1. At the instance of the revenue, the following question has been referred to us for our determination :
'Whether, on the facts and in the circumstances of the case, the assessee was a company whose business consisted wholly or mainly in the dealing in or holding of investments, for purpose of section 23A of the Indian Income-tax Act, 1922 (assessment year 1961-62) and section 104 of the Income-tax Act, 1961 (assessment year 1962-63 to 1964-65) ?'
2. Vissonji sons & company private Ltd. (hereinafter referred to as 'the company') was incorporated in the year 1945. Prior thereto there was a firm called M/s. Vissonji Sons & Company, and the business carried on by that firm was taken over by the company. Amongst the objects for which the company was incorporated were the following :
(a) to acquire from Messrs. Vissonji Sons and Company :-
(1) the business carried on by the said firm as managing agents of Wallace Flour Mills Ltd.,
(2) the factories owned by the said firm known as Dharawash & Digras Ginning and pressing factories with stocks, stores, etc.,
(3) the immovable properties owned by the said firm in Kalbadevi, Bombay, known as 'Narrotamwadi property',
(4) all the shares, stock, debentures and other securities held by the said firm or by any individual member or members of the said firm for and on behalf of the said firm; and to enter into an agreement with the said Messrs. Vissonji Sons & Company for taking over from them the said managing agency of Wallace Flour Mills Company limited and the said factories and properties in terms of the draft agreement which for the purpose of identification has been initialled by Mr. Tricumdas Dwarkadas, Solicitor, Bombay, and to carry the said agreement into effect.
(b) to carry on business as managing Agents of the said Wallace Flour Mills Company Limited, as also to carry on business as Managing Agents, Selling Agents, Commission Agents, Mucccadums and brokers of any other company, concern or person.
3. The issued and subscribed capital of the company was Rs. 30 lakhs till March 31, 1967, and was thereafter Rs. 35 lakhs. In addition, the company had some loan capital also from banks and others. The material accounting years are the years ended March 31, 1961, March 31, 1962, March 31, 1963, and March 31, 1964 respectively. On these dates, the total debts including bank loan stood between Rs. 13.25 lakhs and Rs. 27.50 lakhs, approximately.
4. Right from the very incorporation of the company, it held a fairly sizable investment in shares. But, for the income-tax assessments it was held that the shares of companies other than the managed company and certain cotton mills companies for which the company acts as muccadam, were held on trading account.
5. As regards the volume if investments in shares on March 31, 1955, the total investments in the shares of the managed company and the companies, in which the assessee was interested, was about Rs. 11 lakhs. Since then there had been substantial appreciation in the investments in the share of the managed company. On March 31, 1956, the company held shares worth Rs. 27.78 lakhs of Wallace Flour mills and for the material accounting periods for the present appeals the investments in those shares stood at about Rs. 32 lakhs. The investments in shares of other companies in these four years have ranged between Rs. 7.50 lakhs and Rs. 9.50 lakhs, approximately.
6. So far as some of the other assets owned by the assessee-company were concerned, it had fixed assets in the shape of the ginning factory building and machinery, and in the balance-sheet as at March 31, 1961, the block accounts stood at about Rs. 1.65 lakhs. The total assets, according to the balance-sheet for the material years, stood between Rs. 85 lakhs and Rs. 102 lakhs, which included investments in shares of between Rs. 55 lakhs and Rs. 57 lakhs.
7. The main business income assessable under s. 10 is, of course, from the managing agency. Apart from this, the company had income from cotton business, ready as well as forward, income from ginning and pressing and also cotton brokerage. If reference be had by way of illustration to the figures from the profit and loss account for the ended March 31, 1961, they show that the managing agency commission comes to Rs. 4.89 lakhs, brokerage Rs. 78,765, profit in cotton in bids Rs. 20,897 and gross receipts from ginning and pressing Rs. 1,18,712. The gross dividend income in that year was Rs. 9 lakhs (roundly); to earn this income, the company had employed staff for whom the salary, wages and bonus paid amounted to Rs. 82,670. The total income assessed for the year 1961-62, was Rs. 13.77 lakhs against income as per books of Rs. 7.91 lakhs.
8. Taking a position over a series of years, it was ascertained that from 1945-46 accounting year to 1963-64, the income from business had exceeded the dividend income approximately during half the total number of years.
9. The provisions of s. 23A of the Indian I.T. Act, 1922, were attracted for the assessment years 1961-62 and 1962-63. In the first of these years, the ITO considered what should be the statutory percentage to be taken into account. It was sought to be urged on behalf of the company that the main business of the company was not that of dealing in or holding of investments. In all past years it had not been treated as an investment company. It was also pointed out that right from the formation of the company it had been the managing agents of Wallace Flour Mills and had also other business activities. The investments in the managed companies shares were stated to be incidental to the business of managing agency and similarly shares of Lakshmi Cotton and Vishnu Cotton Mills were held because the assessee was interested in those mills as muccadum. It was also urged on behalf of the assessee that the income from dividends on the shares of the managed company, etc., should be treated as part of the assessee's business income and only on that basis a small fraction of the income from shares would represent really income from investments. These submissions, urged on behalf of the assessee-company, were not accepted by the ITO. According to the ITO, the best method to find out whether the assessee-company is an investment company or not is to ascertain whether the major portion of its income is derived from managing agency business or by holding or dealing in shares. The alternative test intended to be applied by him was to compare the relative volume of capital employed in the business of managing agency, etc., and in the dealing in shares. After formulating these two tests, the ITO held that the income derived from the latter activity was more than the income derived from the former activity and if a major portion of the capital is employed in the former activity, as compared to the employment of capital in the latter activity, the company could rightly be taken as one whose business mainly consisted of in the dealing in or investments. The ITO rejected the contention urged on behalf of the assessee that the dividends from shares of the managed company and the cotton mills companies were from investments relating to those business, i.e., the business of managing agency, buying agency and muccadum. In his opinion, it was not necessary to carry on business that the company should invest in the shares of the flour mills company and the cotton mills companies. Ultimately, for the assessment year 1961-62 he held that the company was one whose main business was in the dealing in or holding of investments, and an order under s. 23A(10) was accordingly passed. Similar decision was taken and orders levying penal super-tax were passed for the other three subsequent years.
10. In an appeal preferred by the assessee-company, the AAC accepted the contention of the assessee-company. According to him, the shares in the flour mills company and the cotton mills companies essentially took on the nature of investment made for business purposes. Turning to the income earned over a series of years, he found that the business income and the gross dividend income fluctuated from year to year; in some years the business income was more while in other years it was less than the dividend income. As regards investments as on March 31, 1961, the total investment stood at about Rs. 55 lakhs against a paid - up capital of Rs. 35 lakhs. But of this only about Rs. 9 lakhs related to investments other than in shares of companies in which the assessee was interested. According to the AAC, the decision of the ITO for the assessment year 1961-62 that the company was an investment company rested on flimsy grounds, viz., that its dividend income was more than the business income and the investments in shares of the companies in which the assessee was otherwise interested were to be regarded as pure investments. He held that the quantum of the respective income from dividends and business for a series of years had to be considered, and not merely for one year. The bulk of investments in other companies was merely incidental to carrying on the assessee-company's main business. Similar orders were also passed for the subsequent assessment years.
11. In second appeal before the tribunal, it was sought to be contended on behalf of the revenue that even if the assessee-company is not to be regarded as an investment company, in common parlance it was so in the technical sense for purpose of s. 23A of the Indian I.T. Act, 1922, and s. 109(f)(ii) of the I.T. Act, 1961. Reference was made to a subsequent amendment made in the 1961 Act, whereby the test was prescribed to determine the nature of a company based on the relative quantum of income from investments and business income chargeable under s. 28 of the 1961 Act. Even though this amendment had no retrospective effect, the contention on behalf of the revenue was that the proper test to be employed was the same. The contentions urged by the assessee before the AAC were reiterated before the tribunal. The Tribunal accepted the contentions of the assessee company and rejected the appeal that was filed on behalf of the revenue. The tribunal rejected the plea urged on behalf of the revenue that the main business of a managing agent and a cotton broker is to derived income from investments in the managed company and in the cotton mills company. It pointed out that the assessee company was able to gain substantial dividend income because the managing agency business was very thriving. It found that it was contrary to facts to take the view that during all the relevant years the company's business mainly consisted in the dealing in or holding of investments, whereas actually it carried on managing agency business and cotton brokerage. Accordingly, the tribunal upheld the finding of the AAC and dismissed the appeal that was filed by the revenue. It is from this order of the tribunal that the above question has been referred to us for our determination.
12. Mr. Joshi, on behalf of the revenue, urged that the AAC as well as the tribunal were in error in taking the view that the assessee-company was not a company whose business consisted wholly or mainly in the dealing in or holding investments. He submitted that for the purpose of s. 23A of the 1922 act and s. 109 of the 1961 Act what is required to be considered is whether the business of of the assessee company consisted wholly or mainly in the dealing in or holding of investments. He submitted that if regard be had to the facts and the finding arrived at by the ITO, the view that was taken by the ITO was correct, and the AAC as well as the tribunal were not justified in taking the view the assessee was a company whose business did not consist wholly or mainly in the dealing in or holding of investments.
13. The material question that we have to bear in mind in dealing this reference is, did the business of the assessee - company consist wholly or mainly in the dealing in or holding of investments. If the answer to this question is in the affirmative, then the revenue is bound to succeed. But if regard be had to the well recognised tests laid down, then the assessee should succeed. The facts found by the AAC as well as the tribunal have not been controverted at all. If those are the facts, then having regard to the settled position in law, in view of more than one decision of the supreme court, in our opinion, the contention urged on behalf of the revenue cannot be accepted. The expression 'wholly or mainly in the dealing in or holding of investments' has been construed by the Supreme Court in the case of CIT v. Distributors (Baroda) P., Ltd. : 83ITR377(SC) . That was a case under the 1922 Act. The Supreme Court there had taken the view that clause (i) of Expln. 2 to s. 23A of the 1922 Act concerned itself with a company whose business consisted 'wholly or mainly in the dealing in or holding of investments.' The word 'mainly' in that clause as well as in the main s. 23A must necessarily take its colour from the word 'wholly' preceding that word in these provisions. A company which comes within the scope of these 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 activities, then it cannot be said that the company's business consists 'wholly or mainly' in dealing in a particular activity. Even in case where a company has more than one business activity and one of its activities is more substantial than others, unless that activities is the primary activity of the company, it cannot be said that the company is engaged 'wholly or mainly' in any one of its business activities. Section 23A applies only to cases where the primary activity of the company is 'in the dealing in or holding of investments'.
14. When the legislature speaks of the business of 'holding of investments', it refers to real, substantial or systematic or organised course of activity of investment carried on by an assessee for a set purpose such of activities if investments carried on by an assessee for the purpose such as the earning of profits. In that case, the assessee, a private company, was the managing agent of two other companies. It memorandum of association permitted it to take up the management of other companies, to invest in the shares of other companies and to deal in the shares of other companies. Dealing in or holding of investments was thus only one of its objects. Apart from its commission from the managing agencies, it earned dividend on the shares of the managed companies as well as dividends from shares held as stock-in-trade and income from dealing in shares. the only shares held by the assessee as its investment were those of the two companies of which it was the managing agent, and it was found that those shares were acquired by the assessee for the purpose of safeguarding its managing agency business. It had invested in no other shares. The total of the dividend income the shares in the managed companies and the managing agency commission exceeded the income from its dealing in shares. Though the assets used by the assessee - company in its dealing in shares were far more than those used for investment in the share of the managed companies, if the value of the managing agencies held by the assessee were taken into consideration, it could be said that the assets of the company used in its dealing in shares would exceed the value of its other assets. On these facts, the Supreme Court took the view that the assessee was not a company whose business consisted mainly in the dealing in or holding of investments within the meaning of clause (i) of expln. 2 of s. 23A of the 1922 Act.
15. The view taken by the supreme court in this case has been reaffirmed later on by the supreme court in the case of Nawn Estates (P.) Ltd. v. CIT  106 ITR 45. In this case, the supreme court has pointed out that in the context of s. 23A the term 'investment' is not a term of art and resort should be had not to its technical meaning but to its popular meaning.
16. If the test laid down by the supreme court in distributors (Baroda) P., Ltd.'s case : 83ITR377(SC) is employed, there is no doubt, whatsoever, on the facts of the present case, as found by the AAC and the tribunal, that the assessee-company was not a company whose business consisted mainly in the dealing in or holding of investments. It is quit apparent from the order of the ACC as well as the Tribunal that a substantial quantity of shares was held by the assessee-company by reason of the fact that it may continue to the managing agents of the Wallace Flour Mills and muccadum of the ginning and pressing companies. As found by the Tribunal, the company was unable to earn substantial dividend income because the managed company's business was very thriving. A sizable portion of the company's income every year, even when the dividend income was more, was from, what may be called, business activity. It is not the case of the revenue that the total dividend income from Wallace Flour Mills and from the shares of the ginning and pressing companies and the managing agency commission was less than the income derived from dealing in shares. Thus, in our opinion, the tests that have been laid down by the supreme court in distributors (Baroda) P., Ltd.'s case : 83ITR377(SC) is directly applicable to the present case and the assessee-company cannot be regard as a company whose business consisted mainly in the dealing in or holding of investments within the meaning of clause (i) Expln. 2 to s. 23A of the 1922 Act or s. 104 of the Act.
17. Accordingly, our answer to the question referred to us is in the negative and in favour of the assessee. The revenue shall pay the costs of the assessee.