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PETITIONER: COMMISSIONER OF INCOME TAX, GUJARAT

       Vs.

RESPONDENT: DISTRIBUTORS (BARODA) (P) LTD.

DATE OF JUDGMENT16/09/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1972 AIR  288            1972 SCR  (1) 726  CITATOR INFO :  RF         1977 SC 153  (14)

ACT: Indian  Income-tax  Act,  1922, s. 23A--"In the  case  of  a company  whose  business consists wholly or  mainly  in  the dealing  in  or holding of investment",  meaning  of-Whether holding  share  of  only two companies of which  it  is  the Managing  Agent is an ’investment company’ within the  scope of the section.

HEADNOTE: The  assessee  is  a private limited  company  and  was  the Managing Agent of two other companies.  All the shares  held by  the assessee company as its investments were the  shares of  those  two companies.  The Income-tax  authorities  held that the assessee company was an ’investment company’ within the  scope of s. 23A of the Act and ordered the  company  to pay  super tax as provided under s. 23A(1).  The High  Court in reference held in favour of the assessee.  Dismissing the appeals, HELD  :  (1) In the facts and circumstances of  the  present case,  the  assessee  company  cannot  be  said  to  be   an ’investment  company’ coming within the scope of s.  23A  of the Act. The  meaning  of the expression "in the case  of  a  company whose  business consists wholly or mainly in the dealing  in or  holding of investments" both in the main s. 23A  and  in the  Explanation  concerns  itself  with  a  company   whose business  consists  "wholly or mainly in the dealing  in  or holding of investments".  The word "mainly" must necessarily take its colour from the word "wholly" preceding that word., In  other words the company which comes within the scope  of those provisions must be a company whose primary business is in the dealing in or holding of investments and only in such cases,  s.  23A applies.  And the  expression  ’business  of holding  of  investments’ in the said section  refers  to  a real,  substantial  and systematic or  organised  course  of activity  of investment carried on by an assesses for a  set purpose such as earning profits. [730 H, 731 D] All  the  shares  held  by  the  assessee  company  as   its investments were the shares of the two companies of which it was  the Managing Agent.  These investments were made for  a collateral  purpose  viz.,  to have a  firm  grip  over  its

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Managing  Agency  business.   The investments  made  by  the assessee company in the shares of the managed companies  are essentially  linked with its Managing Agencies and not  with the  dealing of that company in shares of  other  companies. The  company’s  total  income from dividend  income  of  the shares  of  the managed companies and  the  Managing  Agency commission  together is much more than the income earned  by the company from its share dealings.  Further the assets  of the company used in its share dealings are not more that its other  assets.   Therefore,  it  cannot  be  said  that  the assessee  company’s business consisted wholly or  mainly  in the dealing in investments. [7.33 F] Bengal  Assam  Investors  Ltd. v. C.I.T.,  West  Bengal,  54 I.T.R.   547   and  Narain  Swadesh.    Weaving   Mills   v. Commissioner of Excess Profits Tax, 26 I.T.R. 765,  referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeals Nos.  2350  to 2353 of 1968 and 1313 to 1316 of 1971. 727 Appeals  by  certificate from the judgment and  order  dated July  7,  1967  of  the Gujarat  High  Court  in  Income-tax Reference No.. 22 of 1965. S.   C. Manchanda, R. N. Sachthey and B. D. Sharma, for  the appellant (in all the appeals). S.   T.  Desai and I. N. Shroff, for the respondent (in  all the: appeals). The Judgment of the Court was delivered by 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 those certificates became unsustainable.  To get over  that  difficulty,  the  Commissioner  of   Income-tax, Gujarat.  invoked  our jurisdiction under Art.  136  of  the Constitution  to  appeal against the judgment  of  the  High Court.  Civil Appeals Nos. 1313-1316 of 1971. 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 s.  23-A  of the Indian Income-tax Act, 1922 (to be hereinafter  referred to as the Act) ? 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-cl. (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 :

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"Agents,   Chief   agents   or  licensed   agents   of   any company........" We are not concerned with the other objects mentioned in the memorandum. 728 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. 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. 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. The Income-tax Officer was of the opinion that as during the 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 s. 23A 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  assesssee company  fell  much  below that percentage.   Hence  it  was liable  under S. 23A to pay super tax at the rate of 50  per cent  on  the  undistributed balance  of  the  total  income reduced  as provided in s. 23A (1) accordingly.   In  appeal this  decision  was  affirmed  by  the  Assistant  Appellate Commissioner excepting in regard to certain deductions  with which we are not concerned. Aggrieved  by the order of the Assistant  Appellate  Commis- sioner, the assessee took up the matter in second appeal  to the Income-tax Appellate Tribunal.  The Tribunal agreed with the   ,conclusions  reached  by  the   Assistant   Appellate Commissioner.  ’Thereafter at the instance of the  assessee, the following two questions were referred to the High  Court under S. 66(1) of the Act.               "1. Whether on the facts and circumstances  of               the case the Tribunal was justified in holding               that  the  assessee company is  an  investment               company  for  purposes of section 23A  of  the               Income-tax Act, 1922 ?               729               2.    Whether  the Tribunal was  justified  in               law  in  holding that  while  determining  the               undistributed balance of the total income  for               charging super-tax under the provisions of  S.               23A of the Act no deduction can be allowed  in               respect  of the expenses actually incurred  by               the  assessee company but disallowed  for  the               purposes of computing its assessable income ?" Before  the  High Court, Counsel for the  assessee  did  not press  an  answer to the second question.   Hence  the  High Court did consider that question.  Nor are we called upon to consider  at  question.  The High Court reframed  the  first

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question thus               "Whether on the facts and circumstances of the               case  the  Tribunal was justified  in  holding               that  the assessee company is a company  whose               business  consists  mainly in  dealing  in  or               holding  of investments within the meaning  of               clause  (i)  of  the  second  Explanation   to               section 23A of the Income Tax Act, 1922 ?" The High Court answered that question in the negative and in favour  of  the  assessee.  It is the  correctness  of  that decision that is in issue before us. We have now to consider whether the High Court was right  in concluding that the assessee company did not come within the scope  of  s. 23A.  In arriving at its conclusion  the  High Court  had  approached  the question before  it  from  three different angles viz (1) the  objects  of  the  company   as mentioned in its memorandum of association; (2) the  profits earned  the company during the relevant previous years  from its  various  activities  and (3) the  assets  used  by  the company in those years for the purpose of holding the shares of  the managed companies, dealing with the shares of  other companies   and  in  collection  with  its  other   business activities. Section  23A to the extent relevant for our present  purpose reads :               "   (1)  Where  the  Income  Tax  Officer   is               satisfied that in respect of any previous year               the profits and gains distributed as dividends               by  any  company  within  the  twelve   months               immediately following the expiry of that  pre-               vious   year  are  less  than  the   statutory               percentage of the total income of the  company               of that previous year as reduced by--               (a)..................................               (b)...................................               (c).........................               730               The  Income-tax  Officer shall, unless  he  is               satisfied  that, having regard to  the  losses               incurred  by the company, in earlier years  or               to  the smallness of the profits made  in  the               previous year, the payment of a dividend or  a               larger  dividend than, that declared would  be               unreasonable,  make an order in  writing  that               the   company  shall,  apart  from   the   sum               determined  as payable by it on the  basis  of               the assessment under section 23, be liable  to               pay  super-tax at the rate of fifty per  cent.               In  the  case  of  a  company  whose  business               consists wholly or mainly in the dealing in or               holding  of  investments and at  the  rate  of               thirtyseven percent, in the case of any  other               company  on the undistributed balance  of  the               total income of the previous year, that is  to               say,  on  the total income as reduced  by  the               amounts,  if  any referred to in  clause  (a),               clause  (b)  or clause (c) and  the  dividends               actually distributed, if any....."               Explanation 2, to that section says:               "For  the purposes of this section,  statutory               percentage means:               (i)   in the case of a company whose  business               consists wholly or mainly in the dealing in or               holding of investments 100 % ...... " We  have  now  to see what exactly is  the  meaning  of  the

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expression  "in  the  case  of  a  company  whose   business "consists  wholly or mainly in the dealing in or holding  of investments"  in the main s. 23A and the expression "in  the case  of a company whose business consists wholly or  mainly in  the dealing in or holding of investments" in cl. (i)  of Explanation  2  to  s. 23A.  The  Act  contains  many  mind- twisting formulaes but s. 23A along with some other sections takes  the place of pride amongst them.  Section 109 of  the 1961 Income-tax Act which has taken the place of old s.  23A of the Act is more understandable and less abstruse.  But in these appeals we are left with s.23A of the Act. Clause (i) of Explanation 2 to s. 23A concerns itself with a company  whose  business consists "wholy or  mainly  in  the dealing in or holding of investments".  The word "mainly" in that  clause  as  well  as in  the  main  section  23A  must necessarily take its colour from-the word "wholly" preceding that  word in those provisions.  In other words the  company which comes within the scope of those provisions must be one whose primary business must be "in the dealing in or holding of investments".  If a company engages itself in two or more equally or nearly equally important business  731 activities,  then  it  cannot be  said  that  the  company’s business  consists  "wholly  or  mainly"  in  dealing  in  a particular thing.  Further even in cases where a company has more  than one business activity and one of its activity  is more  substantial than the others, unless that  activity  is the primary activity of the company, it cannot be said  that that company is engaged in "wholly or mainly" in any one  of its business activities.  Section 23A in our opinion applies only to cases where the primary activity of tile company  is in  ’the  dealing in or holding of investments’.   We  shall presently see whether on the facts found by the Tribunal, it can  be  said that the assessee company’s  business  in  the relevant  years  consisted "of mainly in the dealing  in  or holding  of  investments"  as it was not  the  case  of  the Revenue that it was wholly engaged in that business. We  next  come across with another expression which  is  far more  difficult  to  comprehend than the one  that  we  were considering till now.  Section 23A speaks of the business of "holding  of  investments".  Here comes the enigma.   It  is easier  to understand when the section speaks of  a  company having the business of dealing in investments, though to say that  the  company is dealing in investments  may  at  first sight look somewhat incongruous.  When the legislature spoke of  dealings  in investments, it meant  dealing  in  shares, stocks  and securities etc.  But when a person  invests.  in the  share of some of the 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. This  Court  in Bengal and Assam Investors Ltd.  v.  Commis- sioner of Income-tax, West Bengal(1); came to the conclusion that  an  individual who merely invests in  shares  for  the purpose  of earning dividend, does not carry on  a  business and that the only way he can come under S. 10 of the Act  is by converting the shares acquired by him into stock-in-trade i.e.  by carrying on the business of dealing in  stocks  and shares.  In that case this Court was considering whether the dividend  income  of the assessee company therein  could  be considered  as  business  income under S.  10  of  the  Act. Therein this Court was not considering the scope of S.  23A. But  all the same in that case this Court proceeded  on  the basis  that  no one can make a business of  investing.   But then   S.  23A  speaks  of  the  business  of  "holding   of

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investments".  We were told by the Counsel for the  assessee that  that  expression  is an incongruous one  and  that  we should,  following the decision of this Court in Bengal  and Assam  Investors Ltd.(1) hold that there is nothing  like  a business  of  "holding of investments".  We feel  unable  to accede to that contention.  We cannot say that the (1) 59 I.T.R. 547. 732 legislature  did  not know its own mind when  it  used  that expression in s. 23A.  We must give some reasonable  meaning to that expression.  No part of a provision of a statute can be  just ignored by saying that the legislature enacted  the same  not knowing what it was saying.  We must  assume  that the  legislature  deliberately used that expression  and  it intended  to  convey some meaning thereby.   The  expression "’business"  is a well known expression in  income-tax  law. It means as observed by this Court in Narain Swadesh Weaving Mills v. Commissioner of Excess Profits Tax (1) : " some real, substantial and-systematic or organised  course of activity or conduct with a set purpose". This.  is also the meaning given to that expression  in  the earlier  decisions  of  the High  Courts  and  the  Judicial Committee.   We must, therefore, proceed on the  basis  that the legislature was aware of the meaning given by courts  to that expression when it incorporated s. 23A into the Act  in 1957.   Hence we must hold that when the legislature  speaks of  the business of ’holding of investments’, it  refers  to real,  substantial  and systematic or  organised  course  of activity of investment carried on by an assessee for a  ,set purpose such as earning profits. Now let us leave s. 23A and proceed to examine the facts  of the  case  to find out whether the assessee company  can  be held  to ,,come within the scope of s. 23A in the  light  of our interpretation of that provision. We have earlier referred to the objects clause in the  memo- randum of association.  The memorandum permits the  assessee company to take up the management of the other companies, to invest in the shares of the other companies, and to deal  in the  shares of the companies.  Therefore it cannot  be  said that  the assessee company was incorporated  primarily  with the object of carrying on the business of the "dealing in or holding  of  investments".   The  objects  of  the  assessee company  are  many  fold.  The object  of  carrying  on  the business  of "dealing in or holding of investments" is  only one  of them.  Hence the memorandum of association does  not assist  us in deciding whether the business of the  assessee company  "consists of wholly or mainly in the dealing in  or holding of investments." We  shall now take up the question of the profits earned  by the  assessee  company during the relevant  previous  years. The  High  Court  has in its judgment set  out  a  statement showing the profits I earned by the assessee company through its various activities.  It would be convenient to set  out- the same now (1)  26 I.T.R. 765.  733                       ASSESSMENT YEAR           1957-58   1959-60   1960.61 1961.62           Rs.  Rs.  Rs.  Rs. 1.   Managing Agency     2,09,999  2,56,3152,41,7051,96,384 2.   Dividend on shares of managed companies 1,95,179  2,58,511 3,21,746       3,12,251 3.   Income from shares held as stock-in-trade (i) interest on debentures 369  342     309        312’ (ii) Dividends         3,40,6954,68,7755,48,3255,53,999

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(iii) Dealing in shares  23,86716,75528,32922,100 (iv) Share transfer fee  10    10         10 10 Total of Nos. (i) to (iv)3,64,941  4,85,8825,76,9735,76,421 4. Income from interest     4,5953,35815,27623,617 In  order to find out the implications of this statement  we have  to  first decide whether the assessee company  can  be said  to  be a company engaged in the business  activity  of "holding  of  investments." The finding of the  Tribunal  on this point is stated thus               "We agree with the assessee that the shares in               the  managed  companies were acquired  with  a               view to safely hold the managing agencies, but               we  do  not agree that for  that  reason  only               those shares cannot be taken into   account               for the purpose of a business of dealing in or  hold ing               of investments". All  the  shares  held  by  the  assessee  company  as   its investments were the shares of the two company which it  was managing  agent.  It  invested  in  no  other  shares.   The Tribunal  has found that the managed company’s  shares  were acquired by the assessee company   for   the   purpose    of safeguarding its managing agency   business. Therefore it is quite clear that those investments were made   not  in   the course of any business of investment but for the  purpose of securing its managing agencies. Those investments were  made for a collateral purpose viz. to have a firm grip over its managing  agency  business.  If  we  are  correct  in  this, finding--Jr    we  think,  we are-then it follows  that  the dividend income from     shares  of  the  managed  companies cannot  be taken into consideration in finding  out  whether the assessee company’s business "consisted wholly or  mainly in   the  dealing  in  or  holding  of   investments".   The investments  made by the assessee company in the  shares  of the  managed  companies are essentially linked with  its  ’I managing  agencies and not with the dealing of that  company in  shares  of  the other companies. In  other  words  those investments  form  part of the assessee  company’s  managing agency business 734 activity.   If we add the dividend income of the  shares  of the  managed companies, to the managing  agency  commission, the  total income from those two sources is much  more  than the  income  earned by the assessee company from  its  share dealings, in each one of the assessment years.  Hence viewed from  the  point of view of profits earned by  the  assessee company,  it  cannot be said that in the  relevant  previous years  the assessee company’s business consisted  wholly  or mainly in the dealing in or holding of investments". Now  let us look at the question from the point of  view  of the assets employed by the assessee company.  Here again  we can take assistance from the schedule given in the  judgment of the High Court setting out in details the assets used  by the  assessee  company in its several  business  activities. That Schedule reads thus : SHARES OF MANAGED COMPANIES Treated  by  the Income Tax Department  as  investments  not forming part of the business of dealing in shares. 1.    New   India   Indus-tries    6,91,084         6,96,883 6,96,883     6,96,883 2.Cotton Fabrics Ltd. (i) Ordinary shares  3,69,285 3,69,2853,69,2853,69,275 (ii) Preference shares  88,46388,46390,48390,483 Total                    11,48,83211,54,63111,56,65111,56,651      Shares of other companies

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    Treated by the Income-      tax Department as held      for dealing in shares      (stock-in-trade)...25,07,96930,13,51829,88,94636,07,063      Total investment as per      balance sheet    36,56,80141,68,14941,45,59747,63,714" It  is true that the assets used by the assessee company  in its  share  dealing are far more than that used  by  it  for investment  in the shares of the managed company.  But  then we  have  to bear in mind that we do not exhaust  the  total assets  of the company by merely referring to  the  tangible assets  used  by  it.  In addition, we  have  to  take  into consideration the value of the managing agencies held by the assessee  company.  Looked that way, it cannot be said  that the  assets of the company, used in its share  dealings  are far more than its other assets.  At any rate on the basis of the assets used, it cannot be concluded that the  assessee’s business  consisted  "wholly or mainly" in  the  dealing  in investments.  735 It follows from the conclusions reached by us earlier,  that our  answer  to the question before us must be the  same  as that  given by the High Court.  We not only agree  with  the conclusions reached by the High Court but also with premises on the basis of which those conclusions were reached. In  the result Civil Appeals Nos. 1313 to 1316 of  1971  are dismissed  on merits with costs--one set of fees  and  Civil Appeals  Nos. 2350-2353 of 1968 are dismissed as  being  not maintainable but without any order as to costs. S.   C.                                              Appeals dismissed. 736