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SUPREME COURT OF INDIA
K.S. HEGDE AND A.N. GROVER, JJ.
Commissioner of Income Tax, Gujarat (In all Appeals) Appellant
Versus
Distributors (Baroda) (Pvt) Ltd. (In all Appeals), Respondent.
Civil Appeals Nos. 2350 to 2353 of 1968 and 1313 to 1316 of 1971, D/- 16-9-1971.
Advocates appeared
Mr. S. C. Manchanda, Sr. Advocate (M/s. R. N. Sachthey and B. D. Sharma, Advocates with him), for Appellant (In all Appeals); Mr. S. T. Desai, Sr. Advocate (Mr. I. N. Shroff, Advocate with him), for Respondent (In all Appeals).
Constitution of India, 1950 - Article 136 - Indian Income-tax Act, 1922 - Section 23-A, 23-A (1), 66 (1) and 10 - Companies Act, 1956 - Company - Assessment Years - Income-Tax - Whether assessee company comes within scope of Section 23-A of Indian Income-tax Act, 1922 - Whether High Court was right in concluding that assessee company did not come within scope of Section 23-A - Whether dividend income of assessee company therein could be considered as business income under Section 10 of Act - Whether assessee company can be held to come within scope of Section 23-A in light of our interpretation of that provision - Whether business of assessee company consists of wholly or mainly in dealing in or holding of investments - Whether assessee company can be said to be a company engaged in business activity of holding of investments - Whether assessee company s business consisted wholly or mainly in dealing in or holding of investments – Held, Section 23-A speaks of business of "holding of investments" - Here comes enigma - It is easier to understand when section speaks of a company having business of dealing in investments though to say that company is dealing in investments may at first sight look somewhat incongruous - When legislature spoke of dealings in investments, it meant dealing in shares, stocks and securities etc - But when a person invests in shares of some of companies, it is difficult to say that his business is one of investing - In commercial circles investing is not considered as business - An investor may feel perplexed if he is called a businessman – Court have earlier referred to objects clause in memorandum of association - Memorandum permits assessee company to take up management of other companies, to invest in shares of other companies and to deal in shares of companies - Therefore it cannot be said that assessee company was incorporated primarily with object of carrying on business of "dealing in or holding of investments" - Objects of assessee company are many-fold - All shares held by assessee company as its investments were shares of two companies of which it was managing agent - It invested in no other shares - Tribunal has found that managed company s shares were acquired by assessee company for purpose of safeguarding its managing agency business - Therefore it is quite clear that those investments were made not in course of any business of investment but for purpose of securing its managing agencies - If Court add dividend income of shares of managed companies, to managing agency commission, total income from those two sources is much more than income earned by assessee company from its share dealing in each of assessment years - Hence viewed from point of view of profits earned by assessee company, it cannot be said that in relevant previous years assessee company s "business consisted wholly or mainly in dealing in or holding of investments - It is true that assets used by assessee company in its share dealing are far more than that used by it for investment in shares of managed company - But then Court have to bear in mind that Court do not exhaust total assets of company by merely referring to tangible assets used by it - In addition, Court have to take into consideration value of managing agencies held by assessee company - Looked that way, it cannot be said that assets of company, used in its share dealings are far more than its other assets - At any rate on basis of assets used, it cannot be concluded that assessee s business consisted "wholly or mainly" in dealing in investments - It follows from conclusions reached by Court earlier, that Court answer to question before must be same as that given by High Court – Court not only agree with conclusions reached by High Court but also with premises on basis of which those conclusions were reached - Appeals dismissed.
Judgment
HEGDE J.:- These are some of the appeals where the appellant unfortunately had to file two different appeals in respect of the same matter. Civil Appeals Nos. 2350-2353 of 1968 were brought on the strength of the certificates granted by the High Court of Gujarat. No reasons were given in support of those certificates. Hence those certificates must be considered as having not been properly granted. The resulting position was that the appeals brought on the strength of these certificates became unsustainable. To get over that difficulty, the Commissioner of Income-tax, Gujarat invoked our jurisdiction under Article 136 of the Constitution to appeal against the judgement of the High Court. The special leave asked for was granted and thus he came to file Civil Appeals Nos. 1313-1316 of 1971.
2. The assessee is a Private Limited Company and the concerned assessment years are 1957-58, 1959-60, 1960-61 and 1961-62. The only question for decision in these appeals is whether the assessee company comes within the scope of Section 23-A of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act)?
3. The assessee company was incorporated on October 11, 1941. The object clause in the memorandum of association contains the usual string of objects. Confining ourselves to the objects relevant for our present purpose, we get in Clause (3) of the memorandum power "to acquire and hold shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in British India". Sub-clause (p) of that Clause empowers the company "to take part in the formation, management, supervision or control of the business or operation of any company or undertaking and for that purpose to appoint and remunerate any directors, accountants or other experts or agents". Clause (q) provides power "to carry on all or any of the following businesses:
"Agents, Chief agents or licensed agents of any company ........."
4. We are not concerned with the other objects mentioned in the memorandum.
5. In July 1942, the assessee company promoted a company known as New India Industries Ltd. By an agreement dated July 24, 1942, the assessee company was appointed as managing agents of the said New India Industries Ltd. In 1956, the said managing agency was renewed for a period of five years in view of the provisions of the Companies Act, 1956.
6. The group of persons who had floated the assessee company had earlier in the year 1940 floated a company called the Cotton Fabrics Private Ltd. By an agreement dated April 22, 1943, the assessee company was appointed the managing agent of the said Cotton Fabrics Private Ltd. In 1956, the said managing agency agreement was also renewed for a period of five years for the very reason referred to earlier.
7. We have already noted that the assessee company is a Private Company. As such it is not a company in which the public is substantially interested.
8. The Income-tax Officer was of the opinion that as during the previous years to the assessment years in question, the assessee company s income from its business activity "in the dealing in or holding of investments" was very much more than that its income from its managing agencies and further as it had used a very large portion of its assets in the former activity, it must be considered as an "investment company" an expression not found in the Act, Basing himself on that finding, he reasoned thus:
Statutory percentage of profits to be declared as dividends by such a company under Section 23-A was 100 per cent in the first two assessment years and 90 per cent in the remaining two assessment years. The dividends declared by the assessee company fell much below that percentage. Hence it was liable under Section 23-A to pay super tax at the rate of 50 per cent. on the undistributed balance of the total income reduced as provided in Section 23-A (1). He ordered accordingly. In appeal this decision was
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