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Commissioner of Income-tax, Bombay City-iii Vs. Aloo Investment Co. P. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 60 of 1970
Judge
Reported in[1980]123ITR132(Bom); [1979]1TAXMAN433(Bom)
ActsIncome Tax Act, 1961 - Sections 12(4), 104 and 109
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentAloo Investment Co. P. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.E. Dastur, Adv.
Excerpt:
.....cannot be said to result in acquisition of any property - mere fact that large part of income of assessee-company consisted of interest from these loans would lead to conclusion that income arose from investment as contemplated by section 109 (ii) - assessee-company dealing in transactions of aforesaid nature held to be not an investment company. - - ..the businessman would not limit income from investments to income from the kinds of securities which are quoted on the stock exchange, and he would, i think, regard as income from investment a profitable rent from a sub-lease of office premises, or the like, surplus to the company's requirement. it is obvious that if the basis criterion of an investment company is not satisfied, there was no further question of considering whether..........been referred to us for opinion : 'whether, on the facts and in the circumstances of the case, the assessee-company was an investment company within the meaning of the expression in section 109(ii) of the act ?' 2. at the outset, it is necessary to point out that clause (ii) of s. 109 of the act which contained the definition of investment company stood at the material time as follows : 'investment company' means a company whose business consists wholly or mainly in the dealing in or holding of investments.' 3. the assessee is a private limited company with a total paid-up capital of rs. 3,30,000, divided into 330 shares of rs. 1,000 each. as on march 31, 1962, in proceedings for assessment for the assessment year 1962-63, the total assets of the company were as follows : (a) fixed.....
Judgment:

Chandurkar, J.

1. This is a reference under s. 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), in which at the instance of the revenue the following question has been referred to us for opinion :

'Whether, on the facts and in the circumstances of the case, the assessee-company was an investment company within the meaning of the expression in section 109(ii) of the Act ?'

2. At the outset, it is necessary to point out that clause (ii) of s. 109 of the Act which contained the definition of investment company stood at the material time as follows :

'Investment company' means a company whose business consists wholly or mainly in the dealing in or holding of investments.'

3. The assessee is a private limited company with a total paid-up capital of Rs. 3,30,000, divided into 330 shares of Rs. 1,000 each. As on March 31, 1962, in proceedings for assessment for the assessment year 1962-63, the total assets of the company were as follows :

(a) Fixed assets AssetsRs. Rs.253(b) InvestmentShares and securities 8,77,688Properties 2,17,137----------10,94,825(c) Current AssetsRent, dividend and int. receivable 8,964(d) Loans and advances 14,47,194(e) Cash and bank balances 52,944-----------Total 26,04,180-----------

4. The ITO found that the investments in shares, loans and advances and house properties were the investments of the company and since the business of the company consisted wholly or mainly of dealing in or holding of investments, he held it to be an investment company and charged super-tax under s. 104 of the Act at 50 per cent.

5. In appeal before the AAC, it was contended that if the amount of loans and advances which were shown as current assets is taken out the investment in the shares will be less than 50 per cent. of the total assets of the company and that the super-tax could be charged only at 30 per cent. The AAC found that the main holding of the company was in shares and in securities and properties and whatever surplus was left, was invested in other companies for earning interest. The advance of money, by way of loans, was considered by the AAC as an investment of the surplus funds of the company. He thus confirmed the finding of the ITO that the assessee-company was an investment company.

6. The assessee then carried an appeal to the Income-tax Appellate Tribunal. The Tribunal observed that the question which must be asked in such a case is what, according to commercial point of view, would be the main business of the assessee and what had to be decided was, as to what was the major activity carried on by the assessee-company. Thus, according to the Tribunal, the question was whether the loans and advances constituted investment of the assessee-company. The Tribunal took the view that investments referred to in clause (ii) of s. 109 of the Act, must be of a category which can be dealt in or at least held, and loans and advances could not be dealt in or held, in the ordinary sense of the term. Further, according to the Tribunal, these investments must be such that they should constitute assets of a business of dealing in or holding them and loans and advances could not be treated as such investments must less could they be treated 'as assets of the business which deals in or holds them'. This the Tribunal took the view that loans and advances cannot be treated as investments of the assessee-company. The company was, therefore, directed to be treated as on which was not an investment company. The revenue being aggrieved by this view of the Tribunal, sought a reference of the question reproduced earlier to this court.

7. Mr. Joshi, on behalf of the revenue, has argued that advances of loans must be treated as investments which were held by the assessee-company and in aid of this contention he has referred us to certain observations of the Supreme Court in Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45, where the Supreme Court has observed (p. 55)

'By the Finance Act, 1966, which came into force with effect from April 1, 1966, the meaning of the term 'investment company' was clarified by amending clause (ii) of section 109 and providing therein that investment company meant a company whose gross total income consisted mainly of income which, if it had been the income of an individual, would have been regarded as unearned income.'

8. Thus, according to Mr. Joshi, all that the amendment by the Finance Act, 1966, has done is to make clear the legal position and that even in its original form, the definition of investment company in s. 109(ii) of the Act, would become applicable to a case where the income derived by the assessee-company was such that if it had been the income of an individual, it would have been regarded as an unearned income.

9. We shall, at the outset, deal with the definition of investment company, as it originally stood. As already observed, in order that the company should fall within the category of investment company for the purpose of determining the super-tax to be charged, it must be found that it was a company whose business consisted wholly or mainly in the dealing in or holding of investments. The determination of the question, as to whether a company is an investment company would, having regard to the definition, fall in three parts. Firstly, it must be determined; as a fact, whether any investments as contemplated by the definition were made by the company. Secondly, it has to be determined whether, the company could be said to be holding investments and thirdly, it had to be found whether the business of the company consisted wholly or mainly in the holding of investments. We have referred only to the latter part of the definition, because admittedly in this case, even according to Mr. Joshi, it could not be said that advancing of loans by the assessee-company could fall within the words 'dealing in investments'.

10. We must first decide the question as to what is the meaning of the word 'investment' for the purposes of s. 109(ii) of the Act, Now, there can be no doubt that in its must comprehensive sense, the word 'investment' is generally understood as signifying the laying out of money in such a manner that it may produce revenue whether the particular method be a loan or the purchase of stocks, notes, securities or other property. However, so far as the purposes of income-tax are concerned, the word 'investment' must be understood in the popular sense in which it is understood by businessmen. In the popular sense, the word 'investment' must mean conversion of money into some species of property from which income or profit is expected to be received.

11. The word 'investment' has been construed by courts in England. Reference to some of these decisions has been made by the Supreme Court in its decision in Nawn Estates (P.) Ltd. [1977] 106 ITR 45. In IRC v. Broadway Car Co. (Wimbledon) Ltd. [1946] 29 TC 214, the Court of Appeal while construing the expression 'income received from investments' occurring in the Finance (No. 2) Act, 1939, held that the word 'investment' must be construed in the ordinary popular sense of the word, as judged by businessmen, and not as a term of art having a defined or technical meaning. It was observed that rents from leases or under leases could property, in suitable circumstances, be comprised within the phrase 'income from investments'. The same words were construed by the House of Lords in IRC v. Tootal Broadhurst Lee Co. Ltd. [1946] 29 TC 352. The words 'income received from investments' were being construed in that case in the context of the excess profits tax imposed by the Finance (No. 2) Act, 1939, in respect of certain excess of the profits arising from a trade or business over the standard profit as therein determined. Section 12(4) of that Act read as follows (p. 369) :

'Where the function of the company or society incorporated by or under any enactment consists wholly or mainly in the holding of investments or other property, the holding of the investments of property shall be deemed for the purpose of this section to be a business carried on by the company or society.'

12. In Part I of the Seventh Schedule to the Act, certain principles as to computation of profits were set out and the words 'income from investments' appear in para. 6(1) and (2) which were as follows (p. 370) :

'(1) Income received from investments shall be included in the profits in the cases and to the extent provided in sub-paragraph (2) of this paragraph and not otherwise.

(2) In the case of the business of a building society, or of a banking business, assurance business or business consisting wholly or mainly in the dealing in or holding of investments, the profits shall include all income received from investments, being income to which the persons carrying on the business are beneficially entitled.'

13. Dealing with the meaning of the word 'investment', Lord Normand has, in Tootal Broadhurst Lee Co. Ltd. [1947] 29 TC 352, observed :

'The meaning of 'investment' is not its meaning in the vernacular of the man in the street but in the vernacular of the businessman. It is a form of income-yielding property which the businessman looking at the total assets of the company would single out as an investment.... The businessman would not limit income from investments to income from the kinds of securities which are quoted on the stock exchange, and he would, I think, regard as income from investment a profitable rent from a sub-lease of office premises, or the like, surplus to the company's requirement...'

14. The meaning of the word 'investment' was again considered by Macnaghten J. in IRC v. Rolls-Royce Ltd. [1947] 29 TC 137 , where it is observed (p. 140) :

'The word 'investment', though it primarily means the act of investing, is in common use as meaning that which is thereby acquired; and the primary meaning of the transitive verb 'to invest' is to lay out money in the acquisition of some species of property;...'

15. In that case, payment of royalties received by the company for the licences issued by it to manufacture and sell articles was construed as an investment. These decisions thus show that the word 'investment', must be understood in the sense in which businessmen understand it and it is a form of income yielding property. Investment contemplates acquisition of some species of property by laying out money.

16. These decisions were quoted with approval by the Supreme Court in Nawn Estates (p.) Ltd.'s case, [1977] 106 ITR 45. In that case moneys were invested by the company in house properties and its major income in the assessment years was derived from those properties. The question was whether moneys could be said to have been invested as contemplated by s. 23A(1) read with Expln. 2(i) of the Indian I.T. Act, 1922. On a review of the abovementioned authorities, the Supreme Court upheld the decision of the High Court holding that the business of the assessee-company consisted wholly or mainly in holding of investments. What is, however, relevant for the purpose of the present case is that the Supreme Court has positively approved the test which has been evolved by the English courts to determine whether laying out of money in a particular manner can be said to be an investment. It is apparent from the test adopted by the English courts and approved by the Supreme Court that the moneys must be so laid out that there must be acquisition of some species of property in order that the moneys can be said to have been invested for the purposes of s. 109(ii) of the Act. If we apply that test to the facts of the present case, it is obvious that moneys lent by way of loans cannot be said to result in acquisition of any property in specie which, for the purpose of the definition in s. 109(ii) of the Act, could be said to have been held by the assessee-company by way of investment. The mere fact that a large part of that income of the assessee-company consisted of interest from these loans would not, therefore, lead to the conclusion that that income arose from investments as contemplated by s. 109(ii) of the Act. Since no income-yielding property can be said to have been acquired as a result of the loans advanced by the assessee-company, we must confirm the finding given by the Tribunal that the company cannot be classified as an investment company. It is obvious that if the basis criterion of an investment company is not satisfied, there was no further question of considering whether the business of the company consisted wholly or holding of investments.

17. It is also not possible to accept the argument of the learned advocate for the revenue that the new definition introduced by the Finance Act, 1966, must be accepted as merely clarifictory of the intention of the legislature originally expressed in the original definition, which we have reproduced above. Finance Act, 1966, by clause 21(b) substituted the following new definition in place of the existing definition of the investment company :

'(ii) 'Investment company' means a company whose total income consists mainly of income which, if it had been the income of an individual, would have been regarded as unearned income.

Explanation. - In this clause the expression 'unearned income' has the meaning assigned to it in the Finance Act of the relevant year.'

18. Now, it is no doubt true that the Supreme Court has observed that the meaning of the term 'investment company' was clarified by amending clause (ii) of s. 109. These observations, however, cannot be read as meaning that the scope of the original definition was the same as of the new definition. Mr. Dastur has made available to us the notes on clauses in the Finance Bill of 1966 and the relevant note which deals with sub-clause (b) reads as follows :

'Sub-clause (b) seeks to substitute the definition of the term 'investment company' to secure that a company will be regarded as an investment company if its total income consists mainly of income which, if it had been the income of an individual, would be regarded as unearned income.'

19. This note does not even remotely suggest that the definition was being clarified because there was any doubt about the construction placed thereon or that it was intended to do away with the construction placed on the definition by different courts. This clause, on the other hand, clearly indicates that a new criterion was being laid down in order to ascertain whether a company was an investment company or not. When the Supreme Court used the word 'clarification', in our view, all that the Supreme Court intended to convey was that the determination of the question as to whether a company was an investment company or not, became more easy and simple then what it was under the old definition. It would not, therefore, be possible for us to construe the definition of investment company in s. 109(ii) as it stood at the material time in the same way as the new definition which was substituted by the Finance Act, 1966.

20. Mr. Joshi then drew our attention to the last but one paragraph of the Supreme Court judgment in Nawn Estates (P) Ltd. [1977] 106 ITR 45, where the Supreme Court has observed as follows (p. 56) :

'Assuming without holding that the aforesaid expression as used in section 23A of the Act has a legal character, it would not make any difference in the result as the expression 'investment companies' has been defined in the Dictionary of English Law by Earl Jowitt (Volume II)(1959 edition) as 'companies whose income consists mainly of investment income, i.e., income which in the hands of an individual would not be earned income''

21. Relying on these observations, it was contended by Mr. Joshi, that even the Supreme Court has adopted the meaning of investment companies given in Jowitt's Dictionary of English Law and that in that context the test that if an income in the hands of an individual would not be an earned income, it would be investment income, should be applied in the case of an investment company and thus, according to the learned counsel, the income from interest earned by the assessee-company from the loans advanced by it being an unearned income, the company could be classified as an investment company.

22. It is not possible for us to read the observations of the Supreme Court as meaning that the Supreme Court adopted the definition of investment company given by Jowitt. We have gone through the definition from Jowitt's Dictionary and we find that the definition makes reference to ss. 257 to 264 of the Income-tax Act, 1952 (U.K.). It is obvious that the definition is based on the provisions of the relevant Income-tax Act, 1952 (U.K.) and the provisions thereof cannot be imported into the provisions of out Act. We are, therefore, unable to accept the contention advanced by Mr. Joshi that the Tribunal was in error in holding that the assessee-company was not an investment company within the meaning of the expression is s. 109(ii) of the Act. Consequently, the question referred to us must be answered in the negative and in favour of the assessee. Assessee to get the costs of this reference.


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