# 2 S.C.R. 'SUPREME COURT REPORTS . 243 THE WAR PROFITS TAX COMMISSIONER v. ~1/s. BINODIEtAM BALCHAND

- **Citation:** [1962] Supp. 2 S.C.R. 243
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Bench:** P. B. Gajendragadkar, A. K. Sarkar, K. N. Wanchoo, K. C. Das Gupta, N. Rajagopala Ayyangar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/2-s-c-r-supreme-court-reports-243-the-war-profits-tax-commissioner-v-1-s-2603
- **Pages:** 14

## Headnote

War Pr~{ifs Tax-Tax on excess-Profits Managing agent
of company-holding majority of it.s shares-Dividend incomeI'ambilily as busine.s8 profits-War Profits Tax OrdinanceSchedule, if part of statute-"No connect-ion whatever with
the bu8-ines8"-Const.ruction of rule-fi1ralior TVar Profits Tax
Ordinance, Samvat 2001, "'·'· 2(5). 2 (14). 2(16).4 (I). 50, &h.
I r. 3 Ill
Rule 3 (I) of sch. I of the Gwalior War Profits Tax
Ordinance, Samvat 2001, provided: "Income received, from
investments shall be included in the profits of a business liable to the \Var Profits Tax, unless it is proved to satisfaction
of the War Profits Tax Officer that the investments have no
connection whatever with the business."
The respondent, a Hindu undivided family, was carrying
on various businesses in the erstwhile State of Gwalior, and
one of them wa~ its ernployment as the ~ecret~ry, Treasurer
and Managing Agent of a limited company. The respondent
held a maJority of the issued shar-Cs in the company. For
the accounting period July I, 1944, to October 16, 1944, the
War Profits Tax Officer, by his assessment order dated Ju1y 9,
1951, included in its assessable profits the sum received by
the respondent on July 5, 1944, as the dividend declare and
paid by the company on its shares. The respondent claimed
that the said sum could not be included in ·its taxab_le profits
on the ground that it did not deal in shares and. that its
holdings in the company were purely in the_ natuft- of investinents having no connection with its business as defined s. 2(5)
of the Ordinance Gwalior War Profits Ordinance and that
the business of the
Secretari~s, Treasurers
and . M<'.l.nag;ing
Agent of the company which was cacried on by it did not
require any holding of the s_hareS of the co1npany and was
not dependent ~n its investment, in the said cc'mpany. The
High Court or Madhya Pradesh took the view (I) that on a
proper construction ofthe _provisions of the Ordinancr, unless the
acquisition o_f the oSha·res wtts an adventure in the nature of trade
or the-respoUde~t \V"as a.· dealer in_ shares such that the shares
held by -it W·t""re part of its stock in t~:t; _the income derived
therefrom by \Vay of dividends could ri.Of'~oJ~~~:.cl:ia_racterised as
profits from business, and (2) that Soh. I of tfi~··et!Jinance which
Drrem6"r ?.0,
1961
'11lt 'War Profits T.,
Commis•lcatr
v,
JI (s. s; .... ;,.,.
BlkMsid
244 SUPREME COURT REPORTS [1962] SUPP.
was headed "Rule1 for the computation of business", though
it purported to be part of the Ordinance, in reality comprised
rules made by Government under the-rule making• power conferr.d on it bys. 50 of the Ordinance and that r. 3 (I) of
the Schedule, being subordinate legulation, could not validly
bring to charge an item of income which was not within the
the scope of the Ordinance it!Clf.
Htld, that: 1 I) Schedule I of the Gwalior War Profiu
Tax Ordinance WaS part and parcel of the Ordinance itself
and, therefoT", could not be consider.ed to be subordinate
legislation as rults framed under s. 50 of the Ordinance
(2)
the word "conncctio!l" in r. 3 (l} of Sch. I of the
Ordinance was not restricted to cas~ of "direct conneetion",
in view of the expttssion "no connection whatever" in that
rule; and,
(3)
the rc.pondent, as the hQ)der of the majority of the
shares in the company, was enabled by reason of this investment to control the action of the company which w .. the
other party under the Managing ... gency Agreement, and thereff.re, the investment was connected with the business carried
on by it within the meaningofr. 3(1) of Sch. I of the Ordinanae.
Accordingly, the dividend received by the re.tponden t
from the company was properlv included by the assessing
authorities in the computation of its ta1<able profiu under the
Ordinance.
CIVIL APPRLLATB JURISDICTION: Civil Appeal
No. 225 of 1960.
Appeal from the judgment and decree dated
April 19, 1957, of the M1ulhya Pradesh High Court
(Indore Bench) at Indore in Civil Refcrenoo No.
I of 1952

## Text

2 S.C.R.
'SUPREME COURT REPORTS . 243
THE WAR PROFITS TAX COMMISSIONER
v.
~1/s. BINODIEtAM BALCHAND
(P. B. GAJENDRAGADKAR, A. K. SARKAR,
K. N. WANCHOO, K. C. DAS GUPTA and
N. RAJAGOPALA AYYANGAR. JJ.)
War Pr~{ifs Tax-Tax on excess-Profits Managing agent
of company-holding majority of it.s shares-Dividend incomeI'ambilily as busine.s8 profits-War Profits Tax OrdinanceSchedule, if part of statute-"No connect-ion whatever with
the bu8-ines8"-Const.ruction of rule-fi1ralior TVar Profits Tax
Ordinance, Samvat 2001, "'·'· 2(5). 2 (14). 2(16).4 (I). 50, &h.
I r. 3 Ill
Rule 3 (I) of sch. I of the Gwalior War Profits Tax
Ordinance, Samvat 2001, provided: "Income received, from
investments shall be included in the profits of a business liable to the \Var Profits Tax, unless it is proved to satisfaction
of the War Profits Tax Officer that the investments have no
connection whatever with the business."
The respondent, a Hindu undivided family, was carrying
on various businesses in the erstwhile State of Gwalior, and
one of them wa~ its ernployment as the ~ecret~ry, Treasurer
and Managing Agent of a limited company. The respondent
held a maJority of the issued shar-Cs in the company. For
the accounting period July I, 1944, to October 16, 1944, the
War Profits Tax Officer, by his assessment order dated Ju1y 9,
1951, included in its assessable profits the sum received by
the respondent on July 5, 1944, as the dividend declare and
paid by the company on its shares. The respondent claimed
that the said sum could not be included in ·its taxab_le profits
on the ground that it did not deal in shares and. that its
holdings in the company were purely in the_ natuft- of investinents having no connection with its business as defined s. 2(5)
of the Ordinance Gwalior War Profits Ordinance and that
the business of the
Secretari~s, Treasurers
and . M<'.l.nag;ing
Agent of the company which was cacried on by it did not
require any holding of the s_hareS of the co1npany and was
not dependent ~n its investment, in the said cc'mpany. The
High Court or Madhya Pradesh took the view (I) that on a
proper construction ofthe _provisions of the Ordinancr, unless the
acquisition o_f the oSha·res wtts an adventure in the nature of trade
or the-respoUde~t \V"as a.· dealer in_ shares such that the shares
held by -it W·t""re part of its stock in t~:t; _the income derived
therefrom by \Vay of dividends could ri.Of'~oJ~~~:.cl:ia_racterised as
profits from business, and (2) that Soh. I of tfi~··et!Jinance which
Drrem6"r ?.0,
1961
'11lt 'War Profits T.,
Commis•lcatr
v,
JI (s. s; .... ;,.,.
BlkMsid
244 SUPREME COURT REPORTS [1962] SUPP.
was headed "Rule1 for the computation of business", though
it purported to be part of the Ordinance, in reality comprised
rules made by Government under the-rule making• power conferr.d on it bys. 50 of the Ordinance and that r. 3 (I) of
the Schedule, being subordinate legulation, could not validly
bring to charge an item of income which was not within the
the scope of the Ordinance it!Clf.
Htld, that: 1 I) Schedule I of the Gwalior War Profiu
Tax Ordinance WaS part and parcel of the Ordinance itself
and, therefoT", could not be consider.ed to be subordinate
legislation as rults framed under s. 50 of the Ordinance
(2)
the word "conncctio!l" in r. 3 (l} of Sch. I of the
Ordinance was not restricted to cas~ of "direct conneetion",
in view of the expttssion "no connection whatever" in that
rule; and,
(3)
the rc.pondent, as the hQ)der of the majority of the
shares in the company, was enabled by reason of this investment to control the action of the company which w .. the
other party under the Managing ... gency Agreement, and thereff.re, the investment was connected with the business carried
on by it within the meaningofr. 3(1) of Sch. I of the Ordinanae.
Accordingly, the dividend received by the re.tponden t
from the company was properlv included by the assessing
authorities in the computation of its ta1<able profiu under the
Ordinance.
CIVIL APPRLLATB JURISDICTION: Civil Appeal
No. 225 of 1960.
Appeal from the judgment and decree dated
April 19, 1957, of the M1ulhya Pradesh High Court
(Indore Bench) at Indore in Civil Refcrenoo No.
I of 1952.
B. Sen, B.K.B. Naidu and l.N. Shroff, for the.
appellant.
A. V. Viswanatlta Sastri, K . ..4. ChiUJ!e, J.B.
Dadacltanji, S. N. Andley, RaTM•hwar Notla and
P. L. Voltra, for the reapondentR.
1961, December, 20-The Judgment of the
Court w&& delivered by
AYYANGAR, J.-This appeal come1 before us
bv virtue of a oertifioatt- of fitn- granted by the
High Court of lhdhy& Pr&de•h under •.47(2) of the
2 s.c.R.
summ: COURT REPORTS
245
\-
--~---
Gwalior War Profits Ordinance, Samvat 2001
(h')reafter called the Ordinance) on the ground that
the appeal involves a substantial question of law.
The question of law which arises in the appeal
relates to the proper construction of r. 3(1) of the
Schedule of the Ordinance. The respondent-M/s.
Binodiram Balchand is tbe name under which a
Hindu undivided family which was resident in the
State of , Gwalior carried on various busineeses in
that State. Profits derived from business carried
in the State were charged to War Profits Tax under
the Ordinance, Among the b~sinesses carried on by
the respondent was its employment as the Secretary
Treasurer and
Man;:1ging-ag~nt of a
textile mill
which was a limited c'ompany bearing the nam~ of
Binod Mills Company Limited, Ujjain. The appeal
is concerned with the oomputation of the profits of
the respondent to War Profits Tax under the Ordi·
nance, which it might be stated at the outset,
was on lines very similar to the Indian Excess
Profits Tax Act, 1940.
The chargeabJJ accounting -{>eriod with which
the appeal is concerned, is the period commencing
from July 1, 1944, to October 16;- 1944. The
respondent-assessee submitted its return and
thereafter the War Profits Tax Offi<l!l!' by his assessment order dated July 9, 1951, determined the taxable income of tbe assessee foi:- this chargeable
accounting period at Rs. 12, 16,145/· and assessed it
to tax in the sum of Rs. 2,02,691/-. Several points
were raised in relation to this assessment order by
the respondent, and one of them related to the
inclusion in its assessable profits of a. sum of
Rs. 11,09,332/- which wa.s received by the respondent on July 5, 1944, being the dividend declared
and paid by the Binod Mills Ltd,, for 1943 on the
shares held by the respondent. It was the contention of the respondent that 'this sum was its income
from an inveatuumt .pure and simple and was not
lUl
Tire Wlff' hr4its
Tax CommiJsiOntr
Y,
M/8. Binod,ram
Balchand
"-"""'"' J.
1911
Tiit h· .. , Pruf1ls
·r t1X Cl)mmiJJOlltr
V,
M /s Bi,.,,Jiram
Bi.lclumd
246
SUPREME COURT REPORTS [1962] SUPP.
"profits" from business, and so
could not be
included in its taxable profits on a proper cum.truction of the relevant provisions of the Ordinance.
From the uoSeF.smt nt ordt'f the respundcnt fil< d an
appeal to the appellate authority which ho\\ ever
was umuccessfu!.
A revision to the Commissic!llcr
of War Profits Tax m1·t with the samt' fate ar.d
then· after the respondent prayed for a ref en nee to
the High Court under s. 4u(I) of the Ordinan"e
which ran thus:
'46( I) If, in the course of any asBCBBme11t. under
this Ordinance or any proceeding in co11111·ction
thc1 ev. ith, a yut btion c.f law a rib<"'· t be
Commil!sioner, may; either on his own motion
or on reference from any War Profits Tax
authority subordinate to him,
draw up a
statement of the case and refer it with his
own opinion thereon to the High Court."
The Commissioner acceded to this request and
referred for the opinion of the Hi~li Court three
questions:
"(I)
Whether
the
dividend
inc( me of
Rs. I l,(•9,332/· 1ect iv~cl fr cm I] e Bint·d Milla
was t'ba~g•·able undn tlie
War P1dits Tax
Ordinance?
(2) Whether rntain bad debts written off by
th<' assesseeg could be allowed a~ deduct ions
in computing profits for war tax purpOBe ?
(3)
Whether tho expenses of a~H·ssc t'S' bram·h
at Gwalior which was defunct,
could be
allowed as admissible expenses ?"
The High Court answered
.questions :! and 3 in
favour of the department, but the first question was
answered
in the negative and
in favour of the
assessee.
There ii! now no dispute as regards questions 2 & 3 .. nd the appeal
i1
confined to the
correctness of the answer to the first quest.ion.
2 S.C.R.
SUPREME COURT REPORTS
247
Before setting out the grounds upon which the
High Court decided the reference in favour of the
respondent it is necessary to read a few of the
provisions of the relevant law which bear upon the
point arising for consideration.
The preamble to
the Ordinance recites that it was enacted to impose
a tax on "excess profits arising out of certain businesses" and this intention is carried out bys. 4(1)
which is the charging section which enacts:
"4( J) Subject to the provision1i of this Ordinance, there shall, in respect of any business
to which this Ordinance applies, be charged,
levied and paid on the amount by which the
profits during any chargeable period exceed
the standard profits, an exce88 profit tax (in
this ordinance referred to as the 'War Profits
Tax') which sh01.!l be equal to 60 per cent. of
the aforesaid amount."
The expression •business', the profits derived from
which are thus brought to charge- is defined by
s. 2( 5) in these terms:
"2(5} 'business' includes any trade, commerce or
manufacture or any adventure in the nature
of trade, commerce or manufacturer or
any profession or vocation, but does not
include a profession carried on by an [individual or by individuals in partnership, if the
profits of the profession depend wholly or
ma.inly on his or their personal qualifications,
unless such
profession consists wholly or
mainly in the making of contracts on behalf of
other persons or the giving to other persons of
advice of a commercial nature in connection
with .the making of contracts:
Provided that where the functions of a
company or of a society incorporated by or
under any enactment consist wholly or
mainly in the holding of investments or other
property or both, the holding thereof Bhall be
1961
Tl1t War Profits
Tax Commissioner
v.
M/s. Binodiram
Balchan4
AJ>Yangar J.
1»61
rlu War Profits
Ta.t Cc1'11ni1s~1
...
Jtl/s. B1n<Xii,.am
Bal<laond
A,,..,_J,
248 SUPREME OOURT REPORTS [1962) SUPP.
deemed for the purpose of this definition to be
a business carried on by such company or
society;
Provided further that all busint sses to
which this Ordinance applies carried on by
tho same person shall be treated as ono busineBB for the purposes of this Ordinance;"
There arc two further definitions which are of some
relevance to the arguments addressecl
to WI and
might therefore be set out at this stage. Section
2(14) defines the exprel!Bion 'prescribed' as meaning
"prescribed by rules mado under the Ordinance;"
s. 50 being the provision empowering the Government to make rules and this section ran:
"50(1) Subject to
the
proTiaiona of this
Ordinance, Government may make rules for
carrying out the purposes of this Ordinance.
( 2) H.ules made under this section shall
be published in the Official Gazette and shall
thereupon have effect as if enacted in this
Ordinance."
The other relevant definition is of the oxprOBsion 'profits' which is defined in s. 2 ( 16) as :
"profits as determin~d in accordance with
the provisions of this Ordinance and its Ffrst
Schedule;"
There is a First Schedule which follows the Ordinance anrl which iH headed •Rules for the comput1tion of profits for the purposes of War Profits Tax',
and of th(·se the one pertinent to the matter in
controversy in the appeal is r. 3 of. which sub· rs. (1)
and (2) have been relied on in the course of argument.Ii.
They run :
"3(1) Income received from inveat.ments shall
be included in the profita of a busine88
liable to the War Profits Tax, unleBB it is
proved to satisfaction nf t'ie War Pnfi•.11
'
f
2 S.C.R.
SUPREME COURT RETJRTS
249
Tax Officer that the investments have no
connection whatever with the business.
(2) In the case of a business which consists
wholly or ma.inly in the dealing in or
holding of investments, income received
from investments shall Le deemed to be
profits .of that business, and in the case of
a business, a. specific part only of which
consists in dealing in investments, the
income received from investments held for
the purpose of that part of the business
shall be deemed to be profits of that part
of the business.
Explanation :-'The income from invest·
ments to be included in the profits of the
business under the provisions of this rule shall
be·computed exclusive of all income received
by way of dividends or distribution of profits
from a company oa.rrying on a buisness, to the
whole of which th<') Section of the Ordinance
imposing the War Profits Tax applies".
Pa.using here, it is necessary to mention that
in relation to the first question regarding the inclusion of the dividend income in the taxable profits
of the a.sseBSee three contentions were raised on
behalf of the respondent which are thus set out in
the judgment under appeal :
"( 1)
The asses3ees did not deal in shares
and their holdings in the Binod Mills
Limited, were purely in the nature of investments, having no connections with
their business a.s defined in Section 2(5)
read with Rule 1 of Sch. I of the Gwalior
War Profits Tax Ordinance. Tile business
of the Secrekries, Treasurers and Agents
of the Binod Mills Limited, which was
carried on by them did not require any
holding of the shares of the company and
111d1
The War ProjitJ
Tax Commissiot11r
V1
M /s. llinodfram
Bolcband
Avynngar J.
1961
Tiu lt·a, l'rof11J
Tu CommiuiontT
v,
.\Ifs. BiMdiran1
Brliclaand
250
SUl'REME COCRT REPOR'.fS [llJ6:.!) SUPP.
was not dependent on their investment
in the said -company.
(2}
The divirlend
income ac:~rued or aro~e
from the profits of the Binod l\lills Limited,
and as the Orr1inance applied to the
huisneBS carri1·d ••n by this company the
<lividends we1e excluded under th~ explanatrnn to Rule 3( l) of Schedule I.
(3)
The dividend income ~hould be considered
as inoume of the fu!J accounting period,
i.e., from Diwali of 1943 tu Diwali of 1944
and should be apportioned on that basis."
The learned J ndgcs of the High Court dealt only
with the .first. of the above contentions, and having
accepted it, .considered it unnecessary to expreBS any
opinion on the other two.
We may now proceed to state the grounds
upon which the learned Judges of the High Court
answered this contention in favour of the respondent.
It was urged before them by the respondent that
th,ough the provisior.s headed 'Rules for the computation of business' purported to be part of the
Ordinance itself as forming the Schedule to the
Ordinance, they were in reirlity rules made by
government under the rule-making power conferred
on it by s. 50 of the Ordinance. This argument was
accepted apparentl:ibeing aided by the fact that
immediately after the title "Schedule I" occur the
words "See Section 2( 14)''. Proceeding on this
basis the reasoning of the learned Judges was on
these lines. The charge under s. 4( I) was on tho
profits of a business and unless an activity which
resulted in any income derived was one in the
nature of trade, the mere fact that income was
derived therefrom would not make it assessable to
tax under the Ordinance. This they deduced from
an interpretation of the words used in the c~rging
section read in conjunction with the definition of
"profits" in s. 2(16). The ne:xt question we.a whether
,_
2 S.C.R.
SUPREME COURT REPORTS
251
the dividend which the respondent obtained from
the shares held by it in the Binod Mills Ltd., of
which it was the Secretary, Treasurer and Managing-agent were profits derived by any business activity. Unless the acquisition of the shares was an
adventure in tho nature of trade or the respondent
was a dealer in shares, such that the shares held by it
were part of its stock in trade, the income derived
therefrom
by way of dividends could not be
characlterised as profits from, business. If this was
the result on a proper construction of the Act the
question the learned Judges addressed themselves
to next was, whetherr. 3(1), which according to them
was a piece of subordinate legislation, could validly
bring to charge an item of income which was not
within the scope of the Ordinance itself, and this
had necessarily to be answered in the negative.
They
consequently held that r. 3( 1) of the 1st
Sehedule was beyond the ;iower of the rule-making
authority under s. 50 of the Ordinance and answered
the first question referred to them in favour of the
a.ssesssee.
Mr. Sen, learned Counsel for the appellant
has however placed .before us material to show
that Sch. I containing the rules for the computation
of profits were not rules made by the Government
under s. 50 of the Ordinance but was really part of
the Ordinance itself. In the first place, it has to
be noted thats. 2(16) speaks of Sch. I to the Ordinance, and admittedly bedides the one now produced
before us there was no other Schedule attached to
the Ordinance. It is impossible to hold that with
s. 2(16) in the form in which we now find it, the
rules for the computation of the business did not
form part of the Ordinance having been enacted
simultaneously as part and parcel thereof. In this
connection it might be pointed out that the Excess
Profits Tax; Act, 1940, which formed the basis or
model upon which the Ordinance was fashioned has
1961
Th, llr c..r Prflfits Tax
Comtt. isJto11er
lrf / s. Rin:od:ram
Baichand
Ay)'DTI~ or .I.
I:J61
Tiu ff1ar P,-jiis Tox
CommiJlil)fltr
v.
~I/,, BinoJtram
Balc/a,r.d
.. ,, .. ,,,, J,
252 SUPREME COURT REPORTS [1962) SUl'P.
a similar Sch1·dule headed "Rules for the computation of profits'' and the Schedule fo1nied part of
that Act.
The only ground for cvl'n a suspicion
that Sch. I was not a part of th~ Ordinance itself
is the refer<'noe to s. 2 (14) in the heading of these
rules just below tho wordti f;chedule I, but very
little assistlmoe can be sought from this reference,
because s. 2( 14) is not it~elf the source of power for
making rules which is s. 50 of the Ordinance s.nd,
in fact, rules ha.ve been made under thli power
conferred by s. f,0 of the Ordinance; vide War
Profits Tax Rules Samvat 2001, No.
65 dated
December 26, I IJ44, which carrie11 the recital in
the following terms :
"In exercise of the powers conferred by
s. 50 of tho War Profits Tax Ordinance the
GovemmNit of Gwalior are pleased to make
the following ruleH ...... "
Jt·is obvious therefori> "s. 2 (14)" in Sch. I is a mistake or a misprint for "s.2(16)" and it might be
noted that in the corresponding Schedule to the
Indian ExcoEs Profits Tax Act, l 940, immediately
after the title "Schedule I" occur the words "See
s. 2(19)" which· in that enactment corresponds to
e. 2() 6) of the Ordinance.
There are other circumatances to which Mr.
Sen has drawn our attention which also point to
tho Schedule being pa.rt of the Ordinance and not
rules made under s. 50.
The Schedule wa.s the
subject of amendments more than once and each
time this wa.s done it is signifioant that this was
done not by virtue of the exercise of tho rule-making power under s. 50 of the Ordinance but by
further
Ordinances Bhowing clearly th&t
the
Schedule w&11 part of the Ordinance iMielf.
To give
just a fow examples, the Explanation tor. 3(2) whioh
we have extraoted eadier waa not in the Schedule
as oriifilally enaoted
but waa iiit.rodutled as
2 S.C.R.
SUPREME COURT REPORTS
253
an amendent by Ordinance No. 42 dated February '28, 1946. The short title of this Ordinance
runs :
"This Ordinance might be called the
Gwalior War Profit,s Tax (Amendment) Act,
Sam vat 2002".
Further it would be noticed that in the
Explanation there is a comma after the words
"carrying on a business". That comma was not
there when the schedule was amended by the Amending Ordinance of February 28, 1946, but was
introduced bv Ordinance 5 of Sam vat 2004 and the
short title of this second Ordinance reads :
"'l'his Ordinance m·ight
he called the
GwaHor
War Profits -Tax (Amendment)
Ordinance Samva_t 2004".
We do not consider it necessary to dilate on
the point as we are clearly of the opinion that the
Schedule was part of the Ordinance and has therefore to be read not as subordinate legislation under
r. 50 but as part and parcel of the Ordinance
itself.
The whole basis therefore of the reasoning
upon which the learned Judges of the High Court
proceeded falls to the ground and the only question
is whether accepting the respondent's case that the
shares held by it in the Binod Mills Ltd. were reallv
part of its investments, these investments have
"any connection" with its business. It is common
ground that the respondent was the Secretary,
Treasurer and Managing-agent of the Binod Mills
aud what we are now concerned with are the shares
held by it in that company. In the case of every
assessee who oarries on a business activitv and is in
receipt of profits from that business, on the terms
of r. 3(1) income from every inYestment held by
him is liable to be included in the profits assessable
to tax unless such person was able to ,satisfy the
IHI
The War P1ofils
Tax CommiuioTUr
v.
M / 1. JJinodiram
Bale hand
Ayyangar J,
111111
n. w., Profits
T•x ('4'""';SJioru,
v,
Al /s. Hi1&0dirom
Bair.hand
A)')angar J,
2~4 ~UPREME COURT REPORTS [1962) SUPP.
revenue authorities that the investments had "no
r.onnection whatever"
with
his
business.
Mr.
Viswirnathl\ SMtri, learned Counsel for tho respondent sought to overcome this position by submitting that the "connection" contemplated by the rule
wa.s a. direct "conn('ction" and not a remote or fanciful one and that fn the present case there w'\8 realiy
no connrct ion bct1vccn the respond< nt's ownership
of these shares and the office of managing-agent
which it held.
His contention was that except the
fact that the recipient of the profits from the
"business" of mana.gin11: agency and of the dividend
income was the same; th ore was no other connection
between the ono and the other. In further elaboration of his point, he invited us to hold that the
"connection" would be direct only where the
investment was related to a. business activity as
cau~e an:! effect or as a sine qua non.
Thus if it was
a requirement. either of tho Articles of Association
of the company or of the Managing Agency Agreement, that the managing agent should be a shareholder, or the holder of specified number of
shares, then alone, learned Counsel contended, the
managing agoncy
bein~ dependent on the shareholding, there would be that connection which
wouH bring the dividend income with in the expanded definition of profits from business under r. 3{ I).
In all other caiies where shares were held, without
the aseessee
bein~ obliged to hold them for the
purpose of his business activity, no
di~tinction,
Counsel submitted, could ho drawn between the
investment in the shares of a company with
which he had nothing to do, and a company which
be managed under an agreement. · Learned Counsel
further stressed tha.t the ca.se of the respondent wae
stronger because tho Managing Agency Agreement
with the respondent was to last so long as the
respondent-firm oxiated and carried on buainees in
that name 1md could not be terminated by the
company "eave and except when the agent being
...
•
..
2 s.c.R.
SUPREME COURT REPORTS
255
found guilty of fraud in the Management or in the
discharge of their duties," arid having regard to this
security of tenure which the respondent enjoyed;
the holding: of these shares had no connection whatever with ·the business of managing agency. We
find overselves unable to accept this interpretation
of r. 3(1). The relevant words in the rule being
"any connection whatever" it would not be giving
proper effect tq .the meaning of the words "any"
and "whatever" to restrict it to cases of "direct
connection" in the sense suggested on behalf of
the respondent. But this apart, by the number
of shares which the respondent owned in the mills
it is admitted that it obtained a controlling inter>'st
-it held the majority of the shares in the company.
The respondent was therefore enabled by reason
of this investment to control the action of the
company which was the other party under the
Managing Agency Agreement. This control was
capable of being used to further the interests of
the Mana.ging:agent in
its
relations with the
company and whether or not this was used for
obtaining advantages, it wou.ld certainly be avail-
.able for avoiding any disadvantages arising from
misunderstandings with the company. It could
not be denied tba t the control would certainly be
useful to keep the relations between the c6mpany
and the Managing-agent smooth so as to enable the
Managing-agent to earn his commission etc. without
differences or disputes. Even. if therefore the wora
"connection" in r. 3( l) meant a "direct" connection-a construction which we do not adopt-it
appears to us that the present case satisfies even
that test. In :my event the "connection" is not
anything remote, fanciful or imaginary, but on the
other ha.nd real and capable of being turned to
good a0count.
ft certainly cannot be equated with
the holding of shares by the respondent in a
company with which he had no connection other
than as a sha.reholder.
1961
The W or Profits
Tax c,,mmissioner
v.
M/s. Binodirom
Balchand
Ayyangar J.
IHI
n •. w.,. P,,fi
T tvt CMrin iss iDnn
v.
fll /s. Bittodirarn
Br.!clkvtd
256 SUPREME OOURT REPORTS (1962) SUPP.
We are therefore of the opinion that the dividend received b.v the respondent from the Binod
MillR Ltd., wa.i properly included by the a88e88ing
authorities in the computation of the taxable
profit of there spondent under the Ordinance and
that the High
Court erred in answering the
reference in favour of the asse88ee.
We have
already pointed out toot the High Court did not
deal with or express any. opinion .on the two subsidiary contentions urged by the respondent with
reference t" the first question. Those points were
also naturally not argued before us and we do no.t
express any opinion on th"11J. It is obvious that
the reference cannot be disposed of without
d~ciding these contentions and the oase would have
to be remanded to the High Court for dealing with
these subsidiary points.
The appeal will accordingly be a.llowecl, the
jurhrment of the High Court set a.side and the first
cnntentjon in relation to q1,.,~tion No. I answered
again~t th~ asscsse1i and in favl'ur of the appellant
and thP. <>,asn remanded to the High Court for the
<'OnRideratinn oft be other contentions with referenoe
t-0 that question. The appellant will be entitled to
his costs here. The costs in the High C< urt will be
provided in its final order.
Appe.al allowed.