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PETITIONER: WAR PROFITS TAX COMMISSIONER, MADHYA PRADESH,INDORE

       Vs.

RESPONDENT: M/S.  RINODRAM BALCHAND OF UJJAIN

DATE OF JUDGMENT: 20/04/1966

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. WANCHOO, K.N. SHAH, J.C.

CITATION:  1967 AIR  246            1966 SCR  224

ACT: Gwalior  War Prifits Tax Ordinance, Samvat 2001, as  amended by  Amendment  Ordinances of Samvat 2002  and  Samvat  2004, First Schedule, r. 3(1) and (2) and Explanation-Explanation, if retrospective-If applies to r. 3(1).

HEADNOTE: The assessee was the managing agent of a Textile Mill in Uj- jain.   In 1944, the Gwalior State promulgated  the  Gwalior War  Profits  Tax Ordinance.  In 1946, by  the  Gwalior  War Profits Tax (Amendment) Ordinance, an Explanation was  added after  r.  3(2) of the First Schedule to  the  Ordinance  of 1944.  In 1947, another Amendment Or dinance was promulgated whereby  a comma was inserted in the Explanation.   In  July 1944. the assesses received about Rs. 11 lacs as dividend on its shares in the Textile Mill.  The War Profits Tax Officer included  the amount in the assessee’s taxable  income,  and the order was upheld by the Appellate Assistant Commissioner and the Commissioner.  On the question: whether the dividend income  was  chargeable to war profits tax, the  High  Court held, on a reference, that the Explanation applied and  that under the Explanation the dividend income was not liable  to be included in the assessee’s taxable income. In  appeal  to  this  Court,  it  was  contended  that   the Explanation  was  not applicable, because, (i)  it  was  not retrospective;  and  (ii) it was only an Explanation  to  r. 3(2) and not to r. 3(1) which was the rule applicable to the assessee. HELD:The Explanation applies to the computation of the  pro- fits  of the chargeable accounting period, because: (i)  the Ordinance of 1947 expressly assumes that the Explanation was in  existence  from  the  date  when  the  War  Profits  Tax Ordinance came into force in 1944; and (ii) on the  language of  the  Explanation it was meant to be an  Explanation  not only  to r. 3(2) but also to r. 3(1).  By the words  "in  r. 3(2)  the  following  shall  be  added",  in  the   amending Ordinance  of  1946,  all  that  was  meant  was  that   the Explanation should be added below r. 3(2). [228 H-229 E]

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 225 of 1965. Appeal  by special leave from the judgment and  order  dated September 6, 1962 of the Madhya Pradesh High Court in  Misc. Civil Case No. 108 of 1958. I.N. Shroff, for the appellant. S.T.  Desai, S. N. Andley, Rameshwar Nath, P. L. Vohra,  and Mahinder Narain, for the respondent. 225 The  Judgment of the Court was dilevered by Sikri,  J. This appeal by special leave is directed  against the  judgment  of  the High Court of  Madhya  Pradesh  in  a reference made to it under s. 46 of the Gwalior War  Profits Tax Ordinance, Samvat 2001-hereinafter called the Ordinance. Three  questions were referred to the High Court by the  War Profits  Tax  Commissioner, but we are only  concerned  with question No. 1, which reads as follows: -               "Whether   the   dividend   income   of    Rs.               11,09,332/received  from the Binod  Mills  was               chargeable under the War Profits Tax?" When  the reference was first heard by the High Court  three contentions were raised by M/s Binodram Balchand of  Ujjain, respondents  before  us,  hereinafter  referred  to  as  the assessees. They were:               "(1) The assessees did not deal in shares  and               their holdings in the Binod Mills Limited were               purely in the nature of investments, having no               connections with their business as defined  in               Section  2(5) read with Rule 1 of Schedule  1,               of the Gwalior War Profits Tax Ordinance.  The               business  of the secretaries,  treasurers  and               agents  of the Binod Mills Limited, which  was               carried on by them did not require any holding               of  the  shares  of the company  and  was  not               dependent  on  their investment  in  the  said               company.                (2)The dividend income accrued or arose  from               the profits of the Binod Mills Limited, and as               the Ordinance applied to the business  carried               on   by  this  company,  the  dividends   were               excluded under the explanation to Rule 3(1) of               Schedule 1.                (3)The  dividend income should be  considered               as income of the full accounting period, i.e.,               from   Diwali  of 1943 to Diwali of  1944  and               should be apportioned on that basis". The  High  Court  by  its judgment  dated  April  19,  1957, accepted   the  first  contention  of  the   assessees   and accordingly  answered the question in their favour.  It  did not  deal  with contentions Nos. 2 and 3.  The  Commissioner appealed to this Court and this Court by its judgment  dated December 20, 1961, set aside the judgment of the High  Court and  answered the first contention in relation  to  question No.  I  against the assessees and remanded the case  to  the High   Court  for  the  consideration  of  the   other   two contentions with reference to that question.  The High Court on  remand accepted the second contention of  the  assessees and answered question No. 1, set out above, in favour of the assessees.  The Commissioner having obtained special  leave, the appeal is now before us for disposal. 226 A  few facts may be given in order to appreciate  the  point that has. been argued before us.  The assessees were, at the relevant time, the Managing Agents of the Binod Mills  Ltd., Ujjain, which was a private limited company carrying on  the

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business of manufacturing and selling textile goods in 1944. The  Ruler of the Gwalior State promulgated the Gwalior  War Profits  Tax  Ordinance,  Samvat 2001, for  the  purpose  of imposing  tax  on  excess profits  arising  out  of  certain businesses.  The Ordinance came into force on July 1,  1944, and applied originally to the counting period falling within the  period commencing on July 1, 1944, and ending  on  June 30,  1945.   By  virtue of a  notification  the  period  was extended to June 30, 1946. The assessees carried on the Managing Agency business during the aforesaid period in Gwalior State and being liable to be assessed  to war profits submitted a return for  the  period commencing  from  July  1, 1944, to October  16,  1944.   It appears  that Rs. 11,09,332/- was received by the  assessees on  July  5, 1944, on account of dividend on shares  of  the Binod  Mills  for the year 1943.  The assessees  inter  alia contended  before the War Profits Tax Officer that this  sum was not liable to be charged.  The War Profits Tax  Officer, however, by order dated July 9, 1951, in.; clouded this  sum of  Rs. 11,09,132/- in the taxable income and his  view  was upheld in appeal by the Appellate Assistant Commissioner and the Commissioner.  As stated above, the Commissioner, at the instance   of  the  assessees,  referred  three   questions, including  the one with which we are concerned, to the  High Court. It  appears that before the High Court the  learned  counsel for   the  Commissioner  did  not  seriously   dispute   the contention  of the assessees that the dividend income  which the  assessees had received was exempted by the  Explanation to  r.  3 of Schedule 1 of the Ordinance.  The  rule  as  it existed originally was as follows: -               "3(1)  Income received from investments  shall               be  included  in  the profits  of  a  business               liable  to the War Profits Tax, unless  it  is               proved to satisfaction of the War Profits  Tax               Officer  that the investments have no  connec-               tion whatever with the business.                (2)In  the  case of business  which  consists                             wholly or mainly in the dealing in or  handling               of    investments,   income   received    from               investments  shall be deemed to be profits  of               that business, and in the case of a  business,               a  specific  part only of  which  consists  in               dealing  in investments, the  income  received               from investments held for the purposes of that               part  of  the business shall be deemed  to  be               profits of that part of the business". 227 By  s.  2 of the Gwalior War Profits Tax  (Amendment)  Ordi- nance,  Samvat  2002-hereinafter referred to  as,  Ordinance 2002,               r.    3 of the First Schedule to the Ordinance               was amended as               follows: -                "In  rule  3(2)  of  the  First  Schedule  to               Ordinance   the  following  shall  be   added,               namely: -               Explanation-"The income from investments to be               included in the profits of the business  under               the provisions of this rule shall be  computed               exclusive  of  all income received by  way  of               dividends  or distribution of profits  from  a               company carrying on a business to the whole of               which  the Section of the  Ordinance  imposing

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             the War Profits Tax applies", This  Ordinance  was  promulgated  on  February  28,   1946. Another  Ordinance  called  the  Gwalior  War  Profits   Tax (Amendment)  Ordinance, Samvat 2004-hereinafter referred  to as  Ordinance  2004-was promulgated on  September  6,  1947. This  Ordinance amended the Explanation to sub-rule  (2)  of rule 3 of Schedule 1 as follows               "In the explanation of sub-rule (2) of Rule  3               of  Schedule 1 of the Gwalior War Profits  Tax               Ordinance, Samvat 2001 a comma is added  after               the  words  "from  a  company  carrying  on  a               business"  and before the words "to the  whole               of  which"  and shall be always deemed  to  be               there  from  the  date  from  which  the  said               Ordinance came into force". The High Court felt no difficulty in holding that the expla- nation  applied,  and that on its plain terms  the  dividend income  which  the assessees received from  the  profits  of Binod  Mills  Ltd.  was not liable to  be  included  in  the taxable income.  The High Court observed: -                "The  language  of the  explanation  is  very               plain, and it means that if income is received               by way of dividends or profits from a  company               carrying on a business, to the whole of  which               the section of the Ordinance imposing the  War               Profits Tax applies, then the income has to be               excluded in the assessment to War Profits  Tax               of  the assessee receiving that  income.   The               object of the explanation is clearly to  avoid               double taxation.  Here it is not disputed that               the   dividend  income  which   the   assessee               received  was  from the profits of  the  Binod               Mills  Limited and the Mills were  subject  to               the  burden of the War Profits Tax  under  the               Ordinance.  That being so, the explanation  in               terms applies to the case, and the assessee is               entitled to claim that the dividend income  of               Rs.  11,09,332/-  received  from  Binod  Mills               could not               228               be included in the computation of its  profits               for  the purposes of War Profits Tax  and  was               consequently  not  chargeable  under  the  War               Profits  Tax  Ordinance.   Learned   Advocate-               General  appearing  for  the  State  did   not               dispute this position". Mr.  Shroff,  the  learned  counsel  for  the  Commissioner, contends,  first, that the explanation was not in  existence at  the relevant time, and, therefore, cannot be taken  into consideration;   secondly,  that  the  explanation   is   an explanation  to r. 3(2) and not to r. 3(1)  and,  therefore, cannot  be  used to explain r. 3(1).  Mr.  Shroff  complains that  the  High  Court  was  wrong  in  thinking  that   the explanation  formed  part  of  Ordinance  2001,  as  it  was originally  promulgated.  The High Court seems to have  been under this impression because in the order refusing leave to appeal to this Court the High Court observed:-               "There  was no omission at all on our part  to               consider the question whether the  explanation               was prospective or not.  Indeed, this question               was  never  raised by  the  learned  Advocate-               General,  appearing for the Department and  it               was rightly not raised as the Explanation  was               not  added subsequent to the  promulgation  of               the  Ordinance  and  the  very  basis  of  the

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             assessment  of the income of the assessee  was               that  rule  3 of Schedule 1 of  the  Ordinance               together  with the Explanation applied to  the               income  received  by the assessee  during  the               period  from  1st July 1944  to  16th  October               1944". It  seems  that Ordinance 2002 and Ordinance 2004  were  not placed before the High Court and for this reason it  assumed that  the  explanation  was  not  added  subsequent  to  the promulgation of the Ordinance. But  even if it was added subsequently, in our opinion,  the explanation applies to the computation of the profits of the chargeable  accounting  period July 1, 1944 to  October  16, 1944.  If we read Ordinance 2002 and Ordinance 2004 together the   legislative   intention  to   make   the   explanation retrospective becomes clear.  Apart from Ordinance 2004,  it would have been very arguable that the explanation  inserted by  Ordinance 2002 was retrospective because it  dealt  with the   computation  of  profits  and  would  apply   to   all computation of profits made by the Taxing authorities  after February  28, 1946.  But we need not go into  this  question because   Ordinance   2004  expressly   assumes   that   the explanation  was  in  existence  from  the  date  when   the Ordinance came into force and no other meaning can be  given to s. 2 of Ordinance 2004 because by deeming that the  comma shall  be  deemed to be there from the date from  which  the Ordinance  came  into force it expressly  assumes  that  the explanation  was also in force from that date.   Accordingly we are not inclined to 229 accept  the first contention of Mr. Shroff and we must  hold that  the explanation applies to the computation of  profits of the chargeable accounting period July 1, 1944 to  October 16, 1944. Regarding the second contention, Mr. Shroff says that  Ordi- nance 2002 expressly provides that the explanation shall  be added in r. 3(2) of the First Schedule to the Ordinance.  He further says that this explanation is referred in  Ordinance 2004  as "explanation of sub-rule (2) of rule 3 of  Schedule 1".   There is no doubt that Ordinance 2002 did  purport  to add  this explanation to r. 3(2) but it seems to us that  if we  look at the language of the explanation it was meant  to be  an explanation not only to r. 3(2) but to r. 3(1)  also. First, the words "the income from investments to be included in the profits of the business under the provisions of  this rule" are comprehensive and include income from  investments both  under  r.  3(1) and r. 3(2).  Secondly,  there  is  no reason  why  any distinction should have been  made  between investments  mentioned in r. 3(1) and investments  mentioned in  r.  3(2).   Rule  3(1) is general  and  deals  with  all investments from profits of all businesses and would include investments  mentioned  in r. 3(2).  Rule  3(2)  deals  with investments  of  a certain business,  i.e.,  business  which consists  wholly or mainly in the dealing in or  holding  of investments.   We have not been able to appreciate  why,  if Mr. Shroff is right, was it necessary to distinguish between income from investments mentioned in r. 3(1) and income from investments mentioned in r. 3(2).  At any rate, the language of the explanation is quite clear and it seems to us that by the  words  "in  rule  3(2) of the  First  Schedule  to  the Ordinance,  the  following shall be added" what  was  really meant was to add the explanation below r. 3(2). In  the result we agree with the High Court that the  answer to  the  question referred should be in the  negative.   The appeal accordingly fails and is dismissed with costs.

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Appeal dismissed. 230