http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: THE WAR PROFITS TAX COMMISSIONER

       Vs.

RESPONDENT: M/s. BINODIRAM BALCHAND

DATE OF JUDGMENT: 20/12/1961

BENCH: AYYANGAR, N. RAJAGOPALA BENCH: AYYANGAR, N. RAJAGOPALA GAJENDRAGADKAR, P.B. SARKAR, A.K. WANCHOO, K.N. GUPTA, K.C. DAS

CITATION:  1966 AIR 1768            1962 SCR  Supl. (2) 243

ACT:      War   Profits   Tax-Tax   on   excess-Profits Managing agent  of company-holding majority of its shares-Dividend  income-Taxability   as   business profits-War  Profits  Tax  ordinance-Schedule,  if part of  statute-"No connection  whatever with the business"-Construction of rule-Gwalior War Profits Tax ordinance,  Samvat 2001,  ss.  2(5).  2  (14). 2(16).4 (I). 50, Sch. I r. 3 (1).

HEADNOTE:      Rule 3  (1) of  such. I  of the  Gwalior  War Profits  Tax   ordinance,  Samvat  2001  provided: "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  connection whatever with the business."      The respondent, a Hindu undivided family, was carrying on  various businesses  in the  erstwhile State  of   Gwalior,  and  one  of  them  was  its employment  as   the  Secretary,   Treasurer   and Managing  Agent   of,  a   limited  company.   The respondent held a majority of the issued shares in the company.  For the  accounting period  July  1, 1944, to  October 16,  1944, the  War Profits  Tax officer by  his assessment  order  dated  July  9, 1951, included  in its  assessable profits the sum received by the respondent on July s, 1944, as the dividend declare  and paid  by the  company on its shares. The  respondent claimed  that the said sum could not  be included  in its  taxable profits on the ground that it did not deal in shares and that its holdings  in the  company were  purely in  the nature of  investments having  no connection  with its business  as defined  s. 2(5) of the ordinance Gwalior  War   Profits  ordinance   and  that  the business  of   the  Secretaries,   Treasurers  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

Managing Agent of the company which was carried on by it did not require any holding of the shares of the  company   and  was   not  dependent   on  its investment in  the said company. The High Court of Madhya Pradesh  took the view (1) that on a proper construction of  the provisions  of the ordinance, unless  the  acquisition  of  the  shares  was  an adventure in the nature of trade or the respondent was a  dealer in  shares such that the shares held by it  were part of its stock in trade, the income derived therefrom by way of dividends could not be characterised as  profits from  business, and  (2) that Sch. I of the Ordinance which 244 was  headed   "Rules  for   the   computation   of business", though  it purported  to be part of the Ordinance, in  reality  comprised  rules  made  by Government under  the rule  making power conferred on it  by s. 50 of the ordinance and that r. 3 (I) of the  Schedule,  being  subordinate  legislation could not  validly bring  to  charge  an  item  of income which  was not  within  the  scope  of  the ordinance itself. ^      Held that  : Schedule  I of  the Gwalior  War Profits Tax  Ordinance was  part and parcel of the ordinance itself  and,  therefore,  could  not  be considered to  be subordinate legislation as rules framed under s. 50 of the ordinance      (2) the word "connection" in r. 3 (1) of Sch. I of  the Ordinance was not restricted to cases of "direct connection", in view of the expression "no connection whatever" in that rule; and      (3) the  respondent  as  the  holder  of  the majority of the shares in the company, was enabled by reason of this investment to control the action of the  company which  was true  other party under the Managing  Agency Agreement, and therefore, the investment was connected with the business carried on by  it within  the meaning of r. 3(1) of Sch. I of  the   ordinance.  Accordingly,   the  dividend received by  the respondent  from the  company was properly included  by the assessing authorities in the computation  of its  taxable profits under the ordinance.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION:  Civil  Appeal No. 225 of 1960.      Appeal from  the judgment  and  decree  dated April 19,  1957, of  the Madhya Pradesh High court (Indore Bench)  at Indore in Civil Reference No. 1 of 1952.      B. Sen, B.K.B. Naidu and I.N. Shroff, for the appellant.      A. V. Viswanatha Sastri, K. A. Chitale, J. B. Dadachanji, S. N. Andley, Rameshwar Nath and P. L. Vohra, for the respondents.      1961, December,  20-The Judgment of the Court was delivered by      AYYANGAR, J.-This  appeal comes  before us by virtue of  a certificate of fitness granted by the High Court of Madhya Pradesh under s. 47(2) of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

245 Gwalior  War   Profits  ordinance,   Samvat   2001 (hereafter called  the Ordinance)  on  the  ground that the appeal involves a substantial question of law.      The question  of  law  which  arises  in  the appeal relates  to the  proper construction  of r. 3(1)  of   the  Schedule  of  the  ordinance.  The respondent-M/s. Binodiram  Balchand  is  the  name under which  a Hindu  undivided family  which  wag resident  in  the  State  of  Gwalior  carried  on various businesses  in that State. Profits derived from business carried in the State were charged to War Profits  Tax under  the ordinance.  Among  the businesses carried  on by  the respondent  was its employment  as   the   Secretary   Treasurer   and Managing-agent of  a  textile  mill  which  was  a limited company  bearing the  name of  Binod Mills Company Limited,  Ujjain. The  appeal is concerned with  the   computation  of  the  profits  of  the respondent to War Profits Tax under the ordinance, which it  might be  stated at  the outset,  was on lines very  similar to  the Indian  Excess Profits Tax Act, 1940.      The chargeable  accounting period  with which the appeal  is concerned, is the period commencing from July  1, 1944,  to.  October  16,  1944.  The respondent-assessee  submitted   its  return   and thereafter the  War Profits  Tax  officer  by  his assessment order  dated July  9, 1951,  determined the  taxable  income  of  the  assessee  for  this chargeable accounting  period at  Rs.  12,16,145/- and  assessed   it  to  tax  in  the  sum  of  Rs. 2,02,691/-. Several points were raised in relation to this  assessment order  by the  respondent, and one of  them  related  to  the  inclusion  in  its assessable profits  of a  sum of  Rs.  11,09,332/- which was  received by  the respondent  on July 5, 1944, being  the dividend declared and paid by the Binod Mills  Ltd" for  1943 on  the shares held by the respondent.  It  was  the  contention  of  the respondent that  this sum  was its  income from an investment pure and simple and was not 246 "profits" from  business,  and  so  could  not  be included  in  its  taxable  profits  on  a  proper construction of  the relevant  provisions  of  the ordinance.   From   the   assessment   order   the respondent  filed   an  appeal  to  the  appellate authority  which   however  was   unsuccessful.  A revision to  the Commissioner  of War  Profits Tax met  with   the  same   fate  and  thereafter  the respondent prayed  for a  reference  to  the  High Court under  s. 46(1)  of the  ordinance which ran thus:      ‘46(1) If,  in the  course of  any assessment      under this  ordinance or  any  proceeding  in      connection  therewith,   a  question  of  law      arises, The  Commissioner, may; either on his      own motion  or  on  reference  from  any  War      Profits Tax  authority  subordinate  to  him,      draw up  statement of  the case  and refer it      with his  own opinion  thereon  to  the  High      Court." The  Commissioner  acceded  to  this  request  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

referred for  the opinion  of the High Court three questions:,      "(1) Whether  the   dividend  income  of  Rs.      11,09,332/- received from the Binod Mills was      chargeable  under   the   War   Profits   Tax      ordinance ?      (2)  Whether certain bad debts written off by      the assessees  could be allowed as deductions      in computing profits for war tax purpose?      (3)  Whether  the   expenses  of   assessees’      branch at Gwalior which was defunct, could be      allowed as admissible expenses ?" The High  Court answered  questions  2  and  3  in favour of  the department,  but the first question was answered  in the negative and in favour of the assessee. There  is  now  no  dispute  as  regards questions 2  & 3 and the appeal is confined to the correctness of the answer to the first question. 247      Before setting out the grounds upon which the High court  decided the reference in favour of the respondent it  is necessary  to read  a few of the provisions of the relevant law which bear upon the point arising  for consideration.  The preamble to the ordinance  recites  that  it  was  enacted  to impose a  tax on  "excess profits  arising out  of certain businesses"  and this intention is carried out by s. 4(1) which is the charging section which enacts:           "4(1) Subject  to the provisions of this      ordinance, there  shall, in  respect  of  any      business to  which this ordinance applies, be      charged, levied  and paid  on the  amount  by      which  the   profits  during  any  chargeable      period exceed the standard profits, an excess      profit tax  (in this ordinance referred to as      the War Profits Tax’) which shall be equal to      60 per cent. of the aforesaid amount." The expression  ‘business’,  the  profits  derived from which  are thus  brought to charge is defined by s. 2(5) in these terms:      "2(5) ‘business’ includes any trade, commerce      or manufacture or any adventure in the nature      of trade,  commerce or  manufacturer  or  any      profession or  vocation, but does not include      a profession  carried on  by an individual or      by individuals in partnership, if the profits      of the  profession depend wholly or mainly on      his or  their personal qualifications, unless      such profession  consists wholly or mainly in      the making  of contracts  on behalf  of other      persons or  the giving  to other  persons  of      advice of  a commercial  nature in connection      with the making of contracts:           Provided that  where the  functions of a      company or  of a  society incorporated  by or      under any  enactment consist wholly or mainly      in  the   holding  of  investments  or  other      property or  both, the  holding thereof shall      be 248      deemed for  the purpose of this definition to      be a  business carried  on by such company or      society;           Provided further  that all businesses to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

    which this  ordinance applies  carried on  by      the same  person  shall  be  treated  as  one      business for the purposes of this ordinance;" There are  two further  definitions which  are  of some relevance  to the  arguments addressed  to us and might  therefore be  set out  at  this  stage. Section 2(14)  defines the expression ‘prescribed’ as meaning  "prescribed by  Rules made  under  the ordinance;" s.  50 being  the provision empowering the Government make rules and this section ran:      "50(1) Subject  to  the  provisions  of  this      ordinance,  Government  may  make  rules  for      carrying out the purposes of this ordinance.           (2)  Rules made under this section shall      be published  in  the  official  Gazette  and      shall thereupon  have effect as if enacted in      this ordinance."      The  other  relevant  definition  is  of  the expression profits’  which is defined in s. 2 (16) as:           "profits  as  determined  in  accordance      with the provisions of this Ordinance and its      first schedule;" There  is  a  First  Schedule  which  follows  the ordinance and  which  is  headed  ’Rules  for  the computation of  profits for  the purposes  of  War Profits Tax’,  and of  these the  one pertinent to the matter in controversy in the appeal is r. 3 of which sub-rs.  (1) and  (2) have been relied on in the course of arguments. They run:      "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 249           Tax Officer that the investments have no           connection whatever with the business.      (2)  In the case of a business which consists           wholly or  mainly in  the dealing  in or           holding 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 purpose of that           part of  the business shall be deemed to           be profits of that part of the business.           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 the War      Profits Tax applies".      Pausing here, it is necessary to mention that in relation  to the  first question  regarding the inclusion of  the dividend  income in  the taxable profits of  the assessee  three  contentions  were raised on  behalf of the respondent which are thus set out in the judgment under appeal:      "(1) The assessees did not deal in shares and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

         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 Sch. I 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 250           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 I.      (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 learned  Judges of  the High  Court dealt only with the  first  of  the  above  contentions,  and having accepted  it, considered  it unnecessary to express any opinion on the other two.      We may  now proceed to state the grounds upon which  the   learned  Judges  of  the  High  Court answered  this   contention  in   favour  of   the respondent.  It  was  urged  before  them  by  the respondent  that   though  the  provisions  headed ’Rules for  the computation of business’ purported to be  part of the Ordinance itself as forming the Schedule to  the Ordinance,  they were  in reality rules made  by government  under  the  rule-making power conferred  on it  by s. 50 of the Ordinance, This argument  was accepted apparently being aided by the  fact  that  immediately  after  the  title "Schedule I"  occur the words "See Section 2(14)". Proceeding on  this basis  the  reasoning  of  the learned Judges  was on  these  lines.  The  charge under s. 4(1) was on the profits of a business and unless an  activity which  resulted in  any income derived was  one in  the nature of trade, the mere fact that  income was  derived therefrom would not make it  assessable to  tax under  the  ordinance. This they  deduced from  an interpretation  of the words  used   in  the  charging  section  read  in conjunction with the definition of "profits" in s. 2(16). The next question was whether 251 the dividend  which the  respondent obtained  from the shares  held by it in the Binod Mills Ltd., of which  it   was  the   Secretary,  Treasurer   and Managing-agent  were   profits  derived   by   any business activity.  Unless the  acquisition of the shares was  an adventure in the nature of trade or the respondent  was a  dealer in shares, such that the shares  held by  it were  part of its stock in trade, the  income derived  therefrom  by  way  of dividends could  not be  characterised as  profits from business.  If this was the result on a proper

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

construction of  the Act  the question the learned Judges addressed  themselves to  next was, whether r. 3(1),  which according  to them  was a piece of subordinate legislation,  could validly  bring  to charge an  item of income which was not within the scope  of  the  Ordinance  itself,  and  this  had necessarily to  be answered  in the negative. They consequently held that r. 3(1) of the 1st Schedule was beyond  the power of the rule-making authority under s.  50 of  the Ordinance  and  answered  the first question  referred to  them in favour of the assesssee.      Mr. Sen,  learned Counsel  for the  appellant has however placed before us material to show that Sch. I containing the rules for the computation of profits were  not rules  made  by  the  Government under s.  50 of  the Ordinance but was really part of the  Ordinance itself.  In the  first place, it has to  be noted that s. 2(16) speaks of Sch. I to the Ordinance,  and admittedly besides the one now produced before  us there  was no  other  Schedule attached to  the Ordinance.  It is  impossible  to hold that  with s.  2(16) in  the form in which we now find  it, the rules for the computation of the business did not form part of the Ordinance having been enacted  simultaneously as  part  and  parcel thereof. In  this connection  it might  be pointed out that  the Excess  Profits Tax Act, 1940, which formed the basis or model upon which the Ordinance was fashioned has 252 a  similar   Schedule  headed   "Rules"  for   the computation of  profits" and  the Schedule  formed part of  that Act.  The only  ground  for  even  a suspicion that  Sch. I  was  not  a  part  of  the Ordinance itself  is the reference to s. 2 (14) in the heading  of these  rules just  below the words Schedule I,  but very  little  assistance  can  be sought from  this reference,  because s.  2(14) in not itself  the source  of power  for making rules which is  s. 50  of the  Ordinance and,  in  fact, rules have  been made under the power conferred by s. 50 of the Ordinance; vide War Profits Tax Rules Samvat 2001, No. 65 dated December 26, 1944, which carries the recital in the following terms:           "In exercise  of the powers conferred by      s. 50  of the  War Profits  Tax Ordinance the      Government of Gwalior are pleased to make the      following rules......" It is  obvious therefore  "s. 2(14) in Sch. I is a mistake or  a misprint for "s. 2(16)" and it might be noted that in the corresponding Schedule to the Indian Excess  Profits Tax  Act, 1940, immediately after the  title "Schedule I" occur the words "See s. 2(19)"  which in  that enactment corresponds to s. 2(16) of the Ordinance.      There are  other circumstances  to which  Mr. Sen has  drawn our  attention which  also point to the Schedule  being part  of the Ordinance and not rules made  under s.  50.  The  Schedule  was  the subject of amendments more than once and each time this was done it is significant that this was done not by  virtue of  the exercise of the rule-making power under  s. 50 of the Ordinance but by further ordinances showing  clearly that  the Schedule was

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

part of  the Ordinance  itself. To give just a few example, the  Explanation to r. 3(2) which we have extracted earlier  was  not  in  the  Schedule  as originally enacted but was introduced as 253 an amendment  by Ordinance  No. 42  dated February 28, 1946. The short title of this Ordinance runs:           "This  Ordinance  might  be  called  the      Gwalior  War  Profits  Tax  (Amendment)  Act,      Samvat 2002".      Further it  would  be  noticed  that  in  the Explanation there  is  a  comma  after  the  words "carrying on a business". That comma was not there when the  schedule was  amended  by  the  Amending ordinance of February 28. 1946, but was introduced by Ordinance  5 of Samvat 2004 and the short title of this second Ordinance reads:           "This  Ordinance  might  be  called  the      Gwalior War Profits Tax (Amendment) Ordinance      Samvat 2004".      We do  not consider it necessary to dilate on the point  as we  are clearly  of the opinion that the Schedule  was part  of the  Ordinance and  has therefore  to   be   read   not   as   subordinate legislation under  r. 50 but as part and parcel of the Ordinance itself.      The whole  basis therefore  of the  reasoning upon which  the learned  Judges of  the High Court proceeded  falls   to  the  ground  and  the  only question is  whether  accepting  the  respondent’s case that the shares held by it in the Binod Mills Ltd. were  really part  of its  investments, these investments  have   "any  connection"   with   its business. It  is common ground that the respondent was the Secretary, Treasurer and Managing-agent of the Binod Mills and what we are now concerned with are the  shares held by it in that company. In the case of  every assessee  who carries on a business activity and  is in  receipt of  profits from that business, on  the terms  of r.  3(1)  income  from every investment  held by  him  is  liable  to  be included in  the profits  assessable to tax unless such person was able to satisfy the 254 revenue authorities  that the  investments had "no connection  whatever"   with  his   business.  Mr. Viswanatha  Sastri,   learned  Counsel   for   the respondent sought  to overcome  this  position  by submitting that  the "connection"  contemplated by the rule  was a  direct  "connection"  and  not  a remote or  fanciful one  and that  in the  present case there  was really  no connection  between the respondents ownership  of  these  shares  and  the office  of  managing  agent  which  it  held.  His contention was  that  except  the  fact  that  the recipient of  the profits   from the "business" of managing agency and of the dividend income was the same, there  was no  other connection  between the one and  the other.  In further elaboration of his point, he invited us to hold that the "connections would be  direct only  where  the  investment  was related to a business activity as cause and effect or as a sine qua non. Thus if it was a requirement either of  the  Articles  of  Association  of  the company or  of the Managing Agency Agreement, that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

the managing agent should be a shareholder, or the holder of  specified number of shares, then alone, learned  Counsel  contended,  the  managing  agent being dependent  on the  shareholding, there would be that  connection which would bring the dividend income with  in the expanded definition of profits from business  under r.  3(1). In  all other cases where shares were held, without the assessee being obliged to  hold  them  for  the  purpose  of  his business   activity,   no   distinction,   Counsel submitted, could  be drawn  between the investment in the  shares of  a company  with  which  he  had nothing to  do, and  a company  which  he  managed under  an   agreement.  Learned   Counsel  further stressed that  the  case  of  the  respondent  was stronger because  the  Managing  Agency  Agreement with the  respondent was  to last  so long  as the respondent firm existed and carried on business in that name  and could  not  be  terminated  by  the company "save and except when the agent being 255 found guilty  of fraud in the Management or in the discharge of  their duties."  and having regard to this  security  of  tenure  which  the  respondent enjoyed,  the  holding  of  these  shares  had  no connection whatever  with the business of managing agency. We  find ourselves  unable to  accept this interpretation of  r. 3(1). The relevant words  in the rule  being "any connection whatever" it would not be  giving proper effect to the meaning of the words "any" and "whatever" to restrict it to cases of "direct  connection" in  the sense suggested on behalf of  the respondent.  But this apart, by the number of shares which the respondent owned in the mills  it   is  admitted   that  it   obtained   a controlling interest-it  held the  majority of the shares  in   the  company.   The  respondent   was therefore enabled  by reason of this investment to control the  action of  the company  which was the other party  under the  Managing agency Agreement. This control  was capable of being used to further the  interests   of  the  Managing  agent  in  its relations with the company and whether or not this was  used   for  obtaining  advantages,  it  would certainly   be    available   for   avoiding   any disadvantages arising  from misunderstandings with the company.  It could  not  be  denied  that  the control would  certainly be  useful  to  keep  the relations between  the company  and  the  Managing agent smooth so as to enable the Managing agent to earn his  commission etc.  without differences  or disputes. Even  if therefore the word "connection" in  r.   3(1)  meant   a  "direct"   connection  a construction which  we do  not adopt-it appears to us that the present case satisfied even that test. In any  event the  "connection"  is  not  anything remote, fanciful  or imaginary,  but on  the other hand real  and capable  of being  turned  to  good account. It  certainly cannot  be equated with the holding of  shares by  the respondent in a company with which  he had  no connection  other than as a shareholder. 256      We are  therefore of  the  opinion  that  the dividend received by the respondent from the Binod

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

Mills Ltd., was properly included by the assessing authorities in  the  computation  of  the  taxable profit of there respondent under the Ordinance and that  the   High  Court  erred  in  answering  the reference in  favour  of  the  assessee.  We  have already pointed  out that  the High  Court did not deal with  or  express  any  opinion  on  the  two subsidiary contentions  urged  by  the  respondent with reference to the first question. Those points were also naturally not argued before us and we do not express  any opinion  on them.  It is  obvious that the  reference cannot  be disposed of without deciding these contentions and the case would have to be  remanded to the High Court for dealing with these subsidiary points.      The appeal  will accordingly  be allowed, the judgment of the High Court set aside and the first contention in  relation to question No. 1 answered against  the   assessee  and   in  favour  of  the appellant and  the case remanded to the High Court for the  consideration of  the  other  contentions with reference  to that  question.  The  appellant will be  entitled to  his costs here. The costs in the High  Court will  be  provided  in  its  final order.                                    Appeal allowed. 257