Full Judgment Text
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PETITIONER:
BENGAL & ASSAM INVESTORS LTD
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, WEST BENGAL
DATE OF JUDGMENT:
02/11/1965
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
SUBBARAO, K.
SHAH, J.C.
CITATION:
1966 AIR 1514 1966 SCR (2) 471
CITATOR INFO :
RF 1968 SC 761 (6)
RF 1972 SC 288 (17)
ACT:
Indian Income-tax Act, 1922 (Act 11 of 1922), s. 10-
Investment Company--Dividend income-If taxable.
HEADNOTE:
The assessee, an investment company, was assessed to income-
tax on its dividend income under s. 12 of the Income Tax
Act. On reference the High Court held : "it cannot ’be
suggested in this case that the assessee investment company
had no business of any kind. It certainly had one but when
it held shares on which dividends were received tax has to
be computed under s. 12 and the assessee cannot say .that
this being its main activity the income received was its
’business income’ under s. 10". In appeal to this Court the
assessee contended that when a company is formed for the
purpose of acquiring shares and making investments and
generally undertaking financial and commercial obligations
and transactions and operations of all kinds, the dividend
income must be computed under s. 101 of Income-tax Act,
because the company was formed expressly for the purpose of
carrying on business and holding shares in the course of it.
HELD : The High Court rightly answered the question against
the assessee.
On principle, before dividends on shares can be assessed
under s. 10, the assessee, be it an individual or a company
or any other entity, must carry on business in respect of
shares; that is to say, the assessee must deal in those
shares. If an individual person invests in shares for the
purpose of earning dividend he is not carrying on a
business. The only way he can come under s. 10 is by
converting the shares into stock-in-trade, i.e. by carrying
on business of dealing in Stock and shares. [478 E-F]
The very fact that a company is incorporated to carry on
investment does not show that the company is carrying on
business. [478 G]
Lakshminarayan Rani Gopal & Son Ltd. v. Government of
Hyderabad, 25 I.T.R. 449, relied upon.
, Apart from showing mere investment, no facts have been
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brought out in this case to show that the company was in any
way carrying on business in respect of shares. Its position
was in no way different from an individual merely buying
shares with a view to holding them for the purpose of
earning dividends. [479 B-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 508 of 1964.
Appeal from the judgment and order dated January 16, 1962 of
the Calcutta High Court in Income-tax Reference No. 1 of
1954.
S. T. Desai, S. Murthy and B. P. Maheshwari, for the
appellant.
4 72
A. V. Viswanatha Sastri N. D. Karkhanis, R. H. Dhebar and
R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This is an appeal by certificate of the High Court
of Calcutta against its judgment in a reference made to it
under s. 66 (1) of the Indian Income Tax Act, 1922
(hereinafter referred to as the Act.) The question referred
by the Appellate Tribunal was
"Whether, in the case of the assessee, an investment
company, its dividend income is part of its profits and
gains chargeable to tax under section 10 of the Indian
Income-tax Act, 1922
In the Statement of the Case, dated December 3, 1953, the
Appellate Tribunal gave the following facts : The appellant,
Bengal and Assam Investors Ltd., hereinafter referred to as
the assessee, was incorporated on January 30, 1947, and
commenced business on March 19, 1947. According to its
memorandum of association, the company’s objects are:
"3. The objects for which the Company is
established are (and it is expressly declared
that the several sub-clauses of this clause
and all the powers thereof are to be
cumulative and in no case is the generality of
any one sub-clause to be narrowed or
restricted by any particularity of any other
sub-clause, nor is any general expression in
any sub-clause to be narrowed or restricted by
any particularity of expression in the same
sub-clause or by the application of any rule
of construction ejusdem generis or otherwise)
(1) To acquire and hold shares, stocks,
debentures, debenture-stock, bonds,
obligations, and securities issued or
guaranteed by any company constituted or
carrying on business in British India or
elsewhere, or in any British Colony, or
dependency, or possession, or in any foreign
country, and debentures, debenture-stock,
bonds, obligations and securities, issued or
guaranteed by any government, specially
’including the Government of India and a
Provincial Government, sovereign ruler,
commissioner, public body, or authority,
imperial, supreme, national, municipal, local
or otherwise, whether in India or elsewhere.
473
(2) To acquire any such shares, stocks,
debentures, debenture-stock, bonds,
obligations, or securities by original
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supscription, tender, purchase. exchange, or
otherwise, and to subscribe for the same
either conditionally or otherwise, and to
guarantee the subscription thereof and to
exercise and enforce all rights, and powers
conferred by or incident to the ownership
thereof.
(8) To sell, invest in and vary the
investment and to reinvest in any shares,
stocks, debentures stocks, bonds, and
obligations and securities.
(11)To advance, deposit with or lend money,
securities and property to or receive loans or
grants or deposits from the Government.
(12) To lend money, either with or without
security, and generally to such persons and
upon such terms and conditions as the Company
may think fit.
(13) To undertake financial and commerercial
obligations, transactions and operations of
all kinds.
Provided that nothing herein contained shall
be . . deemed to empower the Company to carry
on the business of banking."
The company closed its accounts for the first time on June
30, 1947 and its accounting period was the year ending with
June. In the assessment for 1948-49 a nett loss of Rs.
2,194 was computed. In the assessment for 1949-50 its
grossed-up dividend income was Rs. 32,727 but its
expenditure (including interest on borrowings to acquire
shares, etc.) was Rs. 106,583, the resultant loss being Rs.
73,856. The Income Tax Officer treated this figure as
unabsorbed business loss. In the assessment for 1950-51,
the gross dividend income was Rs. 1,18,238 and the
expenditures (including interest on borrowings, etc.) was
Rs. 51,843 leaving a nett income for the previous year
ending with June 30, 1949, of Rs. 66,395. The Income Tax
Officer in his order dated August 1, 1951, held that as the
sum of Rs. 66,395 was profit from dividends, business losses
of 1948-49 and 1949-50 could not be set off. The assessee
filed two appeals against the assessments made for 1949-5(Y
and 1950-51, and the Appellate Assistant Commissioner, by
his order dated December 18, 1951, disposed of them by a
common order. He held that the dividend income was not
business Incomes and was assessable under S. 12 of the Act.
Accordingly, for the
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assessment year 1949-50 he determined the loss from other
sources at Rs. 73,324 and he held that it could not be
carried forward as it was a loss from other sources under S.
12. The assessee filed two appeals before the Income Tax
Appellate Tribunal, which by its order dated January 12,
1953, dismissed the appeals on two alternative grounds;
firstly it held that the dividend income was assessable only
under S. 12 of the Act, as the assessee was an investment
company. In the alternative, the Appellate Tribunal held
that even if the company were to be a dealer in shares, even
then in its opinion the dividend received as registered
shareholders would be dividend as such and assessable under
S. 12. The Appellate Tribunal concluded that "in our
opinion, on either view of the case, the loss of the
preceding years cannot be adjusted -against the dividend
income of the assessee earned during the years 1949-50 and
1950-51."
The assessee then applied for a reference and suggested
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three questions of law :
"(1) Whether in the facts and circumstances of
the case the assessee company is an investment
holding company or an investment dealing
company.
(2) Whether in the facts and circumstances
of the case the dividends earned by the
company should have not been assessed under
the head "Profits and gains of business,
profession or vocation" under section 10 of
the Indian Income Tax Act.
(3) Whether in the facts and circumstances
of the case the loss brought forward from
preceding years under section 24(2) of the
Indian Income Tax Act should have not been set
off against the dividends earned by the
assessee company during the year in question."
The Commissioner of Income Tax in his reply
suggested the. following question :
"Whether, on the facts and in the
circumstances of the case, the Tribunal was
justified in holding that the loss sustained
by the assessee in the preceding years cannot
be set off against the dividend income earned
by the assessee in the previous year for the
assessment year 1950-51 under section 24(2) of
the Income-tax Act ?"
’The Tribunal, however, as mentioned earlier, referred the
question already set out above.
475
The High Court, by its judgment dated August 31, 1955, found
it impossible to deal with the reference and answer -the
question asked without obtaining from the Tribunal further
and fuller statement of the case. The High Court,
therefore, referred the case back to the Appellate Tribunal
under S. 66(4) of the Act "in order that the Tribunal may
draw up and submit to that Court a supplementary statement
of the case, indicating clearly what view it took as to the
effect of the Appellate Assistant Commissioner’s order in
passing its appellate judgment and on what basis regarding
the year 1949-50 it has made the present reference. To put
the matter in a more definite form, the Tribunal should
indicate whether it regarded the Appellate Assistant Com-
missioner’s order as having effectively revised the
assessment order and if it took that view of the Appellate
Assistant Commissioner’s order, what the revision was,
particularly whether any amount was left in the assessment
as unabsorbed business loss after the transfer of an amount
to loss under other sources, directed by the Appellate
Assistant Commissioner, had been carried out."
The Appellate Tribunal submitted a supplementary statement
of the case, dated February 18, 1957. It was observed in
the statement of the case that "the Appellate Tribunal read
the orders of the Appellate Assistant Commissioner to mean
that the assesses company was an investment company and was
not a company which dealt in shares. The quantum of the
loss in the assessment year 1949-50 as suggested in the
Appellate Assistant Commissioner’s order was not adverted to
by the Appellate Tribunal at the time of the hearing of
appeal as no arguments were addressed to them on that
point." The supplementary statement mostly contained an
interpretation of the orders of the Appellate Assistant
Commissioner and the Appellate Tribunal; the only fresh fact
included was the information that the Income Tax Officer in
conformity with the order of the Appellate Assistant
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Commissioner revised the assessment order for 1949-50 so as
to change, the figures and held that the loss arising from
the set-off of interest against the dividend income was a
loss under the head ’other sources’ while the balance was a
business loss and was directed to be carried forward. In
this order the Income Tax Officer had stated that "loss
under other sources cannot be carried forward as it is under
section 12. Business loss of Rs. 532 will be carried
forward."
The reference was then heard by a Bench consisting of Mitter
and Ray, JJ. It was argued before the High Court that "in
as much as dividend is not expressly mentioned in section 12
in the case
476
of an investment company assessee whose business is to
invest in shares dividend income therefrom should be
computed under section 10 as its business income with the
result that the assessee can claim the benefit of section
24(2) of the Act." This contention, however, did not appeal
to the High Court. The High Court held that "it cannot be
suggested in this case that the assessee investment company
had no business of any kind. It certainly had one but when
it held shares on which dividends were received tax has to
be computed under S. 12 and the assessee cannot say that
this being its main activity the income received was its
’business income’ under section 10." In the result, the High
Court answered the question in the negative.
Mr. S. T. Desai, learned counsel for the assessee, at the
outset -asked us to modify the question referred to the High
Court. He -said that he had asked for three questions to be
framed and that the Commissioner in his reply had also
suggested the real question which arose out of the order of
the Appellate Tribunal. He further says that the real point
in this case is not whether the dividend income is
assessable under s. 10 or s. 12, but whether under s. 24(2)
the assessee is entitled to set off the deficiency or loss
,occurring in the earlier years. But the High Court was
neither requested to issue a mandamus nor requested to
modify or formulate another question and we are not prepared
to frame a new question by way of modification of the
question referred to the High ,Court.
Confining ourselves then to the question actually referred
to the High Court, the problem is quite simple, the problem
being whether an investment company like the assessee
company can claim to have its dividends computed under S. 10
or s. 12 of the Act. Mr. Desai contends that if you look at
the objects of the company it is apparent that the company
is carrying on business. He further relies on Commissioner
of Income Tax v. Cocanada Radhaswami Bank Ltd.(1) and says
that at any rate if the dividend income is -computed under
s. 12, it still is business income for the purpose of S.
24(2). He then draws our attention to Commissioner of
Income-Tax v. Chugandas and Co. (2) where this Court held
that "there is no reason to restrict the condition of the
applicability of the exemption under section 25(3) only to
income on which the tax was payable under the head "Profits
and gains of business, profession or vocation." The
exemption under section 25(3) is general." But these--two
cases have no bearing on the question whether the dividend
income has to be computed under s. 10 or
(1) 57 I.T.R. 306 (2) [1957] 8 S.C.R. 322
477
S. 12 of the Act. They may have reference to the question
sought to be raised before us by way of modification and
which we have declined to modify. The main argument of Mr.
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Desai is that when a company is formed for the purpose of
acquiring shares and making investments and generally
-undertaking financial and commercial obligations and
transactions and operations of all kinds, the dividend
income must be computed under s. 10 because the company is
formed expressly for the purpose of carrying on business and
holding shares in the course of it. In this connection he
refers to the following passage from the judgment of Lord
Sterndale in The Commissioner of Inland Revenue v. The
Korean Syndicate Ltd. (1) :
"But the fact that the limited company comes
into existence in a different way is a matter
to be considered. An individual comes
into existence for many purposes, or perhaps
sometimes for none, whereas a limited company
comes into existence for some particular
purpose, and if it comes into existence for
the particular purpose of carrying out a
transaction by getting possession of
concessions and turning them to account, then
that is a matter to be considered when you
come to decide whether doing that is carrying
on a business or not."
The -learned counsel for the Revenue, Mr. Viswanatha Sastri,
contends that the company was not holding shares as part of
its stock-in-trade, but was holding them merely as an
investment company, and he says that in this respect an
investment company even though it is formed under the
Companies Act is in no way different from an individual who
invests his own moneys or borrows and invests monies in
shares for the purpose of getting dividends. He drew our
attention to East India Prospecting Syndicate, Calcutta v.
Commissioner of Excess Profits Tax, Calcutta(2), where the
Calcutta High Court in dealing with the Excess Profits Tax
Act (XV of 1940) held that "the mere holding of property or
investments cannot amount to a business within the meaning
of that term as used in the Indian Income-tax Act, 1922, and
can only amount to a business as that term is used in the
Excess Profits Tax Act, 1940, by reason of the proviso to
Section 2(5) of that Act. The proviso to Section 2(5) of
the Excess Profits Tax Act, 1940, only makes the holding of
investments or property by limited companies and
incorporated societies tantamount to carrying on of
business." But the assessee in that case was not carrying on
any
(1) 12 T.C. 181 at p. 202 (2) 19 I.T.R. 571
478
investment business at all, and therefore, the decision is
of not much assistance to us. The only assistance we can
derive from that decision is that the Central Legislature in
enacting the Excess Profits Tax Act understood the word
"business" to mean that the term would not include a mere
holding of investments, and made a special provision to rope
in limited companies or incorporated societies which were
holding investments or property within the definition of the
word "business".
Before the amendment of s. 12 by s. 9 of the Finance Act,
1955, it had been held by the Bombay High Court in Commis-
sioner of Income Tax v. Ahmuty & Co. Ltd.(1) that where a
company was a dealer in shares which constituted its stock-
intrude; the dividend income received by the assessee in
respect of its shares was income from business chargeable
under s. 10 and the Income-tax authorities could not compel
the assessee to show the income under s. 12. But there is
no case where it had been held that even if the shares are
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not stock-in-trade of the assessee company, the dividend can
be assessed under s. 10. It seems that in practice an
investment company was being assessed under s. 12 in respect
of dividend income received by it. (see for example Eastern
Investment Ltd. v. Commissioner of Income Tax, West Ben 1
(2) legal C which is a case which came up to the Supreme
Court.)
It seems to us that on principle before dividends on shares
can be assessed under s. 10, the assessee, be it an
individual or a company or any other entity must carry on
business in respect of shares; that is to say, the assessee
must deal in those shares. It is evident that if an
individual person invests in shares for the purpose of
earning dividend he is not carrying on a business. The only
way he can come under s. IO is by converting the shares into
stock-in-trade, i.e. by carrying- on business of dealing in
stock and shares as did the assessee in Commissioner of
Income Tax v. Bai Shirinbai K. Kooka ( 3 ) .
Mr. Desai laid a great deal of stress on the argument that
the very fact that a company is incorporated to carry on
investment shows that the company is carrying on business.
We are unable to agree with this contention. Bhagwati, J
observed in Lakshiminarayan Ram Gopal and Son Limited v.
Government of Hyderabad(1) that "when a company is
incorporated it may not necessarily come into existence,
for the purpose of carrying on a business." He further
observed that "the objects of an incorporated
(1) 27 I.T.R. 63 (2) 20 I.T.R. 1
(3) 46 I.T.R. 86 (4) 25 T.T.R. 449
479
company as laid down in the memorandum of association are
certainly not conclusive of the question whether the
activities of the company amount to carrying on of
business."
Apart from showing mere investment, no facts have been
brought out in this case to show that the company was in any
way carrying on business in respect of shares. Its
position, on the facts placed before us, is in no way
different from an individual merely buying shares with a
view to holding them for the purpose of earning dividends.
No authority has been cited before us that in the case of an
individual to acquire and hold shares with the object of
receiving dividends is to carry on business. We are unable
to hold that if a company does the same, it carried on
business Within S. 10 of the Act.
In the result we agree with the conclusion of the High Court
that the answer to the question must be in the negative.
The appeal, therefore, fails and is dismissed with costs.
Appeal dismissed.
p.C.1/66-17
480