Sabyasachi Mukharji, J.
1. The assessee is an Indian company. We are concerned with tin question whether in the relevant year the assessee was an investment company. The reference arises out of the proceedings under Section 104 of the Income-tax Act, 1961, for the assessment year1961-62, the previous year for which ended on the 31st December, 1961. If the assessee was an investment company, the assessee had to declare not less than 90 per cent. of the distributable income as dividend. According to the assessee it was carrying on the business of insurance and as such it could not be termed as an investment company. It is undisputed that the assessee was carrying on the business of general insurance, namely, marine, fire and miscellaneous insurance, until the 29th January, 1960. On that date according to the explanatory statement sent to the shareholders in connection with the year 1966, the company ceased to carry on any class of insurance business. By the letter dated the 29th January, 1960, the Controller of Insurance cancelled the certificate of registration granted to the assessee-company as an insurance company with effect from the 14th March, 1960, under Section 3(4) of the Indian Insurance Act, 1938. Since then the assessee, according to the revenue, had not been doing any insurance business. The aforesaid explanatory note was circulated to the shareholders for getting certain resolution passed for amendment of the memorandum of association so as to enable the assessee to carry on investment business more economically and efficiently. Such alteration of the memorandum, however, took place in 1967. For the assessment year 1962-63, which is under reference, the relevant previous year of the company ended, as mentioned hereinbefore, on the 31st December, 1961. In the auditors' report for this year it was stated that the company had not transacted any insurance business and that the certificate of registration had been cancelled by the Controller of Insurance with effect from the 14th March, 1960. The directors' report appended to the accounts of the same year also mentioned that the premia as shown in the revenue accounts related to insurance business underwritten by the company as far back as 1956, of foreign treaty companies, etc. It was mentioned that the company had not underwritten any class of general insurance business during 1961. The company had not even a principal officer and the chairman, according to the revenue, and the directors, therefore, had to sign the documents. The assessee derived Rs. 1,22,812.30, as gross interest and dividend before deduction of tax at source. It got Rs. 32,911.41 as the profit from insurance transactions underwritten earlier. There was also undischarged liability in respect of outstanding claims estimated at Rs. 75,446.19. At the general body meeting for consideration of the accounts for the accounting year ended on the 31st December, 1961, the assessee declared Rs, 60,000 as dividend after transferring Rs. 35,000 as provision for income-tax and Rs. 20,000 as reserve for doubtful debts and other balances. In the assessment for the relevant year the income was determined at Rs. 1,53,749. After deducting the tax payable thereon the distributable income came to Rs. 94,622. If the assessee came within the provisions of Section 104 as an investment company, then it should have distributed 90 percent, of Rs. 94,622, which was the distributable surplus of the total income as assessed minus the tax payable thereon. The amount so distributable came to Rs. 85,160. The assessee, however, had declared only Rs. 60,000. Thus, there is a shortfall of Rs. 25,160. If the assessee was not an investment company, then it was enough if it had distributed 60 per cent. of the amount representing the balance out of the total income assessed after payment of taxes. In that event the assessee had complied with the requirements of distribution of the statutory percentage by declaring Rs. 60,000. The Income-tax Officer went into the question as to whether the assessee was an investment company or not. He came to the conclusion that as the assessee's licence for carrying on insurance business had been cancelled in 1960, the main source of the income of the assessee during the accounting year was only income from investments. He pointed out that more than 90% of the assessed income of the company was from investments. He, accordingly, held that the assessee not having distributed 90% of the distributable surplus was liable to pay additional supertax under Section 104 of the Act.
2. The assessee appealed to the Appellate Assistant Commissioner and contended that it did insurance business because it was still governed by the provisions of the Insurance Act, 1938. The Appellate Assistant Commissioner noticed that the income from business was Rs. 28,665 which was confined to receiving the arrear premiums. It was, therefore, held by him that the insurance business was not the main business during the relevant year because the income from this source represented only 19% of the total income. The Appellate Assistant Commissioner, accordingly, held that the assessee was rightly treated as an investment company. There was a further appeal to the Tribunal. After examining the provision as then in force and pointing out that the amendment subsequently made to the definition which did not apply to this year, the Tribunal held that, having regard to the nature of the income derived this year, the assessee was liable to be treated as an investment company.
3. In the premises, under Section 256(1) of the Income-tax Act, 1961, the following question has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the assessee was an investment company within the meaning of Section 109(ii) of the Income-tax Act, 1961, as then in force so as to justify the levy of additional super-tax under Section 104 of the said Act for the assessment year 1962-63?'
4. Section 109(ii) provided :
'For the purposes of Sections 104 and 105, ' investment company' means a company whose business consists wholly or mainly in the dealing in or holding of investments,'
as it stood at the relevant time.
5. In this case it is necessary to determine whether the assessee in the relevant year was an investment company. It was held by the Supreme Court in the case of Commissioner of Income-lax v. Gangadhar Banerjee and Co. (Private) Ltd., : 57ITR176(SC) that Section 23A of the Indian Income-tax Act, 1922, which is in pari materia with Section 104 of the Income-tax Act, 1961, was in the nature of a penal provision and, therefore, the revenue had strictly to comply with the conditions laid down thereunder. The burden lay upon the revenue to prove that the conditions laid down thereunder were satisfied before the order could be made. One of the conditions that is required to be satisfied in this case is that the assessee-company was an investment company. In order to attract the provisions of Section 104, the definition of 'investment company' provided in Section 109(ii) means that it should be a company whose business consisted mainly or wholly in the dealing in or holding of investments. Therefore, merely holding of investments per se will not make a company an investment company unless it was the business of that company to hold the investment or deal in those investments. This question came up for consideration before the Division Bench of the Gujarat High Court in the case of Distributors (Baroda) Private Ltd. v. Commissioner of Income-tax : 69ITR614(Guj) . There the assessee-company as managing agent had held considerable shares in the managed companies in order to safely retain the managing agencies. Besides those shares, the assessee did not hold any other shares as investment though it was carrying on business of dealing in shares in the course of which it held a number of shares and received dividends therefrom. The departmental authorities and the Tribunal held that the assessee was a company whose business consisted mainly in the dealing in or holding of investments so as to attract the applicability of Clause (i) of the second Explanation to Section 23A. The Division Bench of the Gujarat High Court held that as the dealing in and holding of investments were activities of an allied nature in the sense that both dealt with investments, both of them had been clubbed together and it would be sufficient compliance with Clause (i) of the second Explanation to Section 23A if the business consisted wholly or mainly in the dealing in investment or holding of investments or both. Though strictly speaking a company which was merely holding investments could not be said to be carrying on business, as there could not be business of holding of investments, in so far as the legislature had used the word 'business' in the section in relation to holding of investments, according to the Gujarat High Court, the legislature must have had in mind the 'business' in holding of investments, meaning thereby, real, substantial, and systematic or organised course of activity or conduct of making and holding of investments with a view to gaining income from the investments as business as distinguished from mere holding of investments. The Division Bench further held that the burden of showing that the case of the assessee fell within the said clause was on the revenue and as on the facts the revenue had not discharged that burden of establishing that the business of the assessee consisted mainly in dealing in shares, the case of the assessee was not, therefore, covered by Clause (i) of the second Explanation to Section 23A. Delivering the judgment of the Division Bench, Bhagwati J., of the Gujarat High Court, as the learned judge then was, observed at page 626 of the report as follows :
'Suppose a company which is carrying on business of running a textile mill has surplus fund and it invests in shares, the company would undoubtedly be holding investments, but can it be said that its business consists in holding of investments Take another case, the case of an insurance company, which was given by my learned brother in the course of the arguments. Such a company in the course of its business would necessarily make large investments of its moneys with a view to earning interest. But on that account, would it be correct to say that its business consists in holding of investments The holding of investments would not be a business of the company in either case ; the business of the company would be manufacturing textile goods in the first case and insurance in the other. Mere holding of investments is not sufficient to attract the applicability of the clause. What the clause requires is, and that is for the revenue to establish, that it must be a 'business' of the company to hold investments. The company must indulge in holding of investments as a 'business' activity or, in other words, its 'business' must be that of what is popularly known as an investment company. It is only if the company is engaged in the 'business' of holding investments, or, to put it differently, if its 'real, substantial and systematic or organised course of activity or conduct' is directed towards making and holding of investments with a view to gaining income from the investments that the question would arise whether this activity standing by itself or coupled with the activity of dealing in shares constitutes the whole or main business of the company.'
6. This decision of the Gujarat High Court went up in appeal before the Supreme Court and it was approved by the Supreme Court and the decision of the Supreme Court is reported as Commissioner of Income-tax v. Distributors (Baroda) P. Ltd., : 83ITR377(SC) There the Supreme Court held that Clause (i) of Explanation 2 to Section 23A of the Indian Income-tax Act, 1922, 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 Section 23A must necessarily take its colour from the word 'wholly' preceding that word in those provisions. A company which came within the scope of those provisions must be one whose primary business must be 'dealing in or holding of investments'. If a company engaged itself in two or more equally or nearly equally important business activities then it could not be said that the business consisted 'wholly or mainly' in dealing in a particular activity. Even in cases where a company had more than one business activity and one of its activities was more substantial than the others, unless that activity was the primary activity of the company, it could not be said that the company was engaged 'wholly or mainly' in any one of its business activities. Section 23A applied only to cases where the primary activity of the company was in the dealing in or holding of investments. Where the legislature spoke of the business of 'holding of investments' it referred to real, substantial or systematic or organised course of activity of investment carried on by the assessee for a set purpose such as the earning of profits.
7. In the instant reference, in the year in question, the Tribunal and the revenue authorities relied on certain factors in holding that the assessee was an investment company. The Tribunal relied on the fact that the volume of the business in the year in question as on account of insurance was meagre and the income from investment was indicated in the year in question was much larger. While the income from investment represented about 70% of the receipts, the income from other insurance for business done earlier was about 19%. The second factor upon which reliance was placed was that prior to the relevant year in question the certificate of insurance of the assessee had been cancelled. Therefore, it was thought that the assessee-company was not capable of carrying on the business as insurer. Third factor upon which reliance was placed was that there was alteration of the memorandum of association of the company allowing it to carry on investment business more profitably and economically. We shall deal with each of these factors along with certain other facts found by the Tribunal. We have mentioned that it has been found by the Tribunal that the assessee had made large investments when it was carrying on insurance business. The investments were thus acquired in the course of its business, that is to say, the business of insurance. These investments, according to the assessee, had not ceased to be investments on account of insurance business merely because the assessee had ceased to be an insurer. These findings will appear from the facts stated by the Tribunal at page 84 of the paper book.
8. Counsel for the revenue also drew our attention to the profit and loss account for the year ending 31st December, 1961, in contending that there might have been certain investments from Indian as also foreign companies. Our attention was drawn to Clause 3(w) of the memorandum of association which permitted the company to invest and deal with moneys of the company not immediately required upon such security and in such manner as might from time to time be determined by the directors at a meeting. As mentioned hereinbefore there was change in the memorandum of association and such change was sanctioned by a special resolution of the company at a general meeting on 26th June, 1967, and was approved by an order of this High Court on 19th September, 1967. Therefore, the changes in the memorandum of association had not been effected in the year with which we are concerned. In this connection, we may refer to certain provisions of the Insurance Act. Section 2D of the Insurance Act, 1938, provides as follows :
'Every insurer shall be subject to all the provisions of this Act in relation to any class of insurance business so long as his liabilities in India in respect of business of that class remain unsatisfied or not otherwise provided for.'
9. Counsel for the assessee contended before us that by virtue of the provisions of Section 2D various provisions of the Insurance Act, 1938, were applicable to the assessee in the year in question. He drew our attention to Sections 2(9)(b), 3, 6, 7(1), 7(8), 8, 9, 10, 11, 12, 14, 15, 17, 18, 19, 20, 21, 23, 25, 29(i), 30, 31, 33, 40(c), 46, 48, 53(2)(b), 53A, 55, 58, 59, 60 and 61 in support of his contention that there were various obligations of an insurer which were still applicable to the assessee-company in the year in question by virtue of the operation of Section 2D as referred to hereinbefore. This contention appears to be correct because Section 33 which deals with power of investigation by the Central Government came up before the Supreme Court in the case of Vanguard Fire and General Insurance Co. Ltd. v. Fraser and Ross, : 3SCR857 . Reliance may be placed on the observations of the court at page 976 of the report. The Supreme Court held that Section 2D applied to those insurers who had closed their business. It was not necessary to indicate in that section that the word 'insurer' meant a person actually carrying on the business of insurance, for the provisions of the Act applied to such a person proprio vigore. Therefore, when the 'word 'insurer' was used in Section 2D it must have meant a person who was actually carrying on the business of insurance but had closed it. If that was so, Section 33 which provided for investigation would apply to such insurer who had closed his business by virtue of Section 2D. Counsel for the assessee contended, and in our opinion rightly, that by virtue of the various other provisions to which our attention was drawn as mentioned before, investments which were held by an insurance company were continued to be held in discharge of the obligation as an insurer. Therefore, the fact that in the year in question the assessee was holding investments does not by itself conclude the matter. It also cannot be said that the assesses was not holding the investment for the purpose of carrying on its obligations or discharging its obligations under the law of insurance which had to be discharged by virtue of the operation of Section 2D of the Act as mentioned before. We must observe that in the year in question there was no investment; there was no evidence of any activity of dealing systematically or any organised dealing in investment business. Counsel for the revenue contended that there was no positive evidence that the investments that the assessee had held were only in compliance with the requirements of the Insurance Act and was not in excess of the same. We are unable to accept this position. There is a finding of the Tribunal that the investments were made in the course of business as insurer as referred to before. Secondly, for this year, that by itself does not prove that the assessee was dealing systematically or in any organised manner in the business of holding investments. The alteration of the memorandum took place as mentioned before subsequent to the year in question. Furthermore, the clause to which our attention was drawn was only a permissive clause for a company of this nature to invest moneys which were not required immediately for the purpose of insurance business. Incidentally, there was a similar clause which the Gujarat High Court had to consider in the case referred to before.
10. For the reasons mentioned we are of the opinion that in this year it could not be said that the assessee, in the facts and circumstances of the case, was an investment company in terms of the section.
11. In the premises, the question referred to this court is answered in the negative and in favour of the assessee. The assessee will get the costs of this reference.
12. I agree.