DIXIT C.J. - In this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the question which has been referred for decision is :
'Whether, on the facts and in the circumstances of this case, the sum of Rs. 20,856 received by way of interest by the assessee should be taxed under section 28 as business income or under section 56 as income from other sources ?'
The material facts are that the assessee, the Madhya Pradesh State Industries Corporation Ltd., is a Government private limited company. It was incorporated on 11th April, 1961, for taking over and running certain concerns of the Government of Madhya Pradesh, namely, the Ratlam Power Alcohol Project, Spinning Mill, Sanawad, and the Cottonseed Solvent Extraction Project, Ujjain. The shares in the company are held by the Government of Madhya Pradesh, the Madhya Pradesh Electricity Board, and the Director of Industries, M.P. Government. During the period covered by the assessment year 1962-63, of which the accounting year ended on 31st March, 1962, the company did not actually carry on any business; there was also no production. This was a period of capital expenditure and installation of machinery and plant. The share money, which the company received from the Madhya Pradesh Government, the Madhya Pradesh Electricity Board, and the Director of Industries, not being immediately required by it, was deposited in call-deposits in certain banks. On these deposits the company received in the accounting year a total amount of Rs. 20,763.92 as interest. The company showed this amount of interest as 'cash and bank balance' in its accounts as on 31st March, 1962. In the profit and loss account, the amount was shown as 'interest on deposits.'
In its return of income for the assessment year in question, the assessee showed a total loss of Rs. 15,110. Before the Income-tax Officer, the assessee contended that being a newly established undertaking, it had not income liable to tax, and further that the interest receipts should be assessed as income from business as it was authorised to do money-lending business under clauses 13 of the memorandum of association. The claim for treating the interest amount received as income from business was obviously made for the purpose of deduction of a major portion of the expenses incurred, such as, salaries to the directors, rent, etc. The Income-tax Officer held that though the company was authorised to do money-lending business, the interest received by it on deposits from the banks was not any income received from money-lending business. He treated the interest income as income from 'other sources' under section 56 of the Act. He allowed deduction a part of the expenses incurred in earning this interest income.
The assessees appeal before the Appellate Assistant Commissioner failed. Thereupon, it filed a second appeal before the Income-tax Appellate Tribunal, which was also dismised. While dismissing the appeal, the Tribunal observed :
'In this case it is common ground that the projects had not gone into production and in that sense there was no business carried on by the assessee, Therefore, the short question is whether the making of deposits with the banks of the surplus moneys was business carried on in money lending by the assessee-company No doubt clause 13 enables the company to carry on business of money-lending. But what appears to have been done in this case is to invest the companys moneys in accordance with clause 20 of the memorandum and article 72(1) of the articles of association. Placing moneys in call-deposits or fixed deposits with banks cannot be said to be lending moneys to the banks. The nature of these investments has been correctly described in the profit and loss account as interest on deposits. The department was therefore correct in having assessed these interest under the head other sources under section 12 of the Act. As regards quantum, the expenses so far allowed by the department for earning this income are adequate and does not justify any interference.'
At the outset, it is necessary to refer to the relevant clauses of the memorandum of association of the company in order to ascertain the business of the company. Clause III of the memorandum of association sets out the obejcts for which the company ahs been established. One of the objects stated in sub-clause (13) of clause III is :
'To lend money one mortgage of immovable property or on hypothecation or pledge of movable property or without security to such persons and on such terms as may seem expedient and in particular to customers of and person having dealings with the company.'
Then sub-clause (20) says :
'To invest and deal with the money of the company in any securities, investments, properties, movable or immovable, and in such manner as may, from time to time, be determined and to sell, transfer or deal with the same.'
Clause 72(1) of the articles of association, which is also material here, runs as follows :
'72. Without prejudice to the general powers conferred by the last preceding article, and the other powers conferred by these articles, and subject to the provision of the Act, the directors shall have the following powers, that is to say, powers :
(1) to investment in such securities as may be approved by the Governor and deal with any of the moneys of the company upon such investments authorised by the memorandum of association of the company (not being shares in this company) and in such manner as they think fit, and from time to time vary or relaise such investment.'
Now, section 28 of the Act describes the income which is chargeable to income-tax under the head 'profits and gains of business or profession'. Under that provision, the profits and gains of business or profession, which was carried on by the assessee at any time during the previous year, is income chargeable to tax under the head 'profits and gains of business of profession'. We are not concerned with clause (ii) of section 28 as the interest received by the assessee in the present case is not any amount of compensation or payment falling under that clause. 'Business' has been defined by section 2(13) as including 'any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture'. This definition is inclusive and not exhaustive, and the words used in the definition are wide. But it is only 'some real, substantial and systematic or organised course of activity or conduct with a set purpose' that constitutes 'business' (see Narain Swadeshi weaving Mills v. Commissioner of Excess Profits Tax). As one of the objects of the assessee, as stated in its memorandum, is 'to lend money on mortgage of immovable property', an organised money-lending activity carried on by the assessee would no doubt business. But the deposit of the share capital of the assessee in current account of in deposit with any bank cannot by any stretching of the meaning of the term 'money-lending' be said to be an act of money-lending.
Shri Chitaley, learned counsel appearing for the assessee, did not press before us the argument that the interest received by the assessee from the bank was receipt of income from money-lending activity. He, however, contended that share moneys were money relating to the business of the assessee and any interest thereon would be business income as the assessee was authorised under sub-clause III of its memorandum of association and article 72(1) of the articles of association to invest in and deal with the money of the company in any securities investment, etc. Learned counsel relied on the decision of the Supreme Court in Commissioner of Income-tax v. Calcutta National Bank Ltd.
We are unable to accept this contention. for determining whether an act done by a company was one done by it in carrying on its business, it is not sufficient merely to look at the memorandum of association and to find out what business it provides. It is also necessary to determine further whether the particular act done by the company was done in pursuance of the objects enumerated in the in the memorandum or the articles of association. The decision in Commissioner of Inland Revenue v. South Behar Railway Company, Seksaria Biswan Sugar Factory v. Commissioner of Income-tax and Lakshminarayan Ram Gopal and Sons Ltd. v. Government of Hyderabad fully support this proposition. In Commissioners of Inland Revenue v. South Behar Railway Company, Lord Sumner said :
'To ascertain the business of a limited liability company one must look first at its memorandum and see for what business that provides and whether its obejects are still being pursued.'
In Seksaria Biswan Sugar Factorys case, Chagala C.J. observed :
'... in every particular case you have to determine whether in doing what the company did it was taking a step which was a normal step in carrying on it business, and further whether the particular act can be described as being in pursuance of the object enumerated in the memorandum or articles of association.'
In the present case, one of the object of the assessee-company is no doubt to 'invest and deal with the money of the company in any securities, investments, properties...'. The assessee could have carried on this business. But the question to be determined is whether the act of the assessee-company in keeping the amount of share-money in current account or in deposit with rank and earning interet thereon was one done in pursuance of the object of the company enumerated in sub-clause (20) of clause III of the memorandum of association or article 72(1) of the articles of association. In our opinion, on the facts of the case it is impossible to hold that the deposit of share-money in certain bank was an investment made by the assessee-company pursuant to the object specified in the aforesaid two clauses. The assessee-company is not a banking company. As is evident from the memorandum of association, the main activity and business of the company is the taking over from the Government of Madhya Pradesh certain projects and industries and running them, and the development of new industries, industrial areas, estates and establishments. Before the Tribunal, it was common ground that the projects, which the assessee-company took over, had not gone into production in the year of account. The share capital, which the assessee-company obtained from the Madhya Pradesh Government, the M.P. Electricity Board and the Director of Industries, was not immediately required for expenditure. The assessee-company, therefore, deposited the surplus share money in a certain bank and earned interest thereon. The money deposited by the company with the bank were plainly not in the ordinary course of its business of making investments under sub-clause (20) of clause III of the memorandum of association or article 72(1) of the articles of association. It was merely a transaction relating to its share capital, and not an act in the course of its. business. The assessee-company itself showed in its profit and loss account the amount of interest on its deposits with banks as 'interest on deposits'; and in its accounts as on 31st March, 1962, the amount of interest was shown as 'cash and bank balance'. If therefore, the deposits made by the assessee in a certain bank did not constitute any business of the company, then it follows that the interest earned by the assessee on those deposits cannot be regarded as income under the head 'profits and gains of business or profession' under section 28 of the Act.
The decision of the Supreme Court in Commissioner of Income-tax v. Calcutta National Bank Ltd., cited by the learned counsel for the assessee, has no applicability here. In that case, the assessee was a banking company. It owned a building and realised income by way of rent for the portion of the building let out. One of the objects stated in the memorandum of association of the company was 'to purchase or take on lease or in exchange or otherwise acquire any movable or immovable property... which the company may think necessary or convenient, maintain and alter any building or works necessary or convenient for the purpose of the company'. The question raised in that case was whether the income realised by the assessee by way of rent was liable to excess profits tax and could be included in the profits of the business under rule 4(4) of the First Schedule to the Excess Profits Tax Act, 1940. The Supreme Court held that the realisation of rental income by the assessee is in the course of its business in prosecution of one of its objects in its memorandum and was, therefore, liable to be included in its business profits and was assessable to excess profits tax; and that management of property and realisation of rent therefrom, was within the objects of the company. In that case, the Supreme Court pointed out that the definition of the term 'business' under the Excess Profits Tax Act, 1940, was wider than that under the Income-tax Act and the schemes of the two Acts were different; and that it was within the ambit of the business activities of the assessee, a banking company, to realise income from its investments which may be either in share, securities or in immovable properties. Thus, there is a material distinction between the present case and the case before the Supreme Court in that here the assessee-company is not a banking company. That being so, it cannot be urged that the bare fact that the assessee deposited money in the bank was by itself sufficient to show that the deposits were made with a view to carrying on business in the sense of earning profits by investments.
If, as we think, the interest income earned by the assessee is not any income from business, then clearly it is income from 'other sources' falling under section 56 of the Act.
For these reasons, our answer to the question referred is that the sum of Rs. 20,856, received by way of interest by the assessee, is chargeable to income-tax under section 56 of the Act as 'income from other sources'. It cannot be taxed under section 28 of the Act as business income. The assessee shall pay costs of this reference. Counsels fee is fixed at Rs. 200.