PETITIONER:
NAWN ESTATES (P) LTD.
Vs.
RESPONDENT:
C.I.T., WEST BENGAL
DATE OF JUDGMENT14/10/1976
BENCH:
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 contradis-
tinction with manufacturing processing & trading opera-
tions--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 appel-
lant Company inter alia was purchase of land and buildings
and letting out of lands and buildings in lieu of appropri-
ate 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 in-
vestments 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 an-
swered 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 expres-
sion 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 busi-
ness consists wholly or mainly in holding an
in vestment and that if it is so
construed the appellant would not be covered
by section 23A(1).
The counsel for the respondent Revenue con-
tended: 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 contra-
diction to the income received from manu
facturing 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 Compa-
nies 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 busi-
nessmen 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 Improve-
ment 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 expres-
sion "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
JUDGMENT
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 circum-
stances 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%. Ac-
cordingly with the previous approval of the Inspecting
Assistant Commissioner, the Income Tax Officer levied
additional super tax at 50% of the net distributable bal-
ance available with the appellant by applying the provi-
sions of section 23A(1) of the Act. Aggrieved by this
order, the appellant took the matter in appeal to the Appel-
late 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 con-
sisted 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 con-
sisted 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 appropri-
ate 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 invest-
ments’ in the context of section 23A of the Act and Explana-
tion 2(i) thereto.
Mr. Mukherjee, counsel for the appellant, has strenuous-
ly 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 ’i-
nvestment 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, deben-
tures, stocks or other securities. According to Mr. Mukher-
jee, 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 submis-
sion 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 activi-
ty 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 had not to the technical meaning of the
term but to its popular meaning with reference to the con-
text 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 busi-
nessmen, 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 proper-
ties 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 analo-
gous provisions, fundamental concepts, and general princi-
ples 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 deben-
tures held by the respondent company in a
Belgian and two Rumanian oil producing compa-
nies) 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 well-
known 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, 160-
61;[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, Para-
graphs 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 con-
strued 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 proper-
ly, 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 wheth-
er 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 business-
man. 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 pri-
marily 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 invest-
ments would be investments acquired by the
laying out of money .... Business consist-
ing 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 intro-
duced 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 undistrib-
uted income in the total income of the shareholders, whenev-
er 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 mainte-
nance 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 ascertain-
ment 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 percent-
age, 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 undis-
tributed 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 substan-
tially 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 dis-
tinction between investment companies and
trading or manufacturing companies; the re-
quirement 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 transfer-
ring their assets (including house property,
stocks and shares) to such a company in ex-
change 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 re-
quire funds for internal financing or capital
formation as the industrial or trading compa-
nies 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 in-
come’) 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 compa-
nies. (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 undis-
tributed 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 indi-
rectly, by or for not more than five individu-
als. 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 indirect-
ly, 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 deal-
ings 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 sugges-
tion 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 con-
trolled or held by at least six persons (an individual with
his relatives, and a nominator and his nominee being treat-
ed 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 distri-
bution at a reduced level on the ground of current and
future needs of the company and a right of appeal was pro-
vided to the Board of Referees from the order of the Commis-
sioner. The 1955 Amendment also provided for
808
set-off of the amounts distributed in excess of the statuto-
ry 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 fixa-
tion 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 non-
industrial 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 substantial-
ly 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 compa-
ny 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 busi-
ness consisted wholly or mainly in the dealing in or hold-
ing 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 defini-
tion 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 ’Sal-
aries’, 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 immedi-
ately derived from personal exertion or repre-
sents 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 amend-
ed 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 afore-
said 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 individu-
al 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 dis-
missed.
811