Skip to content


Charmugaria Trading Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 203 of 1973
Judge
Reported in[1977]110ITR715(Cal)
ActsIncome Tax Act, 1961 - Sections 104(1) and 109; ;Finance Act, 1966
AppellantCharmugaria Trading Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateA.C.S. Chari, Adv.
Respondent AdvocateSuhas Sen and ;Ajay Mitra, Advs.
Cases ReferredDistributors (Baroda) P. Ltd. v. Commissioner of Income
Excerpt:
- .....on the facts and in the circumstances of the case, the tribunal was right in holding that the assessee-company is an investment company within the meaning of section 109(ii) of the income-tax act, 1961 '7. to appreciate the dispute in this reference it would be convenient to note the said section 109(ii) of the income-tax act, 1961, as it stood at the relevant time. the original clause (ii) of the said section was as follows :' (ii) ' investment company ' means a company whose business consists wholly or mainly in the dealing in or holding of investments.'.8. the section was, however, subsequently amended twice, respectively, by the finance act, 1966, and the finance act, 1968.9. it is to be determined in the instant case whether the assessee is a company whose business consists.....
Judgment:

Dipak Kumar Sen, J.

1. This reference is at the instance of the assessee, Charmugaria Trading Co. Ltd. The assessment year involved is 1963-64, the relevant previous year being the accounting year ended on 30th June, 1972. The facts found or admitted as appearing from the statement of the case ami the annexures thereto may be briefly noted as follows :

2. The assessee is a company in which admittedly the public are not substantially interested. For the assessment year in question the distributable surplus was Rs. 11,637 and the company declared a dividend of Rs. 7,200. It is the contention of the revenue that the assgssee ought to have distributed the statutory percentage of 90 per cent. of its distributable surplus inasmuch as it was an investment company within the meaning of Section 109(ii) of the Income-tax Act, 1961.

3. The Income-tax Officer proceeded on the basis that the assessee was an investment company and levied additional super-tax under Section 104(1) of the Income-tax Act, 1961, as in the earlier assessment year 1962-63, where it was held that the assessee was an investment company and this finding was confirmed in appeal.

4. This order of the Income-tax Officer in this assessment year was confirmed respectively by the Appellate Assistant Commissioner and the Tribunal. It was contended on behalf of the assessee before the Tribunal that the expression 'investment' in Section 109(ii) of the Act ought to be interpreted in the commercial sense and not according to its dictionary meaning and it ought to have been held that the assessee was not an investment company within the meaning of the said section.

5. The Tribunal found as a fact that about 80 per cent. of the assets of the assessee had been advanced by way of a deposit to a single party. It was further found that the assessee looked forward to earning interest regularly from the said deposit and the interest on this loan constituted the major part of the assessee's income. Accordingly, the Tribunal held that this was an investment. The contention of the assessee that this was not capable of being dealt with and, therefore, could not be an investment was rejected.

6. From this order of the Tribunal the following question has been referred under Section 256(1) of the Income-tax Act, 1961 :

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company is an investment company within the meaning of Section 109(ii) of the Income-tax Act, 1961 '

7. To appreciate the dispute in this reference it would be convenient to note the said Section 109(ii) of the Income-tax Act, 1961, as it stood at the relevant time. The original Clause (ii) of the said Section was as follows :

' (ii) ' investment company ' means a company whose business consists wholly or mainly in the dealing in or holding of investments.'.

8. The section was, however, subsequently amended twice, respectively, by the Finance Act, 1966, and the Finance Act, 1968.

9. It is to be determined in the instant case whether the assessee is a company whose business consists primarily in the dealing in or holding of investments. Mr. Suhas Sen, learned counsel for the revenue, contended before us that the expressions 'investment' and 'holdings' have wide connotation and include even loans and deposits. In support Mr. Sen relid upon two English decisions. The first decision is in the case of In re Lewis's Will Trusts : O'Sullivan v. Robbins [1931] 1 Ch 118; [1937] 1 All ER 227.

10. The facts in that case were that a testator had appointed the plaintiff as his sole executrix and trustee. In his will the testator had bequeathed certain securities in the following language :

' I bequeath the following securities (or the investments representing the same at my death if they shall have been converted into other holdings), namely......to my trustee upon trust to pay the income therefrom......'

11. One of the securities named in the will had been redeemed during the life-time of the testator and the amount redeemed had been placed together with other money of the testator on a deposit account with a bank and also with a company, viz., the Army and Navy Stores Ltd. The question arose whether the particular bequest was adeemed. Bennett J. held that there was no question of ademption as the money which was realised by the testator during his lifetime was kept on deposit and such a deposit could be regarded as an investment or a holding within the meaning of the clause of the will.

12. The next case cited by Mr. Sen was Inland Revenue Commissioners v. Laurence Philipps & Co. (Insurance) Ltd. [1947] 2 All ER 144 . In this case the assessee-company was formed with the object of carrying on business inter alia, of insurance brokers, insurance agents, agents or managers of any insurance company, club or association or any individual underwriter and also to lend money to any person or company. In the year 1934, the assessee took part in the formation of a marine syndicate. The assessee acted as an underwriting agent of this syndicate and received a salary and commission. In the year 1935 the assessee further promoted a non-marine syndicate. In this non-marine syndicate certain persons were lent monies by the assessee on the strength of which they joined the syndicate and became underwriting members. The question arose whether the loans made by the assessee to these members of the non-marine syndicate was capital employed in the trade or business within the meaning of the Finance Act, 1939, and whether the said amounts should be included in computation of the 'pledged amount of the capital' for the purpose of assessment of excess profits tax. In his judgment, Atkinson J. held that the said loans were temporary deposits made by the assessee with the object of securing business and constituted capital employed in the assessee's trade or business and was liable to be computed for the purpose of excess profits tax. There is a discussion in his judgment whether the monies lent were investments or not in the following language (page 149) :

' Here the question is whether or not these loans were investments. I think that this money was capital put into the business and expended in a business transaction. The income derived from the transaction was not from a source outside the trade, but was within it, it being a customary part of the company's trade to promote syndicates. If it was customary for the company to promote syndicates, it must be part of its ordinary business functions to advance money to the syndicates where required......I think the payments were temporary deposits on loan made with the object of securing a business revenue, not some collateral kind of revenue but ordinary business revenue. That business revenue is included in the assessed profits. It could not have been earned without these deposits being made to finance the two members. It was, therefore, capital employed in the business............

There is never any difficulty about regarding money lying idle in the bank as money employed in the business providing there is a reasonable probability of it being wanted in the accounting year or in a short space of time thereafter: see Thomas v. Roberts Inland Revenue Commissioners [1946] Excess Profits Tax Leaflet, No 42......These deposits on loan toHenderson and Broadbridge were performing an active operation as compared with the passive operation of such balances. I read the Finance (No. 2) Act, 1939, Sched. VII, pt. II, para. 1 :

' (1) Subject to the provisions of this part of this schedule, the amount of the capital employed in a trade or business.......shall be taken to be......

(b) so far as it consists of assets being debts due to the person carrying on the trade or business......

as meaning, or, at any rate, as including, debts arising from business transaction or from the employment of money in the business. I agree with the Solicitor-General that the paragraph does not include any debt however it comes about, because an investment may lead to a debt--for instance, a mortgage is a debt, notwithstanding that it is an investment--but, if a debt arises from a business transaction or through the employment of money in the business, it seems to me that the debt is capital within para. 1 of pt. II of the schedule.''

13. Mr. Sen has also cited a judgment of the Supreme Court in the case of Commissioner of income-tax v. Distributors (Baroda) P. Ltd. : [1972]83ITR377(SC) . In this case the Supreme Court had to consider Clause (i) of Explanation 2 to Section 23A of the Indian Income-tax Act, 1922.

14. In construing the said clause the Supreme Court held that a company must be one whose primary business must be 'in the dealing in or holding of investments ' before it came within the mischief of this section.

15. The Supreme Court construed the meaning of the expression 'holding of investments '. The Supreme Court followed its earlier decisions in the case of Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax : [1954]26ITR765(SC) and in the case of Bengal and Assam Investors Ltd. v. Commissioner of Income-tax : [1966]59ITR547(SC) and held that the expression ' business of holding of investments ' consisted of some real, substantial and systematic or organized course of activity or conduct with a set purpose. The Supreme Court held that when the legislature spoke of the business of holding of investments it referred to real, substantial and systematic or organized course of activity of investment carried on by an assessee for a set purpose such as earning profits.

16. Mr. Chari, learned counsel appearing on behalf of the assessee, has drawn our attention to a decision of the Gujarat High Court in the case of Distributors (Baroda) P. Ltd. v. Commissioner of Income-tax : [1968]69ITR614(Guj) . This judgment was affirmed by the Supreme Court in Commissioner of Income-tax v. Distributors (Baroda) P. Ltd. : [1972]83ITR377(SC) which we have considered earlier. Bhagwati J. of the Gujarat High Court (as he then was) held in construing Explanation 2, Clause (i) of Section 23A of the Indian Income-tax Act, 1922, that the word ' business ' as appearing in this section must be given its legal meaning and it was for the revenue to establish that the assessee was carrying on the business of an investment company, i.e., the activity in which the company was indulging was a real, substantial and systematic or organised course of activity 'of holding investments with a view to gaining income therefrom. It was held that mere holding of investment was not enough but there should be something more to convert the holding of the investments into a business. The approach for such determination should not be legalistic but should be a common sense approach from the commercial point of view.

17. Lastly, a decision of this court in the case of Great Pyramid Insurance Co. Ltd, v. Commissioner of Income-tax : [1976]102ITR394(Cal) was cited. In this case the assessee was an insurance company carrying on the business of general insurance. The Controller of Insurance cancelled the certificate of registration as an insurance company with effect from 14th March, 1960, under the provisions of the Indian Insurance Act, 1938. For the assessment year 1962-63, it was found that the statutory percentage of the distributable surplus of the assessee, i.e., 90 per cent., had not been distributed, The question arose if the assessee was an investment company and whether additional super-tax under Section 104 of the Act would apply to the assessee. It was held that it could not be said that the assessee was an investment company within the meaning of Section 109(ii) of the Income-tax Act, 1961.

18. The investments which had originally been made by the assessee as an insurance company were continued by virtue of Section 2D of the Insurance Act for the purpose of discharge of its obligation as an insurer. It was found that in the year in question there was no investment nor any evidence of any activity of dealing systematically or in any organised manner in investment business. The Tribunal had found that the investments had been made earlier in the usual course of its insurance business.

19. The law as laid down by the Supreme Court in the case of Distributors (Baroda) Private Ltd. : [1972]83ITR377(SC) was followed and applied.

20. After a careful consideration of the law as laid down in the various decisions noted above and the facts found in the instant case, it appears to us that it would not be possible to answer the question which has been referred to us without further finding of facts. The law has been settled by the Supreme Court in Commissioner of Income-tax v. Distributors (Baroda) P. Ltd. : [1972]83ITR377(SC) . Before a company can be stated to be an investment company falling within the mischief of Section 109(ii) of the Income-tax Act, 1961, the following have to be found as a fact :

(a) That the assessee is carrying on a business, i.e., it is carrying on a systematic or an organised activity with the set purpose, inter alia, of making profits.

(b) That the business consists of either dealing in investments, that is, dealings in shares, securities, etc., or holding of investments.

(c) That such business is its primary business.

21. All that has been found in the instant case is that during the assessment year in question a major part of the assets of the assessee has remained in deposit and has earned interest. It has also been found that such interest formed a major part of the income of the company. What remains to be found is the nature of the activity pursuant to which the money remained invested and the purpose of such investment. The basic terms of the loan or investment or deposit including the period have not been looked into by the Tribunal. The object of the assessee in making this investment has not been enquired into. A cogent evidence would have been resolution of the directors of the assessee, if any, in respect of the deposit which was not considered. Neither the nature of the other business activities, if any, which are being carried on by the assessee nor the objects of the assessee as appearing in its memorandum and articles have been considered to determine what is the primary business of the assessee.

22. In this view of the matter, we send the matter back to the Tribunal with the direction that the Tribunal will take fresh evidence if necessary, and determine the necessary facts as indicated above and dispose of the matter according to law as indicated. The Tribunal will give further opportunity to the parties for adducing fresh evidence and of being heard if they so desire.

23. There will be no order as to costs.

Deb, J.

24. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //