory percentage was raised from 60 per cent
to 90 per cent. The rate of penal tax was raised from four annas in the rupee
i.e. 25 per cent, on the undistributed balance to 50 per cent in respect of an
investment company and 37 per cent in respect of other companies.
In 1958 a new provision was introduced by
section 9 of Finance Act, 1958 (Act No. 11 of 1958) with effect from April
1,1958, empowering the Income Tax Officer to refrain from passing an order
under old section 23A, if the payment of a dividend or a larger dividend than
that declared would not have resulted in a benefit to the Revenue..
In 1959 the statutory percentage was raised
to 50 per cent for industrial companies and to 65 per cent for nonindustrial
companies. by means of section 11 of Finance Act, 1959 (No. 12 of 1959) with
effect from April 1, 1960. The statutory percentage was reduced from 100 per
cent to 90 per cent in respect of investment companies by means of section
11(ii) of Finance Act, 1960 (No. 13 of 1960) with effect from April 1, 1960.
In 1961, a radical change in the law relating
to income tax was introduced by the Finance Act of that year. It exempted from
additional super-tax (i) a company in which the public were substantially
interested, (ii) a subsidiary company of any company in which the public were
substantially interested. if the whole of the share capital of the subsidiary
company had been held by the parent company or by its nominees throughout the
previous year and (iii) a company whose share capital to the extent of at least
75 per cent was throughout the previous year beneficially held by a charitable
institution or fund established in India and whose income from dividends was
exempt from tax under section 11 of the Act. Excepting these three classes of
companies, all other companies were brought within the scheme of additional
super taxation. The expression 'profits and gains distributed by any company'
appearing in section 104 was not confined to companies deriving income from
business. The expression 'distributable income' was defined in section 109(i)
as meaning the 'total income' of a company as reduced by certain items. The
'total income' of any assessee under the Act comprised not merely business or
profession income, but income under the various heads of income enumerated in
section 14. Consequently, the scheme for levy of additional super-tax was also
made applicable to a company 809 whose income arose wholly or in part from
property (8. 22), or securities (s. 18), or capital gains (s. 45), or other
sources (s. 56). An 'investment company' was defined in section 109(i) of the
Act as meaning a company whose business consisted wholly or mainly in the
dealing in or holding of investments. The statutory percentage in the case of
an investment company (whether Indian company or not) was fixed at 90 per cent
by section 109(iii)(1) of the Act. It is significant that even in this Act, the
restricted definition of the expression 'investment company' as appearing in
section 372(II) of the Companies Act, 1956 was not adopted by the Legislature.
By Finance Act, 1966, which came into force
with effect from April 1, 1966, the meaning of the term 'investment company'
was clarified by amending clause (ii) of section 109 and providing therein that
investment company meant a company whose gross total income consisted mainly of
income which, if it had been the income of an individual, would have been
regarded as unearned income. An Explanation was also added by this Act to the
aforesaid clause (ii) reading as under :-"Explanation: In this clause the
expression unearned income' has the meaning assigned to it in the Finance Act
of the relevant year." In section 2(7)(e) of the Finance Act, 1966,
'unearned income' was defined as meaning income which is not earned income.
In section 2(7)(c) of the Finance Act, 1966,
'earned income' was defined thus:
"earned income" means any income of
an assessee who is an individual, (i) which is chargeable under the head 'Salaries',
or (ii) which is chargeable under the head 'profits and gains of business or
profession', where the business or profession is carried on by the assessee or,
in the case of a firm, where the assessee is a partner actively engaged
"in the conduct of the business or profession, or (iii) which is
chargeable under the head 'income from other sources' if it is immediately
derived from personal exertion or represents a pension or superannuation of
other allowance given to the assessee in respect of the past services of any
deceased person, or which is chargeable under that head under clause (ii) of
subsection (2) of section 56 of the Income Tax Act, and XX XX XX 810 Clause
(ii)of section 109 was again amended by Finance Act, 1968 (Act 19 of 1968) with
effect from April 1, 1969. As a result of this amendment, the clause read as under
:-"Investment company" means a company whose gross total income
consists mainly of income which is chargeable under the heads 'interest, or
securities, income from-house property, capital gains and income from other
sources." In view of the foregoing discussion, we are clearly of opinion
that the High Court was fight in holding that the appellant is a company whose
business consisted wholly or mainly in holding of investments.
Assuming without holding that the aforesaid
expression as used in section 23A of the Act has a legal character, it would
not make any difference in the result as the expression 'investment companies'
has been defined in 'Dictionary of English Law' by Earl Jowitt (Volume II)
(1959 Edition) as "companies whose income consists mainly of investment
income i.e. income which in the hands of an individual would not be earned
income." In the result, the appeals fail and are hereby dismissed but in
the circumstances of the case without any order as to costs.
P.H.P. Appeal dismissed.
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