# NAWN ESTATES (P) LTD v. · C. I. T., WEST BENGAL

- **Citation:** [1977] 1 S.C.R. 798
- **Court:** Supreme Court of India
- **Decided:** 1976-10-14
- **Bench:** H. R. Khanna, Jaswant Singh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/nawn-estates-p-ltd-v-c-i-t-west-bengal-6974
- **Pages:** 13

## Headnote

Income
lax Act 1922-Sec. 23A(l)~Expln. 2(1) to Sec. 23A(l)-
!'.1eaning of investment Companies, whether restricted to shares stocks and
other securities or used in contradistinction with manufacturing processing &:
trading
operatio11s-lndian Companies
Act 1913-Sec.
87(f)-Companies
Act 1956-Sec. 372(11).
Interpretation of statuteS>--Expressions not being terms of art whether to
be construed in technical sense or ordinary popular sense as used by bu3i-·
ness men-Legislative history as guide to construction-Genesis jlld development of law as key to interpretation-Whether EnKlish decisions useful guides
or construction of analogous provisions, fundamenflll concepts and ge11aal
principles.
The appellant is a. Private Limited
Company
incorporated
under
the
Indian Companies Act, 1913, its shares being held by the members of the
Nawn family.
The object of the appellant Company inter alia was purchase of land and buildings and letting out of lands and buildings in lieu
of a-ppropriate consideration.
The appellant at the relevant time was investing monies in the house properties and its major income every year has been
derived from those properties.
The Income Tax Officer held that the appellant was a Company whose
business consisted mainly in holding of investments as envisaged by secti&n
23A(l) and explanation 2(i) thereto of the Income Tax Act 1922 aind that
since it had declared dividend which was less than the prescribed statutory
100 per cent of his total income as reduced by taxes referred to in clall!les
a, b and c of section
23A(l), it was liable to pay super tax on the undistributed balance of the distributable profits at the prescribed rate of 50
per cent. An appeal by the assessee before the Appellate Asstt. Commissioner
succeeded. The Tribunal, however, restored the order of the Income-tax Officer.
In a reference filed ait the instance of the assessee, the High Court answered
the reference in favour of the Revenue and against the assessee.
Jn an appeal by Special Leave, the appellant contended :
That the
appellant was not a company whose
business
consisied
wholly or mainly in holding of investments because the meaning to
be attributed to the said expression having not been defined by the
Income Tax Act, 1922, the technical meaning assigned to "Investment Companies" under section 87 (f) of the Indian Companies Act,
1913, which was in force when the Indian Income Taix Act, 1922
was enacted should be given, or, in the alternative,
the
meaning
given to it in section 372(11) of the Companies Act, 1956, shouid be
given to the said expression. So constru ng only the Companies whose
principal business is the acquisition a.nd holding of shares, debentures,
stocks and other securities would be covered by the Company whose
business consists wholly or mainly in holding an . investment and that
if it is so construed the aippellant would not be covered by section
23A(l).
The counsel for the respondent Revenue contended : That the exoression "A company whose business consists wholly or mainlv in the
holding of investments" means a Company whose income is derived
from investments in contradiction to the income received from manufacturing or processing or trading operations.
The expression "investment" in the context in which it occurs not being a term of art
NAWN ESTATES V. C.I.T. WEST BENGAL
799
with a definite and technical meaming should be understood in its
ordinary popular sense as understood in business parlance.
Dismissing the appeal.
HELD:
1. The expression investment is not defined in the Income-Tax Act but
the Act also does not lay down that the terms and expression not defined
therein shall htwe the same. meaning as given to them in the Companies
Act.
[802AJ
•
2. The legislative history of the Income Tax Act, 1922 right from its
amendment in the year 1955 and thereafter as well as the Legislative history
of the Income Tax Act, 1961, clearly shows that Legislature did not adopt
the definifton of investment Companies as given in

## Text

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798
NAWN ESTATES (P) LTD.
v.
· C. I. T., WEST BENGAL
October 14, 1976
[H. R. KHANNA AND JASWANT SINGH, JJ.]
Income
lax Act 1922-Sec. 23A(l)~Expln. 2(1) to Sec. 23A(l)-
!'.1eaning of investment Companies, whether restricted to shares stocks and
other securities or used in contradistinction with manufacturing processing &:
trading
operatio11s-lndian Companies
Act 1913-Sec.
87(f)-Companies
Act 1956-Sec. 372(11).
Interpretation of statuteS>--Expressions not being terms of art whether to
be construed in technical sense or ordinary popular sense as used by bu3i-·
ness men-Legislative history as guide to construction-Genesis jlld development of law as key to interpretation-Whether EnKlish decisions useful guides
or construction of analogous provisions, fundamenflll concepts and ge11aal
principles.
The appellant is a. Private Limited
Company
incorporated
under
the
Indian Companies Act, 1913, its shares being held by the members of the
Nawn family.
The object of the appellant Company inter alia was purchase of land and buildings and letting out of lands and buildings in lieu
of a-ppropriate consideration.
The appellant at the relevant time was investing monies in the house properties and its major income every year has been
derived from those properties.
The Income Tax Officer held that the appellant was a Company whose
business consisted mainly in holding of investments as envisaged by secti&n
23A(l) and explanation 2(i) thereto of the Income Tax Act 1922 aind that
since it had declared dividend which was less than the prescribed statutory
100 per cent of his total income as reduced by taxes referred to in clall!les
a, b and c of section
23A(l), it was liable to pay super tax on the undistributed balance of the distributable profits at the prescribed rate of 50
per cent. An appeal by the assessee before the Appellate Asstt. Commissioner
succeeded. The Tribunal, however, restored the order of the Income-tax Officer.
In a reference filed ait the instance of the assessee, the High Court answered
the reference in favour of the Revenue and against the assessee.
Jn an appeal by Special Leave, the appellant contended :
That the
appellant was not a company whose
business
consisied
wholly or mainly in holding of investments because the meaning to
be attributed to the said expression having not been defined by the
Income Tax Act, 1922, the technical meaning assigned to "Investment Companies" under section 87 (f) of the Indian Companies Act,
1913, which was in force when the Indian Income Taix Act, 1922
was enacted should be given, or, in the alternative,
the
meaning
given to it in section 372(11) of the Companies Act, 1956, shouid be
given to the said expression. So constru ng only the Companies whose
principal business is the acquisition a.nd holding of shares, debentures,
stocks and other securities would be covered by the Company whose
business consists wholly or mainly in holding an . investment and that
if it is so construed the aippellant would not be covered by section
23A(l).
The counsel for the respondent Revenue contended : That the exoression "A company whose business consists wholly or mainlv in the
holding of investments" means a Company whose income is derived
from investments in contradiction to the income received from manufacturing or processing or trading operations.
The expression "investment" in the context in which it occurs not being a term of art
NAWN ESTATES V. C.I.T. WEST BENGAL
799
with a definite and technical meaming should be understood in its
ordinary popular sense as understood in business parlance.
Dismissing the appeal.
HELD:
1. The expression investment is not defined in the Income-Tax Act but
the Act also does not lay down that the terms and expression not defined
therein shall htwe the same. meaning as given to them in the Companies
Act.
[802AJ
•
2. The legislative history of the Income Tax Act, 1922 right from its
amendment in the year 1955 and thereafter as well as the Legislative history
of the Income Tax Act, 1961, clearly shows that Legislature did not adopt
the definifton of investment Companies as given in the Indian Companies Act,
1913 or in the Companies Act, 1956.
[801H, 802A-B]
3. While enacting section 23A and explanation 2(i) thereto the Legislature intended to cover fields of activity wider than those contemplated by
the provisions of the Companies Act, 1913 and 1956.
(802-B]
4. The term 'investment' in the text in which it occurs not being a term
of art there is no warrant for giving it the restricted
meaning.
The said
expression has to be understood in the ordinary popular sense 1'S used by
businessmen and so construed it would embrace within
its
compass
the
appellant Company whose primary or principal income is admittedly derived
from house property which it leases out to tena·nts.
[802C-D]
Commissioner of Sales Tax, M.P. Indore v. Jaswant Singh Charan Singh
(19 SIC 469) followed.
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5. It is now well settled that on analogous provisions, fundamental conF.
cepts and general principles unaffected by
the
specialities
of
the
English
Income Tax Statutes, the English Authorities can be useful guides.
(802-E] ..
Commissioner of 1rμcome Tax v. Vazir Sultan & Sons (36 ITR 175)
followed .
. Commissioners of Inland Revenu.e v. Gas Lighting Improvement Co. Ltd.
(1923) 12 T.C. 503; (1923) A.C. 723 (H.L.), Inland Revenue Commis£ioners
v. Desouttex Bros Ltd. (1945) 29 T.C. 155, 160, 161; (1941}) 1 All E.R.
58, 59, 60 (C.A.), Inland Revenue Commissioners v. Broadway Car Co.
(Wimbledon) Ltd. (1946) 2 All E.R. 609, 610, 611; 29 T.C. 214, 220,
222 (C.A.).
Commissioners of ifnland Revenue v. Tootal Broadhurst Lee
Co. Ltd. (1949) 29 T.C. 352, 373, Inland Revenue Commissioners v. Rolls
Royce Ltd. [1944] 2 All E.R. 340 and Commissioner of Income-tax Gujarat v.
Distributors <Baroda) P. Ltd. (83 ITR 377) approved.
6. The genesis and development of the law relating to additional super
tax on undistributed profits of certa·in
Companies also confirms
the
con•
clusion that the expression "A company whose business consists wholly or
mainly in the dealing in or holding of investments" takes within its compMs
'Compnnies which wholly or mainly derivecl their
income
from
house
rproperty.
[804-D]
7. Even if it is assumed that the expression has a legal character, it would
not make any difference in the result of the present appeal as the dictionary
meaning of the expression "Investment Companies" is Companies whose
income consists mainly of investment income i.e., income which in the hands
of individual would not be earned income. f810Cl
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800
SUPREME COURT REPORTS
(1977] 1 S.C.R.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nm;. 1760-1963
of 1971.
(Appeals by Special Leave from the Judgment and Order dated
9-2-1971 of the Calcutta High Court in Income Tax Reference No.
90/67).
N. Mukherju and P. K. Mukherjee, for the Appellant.
B. B. Ahuja and R. N. SachtMy, for the Respondent.
The Judgment of the Court was delivered by
•
IASWANT SINGH, J.-These appeals by special leave are directed
against the judgment dated February 9, 1971 of the Calcutta High
Court whereby the following question referred to it undeie section
66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to
as 'the Act') was answered in the affirmative i.e. in favour of the
Revenue and against the appellant :-
"Whether on the facts and in the circumstances of the
case, the assessee is a company whose business consists
wholly or mainly in the dealing in or holding of investmenti: ?"
The facts material for our present purpose are : The assesseeappellant is a private limited company incorporated under the Indian
Companies Act, 1913, its shares being held by the members of Nawn
family.
For the assessment years 1955-56, 1956-57, 1957-58 and
1959-60 corresponding to the financial years ending on March 31,
1955, March 31, 1956, March 31, 1957 and March 31, 1959 respectively, the Income Tax Officer being of the view that since the rents
accruing to the appellant from lands and house properties held by it
formed a major part of its income, it was a company whose business
consisted mainly in holding of investments as envisaged
by
subsection (1) of section 23A of the Act and Explanation 2(i) thereto
and since it had declared more than 60% but less than the prescribed
statutory 100% of its total income as reduced by taxes referred to
in clause11 (a), (b) and (c) of the aforesaid sub-section as dividends,
it was liable to super tax on the undistributed balance of the distributable profits at the prescribed rate of 50%. Accordingly with the
previous approval of the Inspecting
Assistant Commissioner,
tho
Income Tax Officer levied additional super tax at 50% of the net
distributable balance available with the appellant by applying the
provisions of section 23A(l) of the Act.
Aggrieved by this order,
the appellant took the matter in appeal to the Appellate Assistant
Commissioner, who acceding to the contention of the appellant and
following an order dated April 6, 1963, of the Income-tax Appellate
Tribunal in Income-tax Appeal No. 5490 of 1961-62 for the assessment year 1958-59, held that 'the appellant was not a company whose
business consisted wholly or mainly in the dealing in or holding of
investments', and remitted the levy.
Dissatisfied with the order of the
Appellate Assistant Co=issioner, the Revenue took the matter to
the Tribunal but could not persuade it to hold that the appellant was
a company wlilose business consisted wholly or mainly in the dealing
in or holding of investments.
The Revenue then had the aforesaid
NAWN ESTATES v. C.I.T. WEST BENGAL (Jaswant Singh, J.)
80 l
question referred under section 66(1) of the Act to the High Court
at Calcutta which by its aforesaid judgment dated February 9, 1971,
answered the question in favour of the Revenue and against the appellant.
It is against this judgment that the present app~ls are directed.
A
It would be seen that the expression 'company whose business
consists wholly or mainly in the dealing in or holding of investments'
consists of two parts viz. ( 1) a company whose business consists
B
wholly or mainly in the dealing in investments and (2) a company
whose business consists wholly or mainly in holding of investments,
and what we are required in these appeals is to find out the true
meaning•of the latter part of the expression i.e. of 'a company whose
business consists wholly or mainly in holding of investments' in the
context of sub-section ( 1) of section 23A of the Act and Explanation 2(i) ltereto and to determine whether the appellant is a company c
whose businei;s falls within the ambit of the said second part of the
expression.
·
Our task: has been facilitated to some extent because of the concession rightly and faidy made on behalf of the appellant that the
objects for which it was incorporated included inter alia ( 1) purchase
of lands and buildings and (2) letting out of lands and buildings in
lieu of appropriate consideration and that during the years in question,
D
the appellant has been inter alia investing moneys in house properties
and its major income every year has been derived from those properties.
The controversy revolves only round
the meaning
of the
expression 'holding of investments' in the context of section 23A of
the Act and Explanation 2(i) thereto.
Mr. Mukherjee, counsel for the appellant, has strenuously urged
E
that the expression not having been defined in the Act must necessarily
take its colour from and to be given the same technical meaning as
borne by the expression 'investment companies' as used in section
87(f) of the Indian Companies Act, 1913 (which was in operation
when the Indian Income-tax Act, 1922 was enacted) or as used in
section 372(11) of the Companies Act, 1956 which followed it and
thus has to be confined to such companies whose principal business
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is the acquisition and holding of shares, debentures, stocks or other
securities.
According to Mr. Mukherjee, the appellant cannot in this
view of the matter be deemed to be a company falling within the
purview of the aforesaid expression.
Mr. Ahuja, Counsel appearing on behalf of the Revenue has,
on the other hand, contended that the expression 'a company whose
business consists wholly or mainly in the
ho~ding of investment£'
G
appearing in section 23A of the Act as amended by Finance Act,
1955 means a company whose income is derived from investments
in contra-distinction to the income received from manufacturing or
processing or trading operations and the word 'investments' in the
context in which it occurs not being a term of art with a defined
and technical meaning should be understood in its ordinary popular
sense as understood in business parlance.
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We have given our careful consideration to the matter and are
unable to persuade ourselves to accept the submission made
by
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802
SUPREME COURT REPORTS
(1977] 1 S.C.1'..
Mr. Mukherjee. It is true that the term 'investment' is not defined
in the Income-tax Act but it cannot be ignored that the Act does not
lay down that the terms and expressions not defined therein shall
havq the same meaning as given to them in the Companies Act in a
particular
context. It may also be noted in this connection that
although the Legislature amended section 23A of the Act in 1955
and thereafter, it did riot adopt the definition of 'investment companies'
as given in section 87(f) of the Indian Companies Act, 1913 or
section 372(11) of the Companies Act, 1956. It appears that while
enacting section 23A of the Act and Explanation 2(i) thereto, the
Legislature intended to cover fields of activity wider than those contemplated by the aforesaid provisions of the Companies Act, 1913 or 1956.
The te1m 'investment' in the context in which it occurs not being a
term of Art, there is, in our judgment, no warrant for giiiing it the
•
restricted meaning as canvassed by Mr. Mukherjee. We think, in a , "
situation like the one with which we are confronted, resort should be
1o
had not to the technical meaning of the term but to its popular meaning
\
with reference to the context in which it occurs. (See decision of this
Court in Commissioner of Sales Tax, M.P. Indore v. Jaswant Singh
Charan Singh(!).
In the instant case, the aforesaid expression has to be understood
in the ordinary popular sense as used by businessmen, and so construing it, it would, in our opinion, embrace within its sweep the appellant
company whose primary or principal income is admittedly derived
from house properties which it leases out to tenants. It will be profitable in this connection to refer to some English cases where the term
'investment' occurring in analogous provisions came up for interpretation for it is now well settled that on analogous provisions, fundamental
concepts, and general principles unaffected by the specialities of the
English Income-tax statutes, English authorities can be useful guides.
(See decision of this Court in Commissioner of Income Tax v. Vazir
Sultan & Sons(2).
In Gas Lighting Improvement Commissioners Inland Revenue v.
Co. Ltd.( 3 ) Viscount Cave L.C. while construing the word investment
in Rule 8 of Part I of the Fourth. Schedule to the Finance (No. 2)
Act, 1915, observed at page 534 as under :-
"That they (i.e. the shares and debentures held by the
respondent company in a Belgian and two Rumanian oil
producing companies) are investments in the ordinary sense
of the term probably no one would deny. They are money
put out in th~ shares and securities of undertakings other than
the undertakmg of the appellant-company itself, with the
expectation of receiving dividends or interest upon them; and
they satisfy any one of the definitions quoted by the Master
of ~~ Rolls fr<?m well-knowi;i dictionaries
and any other
defirut10n of an mvestment which I am able to conceive."
In Inland Revenue Commissioners. v. Dcsoutter Bros Ltd.(4 )
Lord Green while construing the word 'investment' occurring in the
(I) 19 S.T.C. 469. (2) 36 I.T.R. 175. 0) (1923) 12 T.C. 503 @.534=(1923] A.C.
723@ 729, 730 (H.L.) (4) (1945) 29 T.C. 155, 160-61;[1946] I All. E.R. 58,S9CP.
NAWN ESTATES v. C.I.T. WEST BENGAL (Jaswant Singh, J.)
803
expression income received from investment in section 12 ( 1) ( 4) of
the English Finance (No. 2) Act, 1939 and Schedule 7, Part I, Paragraphs 6(1) and (2) thereof held that it is not a word of art and
it has to be interpreted in the popular sense.
Again in Inland Revenue Commissioners v. Broadway Car Co.
(Vimbledon) Ltd.(1') which is a direct authority on the question in
hand), the Court of Appeal while construing the expression 'income
r~eived from investments' occurring in the Finance (No. 2) Act,
1939, held that the word 'investment' must be construed in the ordinary poimlar sense of the word as used by businessmen and not as a
term of art having a defined or technical meaning and that it was impossible to say that the Commissioners had erred in law in coming
·to the co~clusion that rents from leases or under leases can properly
be comprised within the phrase 'income from investments.'
At page
611, Cohen L. J. observed :
"The expression is, therefore, not limited to mvestments
which you would buy on the advice of a stock-broker-stock
exchange investments.
If you once go beyond that field,
it seems to me reasonably clear that rents from leases or
under-leases can properly, in suitable circumstances,
be
comprised within the phrase 'income from investments."
Again in Commissioners of Inland Revenue v. Tootal Broadurst
Lee Co. Ltd.(2) Lord Normand while dealing with the question
whether income described as royalties received by the appellant company under three separate agreements relating to patent rightS
and
admittedly part of the appellant's business profits was income from
an investment within the meaning of Paragraph 6 of Part I of the
Seventh Schedule to the Finance (No. 2) Act, 1939 observed at page
373, as follows :-
"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 ........ "
In Inland Revenue Commis.~ioners v. Rolls-Royce Ltd( 3) Macnaghten, J. observed at pages 341, 342 as follows :-
"The word 'investment' though i't primarily means the
act of investing, is in common use as meaning that which is
thereby acquired; and the prLmary meaning of the transitive
verb 'to invest' is to lay out money in the acquisition of
some species of property; consequently, letters patent, which
--(1-) [1946] Aii:'"E.'R. 609,610,611, 29 T.C. 214,220,222, (C. A.)
(2) (1949) 29 T.C. 352,373. (3) [1944] 2 All. E.R .. 340.
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SUPREME COURT REPORTS
[1977] 1 S.C.R.
aro undoubtedly a species of property, may properly be described as an investment ..... Some light on the true interpretation of the word 'investment' in the Finance (No. 2)
Act, 1939, Schedule VII, paragraph 6(1), may, I think, be
obtained from consideration of the provisions of subparagraph ( 2) . The income which is to be included in the profits under subpara. ( 1) is, it will be observed, income received
from investments in the case of a building society, of a
banking business, assurance business, and a business concerned, wholly or mainly, in dealing in or holding of investments. In all those cases the investments would be invtj5tments acqμired by the laying out of money .... Business
consisting wholly or mainly in dealing in or holding inve·stments would, as a general rule, be business where mfi!ley,
and nothin_g but money, is laid out in acquiring the investments.
Thus the position that emerges from the above mentioned decisions
is that the aforesaid expression cannot be limited to companies whrn1e
principal business is the acquisition and holding of shares, debentures,
stocks or other securities as contended on behalf of the appellant but
covers companies w'hose primary or principal source of income is
house property or capital gains as well.
The decision in Commissioner of Income-tax Gujarat v. Distributors (Baroda) P. Ltd. (')
on which reliance has been placed by Mr. Mukherjee is not helpful
to the appellant as it turned on the particular facts of that case.
The genesis and development of the law relating to
additional
super-tax on undistributed profits of certain companies also confirms
the conclusion reached by us that the expression 'a company whOie
business consists wholly or mainly in the dealing in or holding of
investments' takes within its compass companies which wholly
or
mainly derive their income from house property.
It appears that it was for the first time in 1930 that deriving
an
inspiration from the corresponding law in tho U. K. contained in tile
Finance Act of 1922 and the Acts that succeedeo it a provision for
inclusion of undistributed income of a company controlled by five or
less members, in the total income of the members of the company was
introduced in the Indian Income Tax Act, 1922, by insertion of i;ection 23A(2) by section 4 of the Income-tax (Amendment) Act, 1930
(Act 21of1930).
This section required the Income-Tax Officer to
pass an order including the undistributed income in the total income
of the shareholders, whenever he was satisfied-- (i) that the company's
profits and gains were allowed to accumulate beyond its reasonable
needs, existing or contingent, having reg~rd to the maintenance and
development of its business, and {ii) that such accumulation
or
failure to distribute was for the purpose of preventing the imposition
of tax upon any of the members in respect of their shares in
the
profits and gains so accumulated or not distributed.
Because of the
inclusion of the element of motive, which is difficult of ascertainment
as held in David Gar/aw & Sons L~d. v. C.l.R.(') section 23A(2)
(I) 83 I.T.R. 377.
NAWN ESTATES v. C.I.T. WEST BENGAL (Jaswant Singh, J.)
.805
virtually remained a dead letter as only one order was passed under
section 23A(2) between 1930 when the section was introduced a~d
31st March, 1936, when the Income-tax Inquiry Committee subnutted its report.
1
By the Amendment Act VII.of 1939, the law ~as re-cast and _the
element of motive as also of current needs and possible future requrrements of the company for expansion was dropped.
Instead a simp~e
test was adopted by means of section 23A, namely, whether a certain
minimum percentage of the distributable income, 60 per cent generally
and 10(! per cent in certain cases, referred to a~ the statutory percentage, had or had not been distributed as dividends.
In case of nondistribution, the section invested the Income Tax Officer with power
A
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to make 361 order levying additional super tax on the entire undistribu- ·
ted balance of the net income of the company and not merely on so
C
much of it as was necessary to bring up the distribution to the statutory percentage bu tto regard the whole of it to have been distributed
Officer was empowered to treat not only that part of the net undistributed income of the company which would be equivalent to the statutory percentage but to regard the whole of it to have been distributed
amongst the members in accordance with their shares in the company
and included in their total income.
The Income Tax Officer was,
however, permitted to refrain from making such order, if he thought
it fit to do so, taking into consideration the past losses of the company
and its meagre income for the current year.
Although the Amendment Act, 1939 simplified the procedure, there still remained certain
defects to be remedied.
It left the definition of 'a company in which
the public are substantially interested' untouched. - Consequently, it
remained possible for a company, though substantially controlled by
~ group of persons united together in interest, to escape the operat10n of section 23A by so managing its affairs that on the last date
of the accounting year its shares carrying 25 % of the voting power
were allotted to the members of the public which included relations.
The cumbrous procedure of ascertaining the quantum of the additional
~uper-tax payable by relating it to the rate applicable to the totltl
mco~e of the shareholder after including the sum apportioned in hii;
total mcome, was also allowed to continue.
These and some other
defects were noticed by the Mathai Commission iti; Report in paras
33 to 36 in the following words :-
"33. Application of 100 per cent clause to investment
companies.--Section 23A of the Indian Income-Tax
Act does not mak© any distinction between invest-
~ent compa~es and trading or manufacturing compames; the reqmrement of 60 percent distribution applies
equally to all.
The formation of 'private' investment companies,or what may be termed as 'personal
holdi1:1g .c.ompanies', enables rich persons to escape
tax liability, by transferring their assets (including
house property, stocks and shares) to such a com____ __;p::__a_n__::y_in_exchange for the shares of the company,
(1) 11 T.C. 96,120
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806
SUPREME COURT REPORTS
(1977] 1 S.C.R.
inasmuch as personal super-tax on 40 per cent of
the distributable income of the company is
saved.
Such companies admittedly do not require funds tor
internal financing or capital formation as the industrial or trading companies do.
It has, therefore,
been suggested that the entire (100 per cent) amount
of the distributable "profits of such companies ought
to be required to be distributed.
34. The foreign practice on this point also shows that
the Indian law is unduly lenient towards such investment companies.
In the U. K., investment companies (companies the income whereof
cqj1sists
mainly of 'investment income') are treated on special
lines in respect of their investment income (i.e., income which, if the company were an individual, would
not be earned income) ; such income is automatically
deemed. to be the income of the members of the
company according to their interests, while the estate
or trading income of such a company is treated in
the same manner as the income of non-investment
companies.
(Section 262 of the U. K. Income Tax
Act, 1952).
35. Very stringent regulations have been laid down in
the income-tax law of the U.S.A. in respect of the
distribution of earnings of 'personal holding companies." A special surtax is payable by them upon
their undistributed profits, subject to certain adjustments, in addition to the regular corporate norma;
tax and surtax.
This surtax is at the rate of 75 pet
cent of the undistributed profits upto $ 2,000 and
85 per cent of the amount of undistributed profits in
excess of S 2,000. A corporation is
a personal
holding company if (i) at least 80 per cent (or 70
per cent in certain cases where a corporation was a
personal holding company in a prior year) of its
gross income for the taxable year is 'personal holding company income' and (ii) at any time during
the last half of the taxable year more than 50 per
cent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.
It has been specifically provided in section 503 of the Internal Revenue Code that an individual is considered as owning the stock owned not
only by or for himself but also the stock owned,
directly or indirectly, by or for his fam~ly (brothers,
sisters, spouse, ancestors and lineal descendants) or by
or for his partner. 'Personal holding company income'
is practically synonymous with income from investments or income from dealings in investment.
It
NAWN ESTATES v. C.I.T. WEST BENGAL (Jaswant Singh, !.)
807
includes dividends and annuities, interests, royalities,
gains from stock, security and commodity transactions, rents and certain income from estates and
trusts, subject to certain qualifications.
_ "36. It will thus be seen that the suggestion
requiring
investment companies in which the public are not
substantially interested to distribute 100 per cent of
their distributable profits is reasonable, and we accordingly recommend its incorporation in section 23A."
Acoordingly following the recommendations of the Mathai Committee the provi_sions of section 23A were tightened and recast
by
section 15 of Finance Act 15 of 1955 and certain incomes which
were note being taxed
were brought into the net.
The definition
of 'a company in which public was substantially
interested'
was
widened so as to include a company owned by the Government or a
company in which the Government held 40% or more of the share
capital.
In the case of non-Government companies, the definition
made it essential that--
(i) at least 50 per cent of the voting power was in the hands of
the public (in the case of an industrial company i.e. a company engaged in the manufacturing or processing of goods or in mining or in
the generation or distribution of electricity or any other form of power
at least 40 per cent) ,
(ii) the shares of the company were at some time- during the
previous year dealt with in any stock exchange in India, or
were
freely transferable by the holder to other members of the public,
(iii) the affairs of the company, or the shares carrying more than.
SO per cent of the total voting power (in the case of an industrial
company more than 60 per cent) were controlled or held by at least
A
B
c
D
E
six persons (an individual with his relatives, and a nominator and
F
his nominee being treated as one single person), and
(iv) such dispersal of control and voting power was
present
throughout the previons year.
In adition, instead of treating the undistributed income as having
been disti:ibuted as dividends and making the shareholders liable for
the additional tax in the first instance, the Amendment Act made the
company itself liaele to pay the additional super--tax strai!!htway, at a
flat rate of four annas on each rupee of the undistributed income
(after permitted deductions) .
Power was also given- to the company to apply to the Commissioner for fixing the statutory percentage of distribution at a reduced
level on the ground of current and future needs of the companv and a
right of appeal was provined 'to the Board of Referees from the order
of the Commissioner.
The 1955 Amendment also
provided
for
G
H
A
B
c
D
E
F
G
H
808
SUPREME COURT REPORTS
[1977] 1 S.C.R.
set-off of the amounts distributed in excess of the statutory percentage
in earlier years against the short-fall of distribution in the accounting
year.
In 1957, the law was again amended by section 7 of Finance (No.
2) Act, 1957 (26 of 1957) with effect from first April, 1957.
The
provisions authorising ad hoc fixation of the statutory percentage for
each company and the right of appeal to the Board of Referees were
eleminated.
The statutory percentage was fixed at 100 per cent for
investment companies, 45 per cent for industrial companies and 60 per
cent for all other companies.
In the case of non-industrial companies with large accumulated profits, the statutory percentage ~as raised
from 60 per cent to 90 per cent.
The rate of penal tax was raised
from four annas in the rupee i.e. 25 per cent, on the u11distributed
balance to 50 per cent in respect of an investment company and 37
per cent in respect of other companies.
In 1958 a new provision was introduced by section 9 of Finance
Act, 1958 (Act No. 11 of 1958) with effect from April 1, 1958, empowering the Income Tax Officer to refrain from passing an order
under old section 23A, if the payment of a dividend or a larger dividend
than that declared would not have resulted in a benefit to the Revenue.
In 1959 the statutory percentage was raised to 50 per cent for
industrial companies and to 65 per cent for non-industrial companies
by means of section 11 of Finance Act, 1959 (No. 12 of 1959) with
effect from April 1, 1960.
The statutory percentage was reduced
from 100 per cent to 90 per cent in respect of investment companies
by means of section 11 (ii) of Finance Act, 1960 (No. 13 of 1960)
with effect from April 1, 1960.
In 1961, a radical change in the law relating to income tax was
introduced by the Finance Act of that year. It exempted from additional super-tax (i) a company in which the public were substantially
interested, (ii) a subsidiary company of any company in which the
public were substantially interested if the whole of the share capital
of the subsidiary company had been held by the parent company or
by its nominees throughout the previous year and (iii) a company
whose share capital to the extent of at least 75 per cent was throughout the previous year beneficially held by a charitable institution or
fund established in India and whose income from dividends
was
exempt from tax under section 11 of the Act.
Excepting these three
classes of companies, all other companies were brought within the
scheme of additional
super taxation.
The expression 'profits and
gains distributed by any company' appearing in section 104 was not
confined to companies deriving income from business.
The expression 'distributable income' was defined in section 109(i) as meaning
the 'total income' of a company as reduced by certain items.
The
'total income' of any assessee under the Act comprised not merely
business or profession income, but income under the various heads
of iricome enumerated in section 14.
Consequently, the scheme for
levy of additional super-tax was also made applicable to a company
•
NAWN ESTATES v. C.I.T. WEST BENGAL (Jaswant Singh, ].)
809
whose income arose wholly or in part from property (s. 22),
or
securities (s. 18), or capital gains (s. 45), or other sources (s. 56).
An 'investment company' was defined in section 109(i) of the Act
as meaning a company whose business consisted wholly or mainly
in the dealing in or holding of investments.
The statutory percentage in the case of an investment company (whether Indian company
or not) was fixed at 90 per cent by section 109 (iii) (1) of the Act.
It is significant that even in this Act, the restricted definition of the
expression 'investment company' as appearing in section 372(II) of
the Cempanies Act, 1956 was not adopted by the Legislature.
A
B
By °Finance Act, 1966, which came into force with effect from
April 1, 1966, the meaning of the term 'investment company' was clarified by ~mending clause (ii) of section 109 and providing therein
c
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.
An
Explanation was also added by this Act to the aforesaid clause (ii)
reading as under :-
"Explanation : In this clause the expression 'unearned
D
income' has the meaning assigned to it in the Finance Act of
the relevant year."
In section 2(7) (e) of the Finance Act, 1966, 'unearned income'
was defined as meaning income which is not earned income.
In section 2(7) (c) of the Finance Act, 1966, 'earned income'
was defined thus :
"earned income" means any income of an assessee. who
is an individual,
xx
xx
xx
xx
(i) which is chargeable under the head 'Salaries', or
(ii) which is chargeable under the head 'profits and gains
of business or profession',
where the
business or
profession is carried on by the assessee or, in the
case of a firm, where the assessee is a partrer actively
e;ngaged "in the conduct of the business or profesF
s10n, ~r
G
'(iii) which "is chargeable under the head 'income from
other sources' if it is immediately derived from personal exertion or represents a pension or superannuation of other allowance given to the assessee in resxx
pect of the past services of any deceased person, or
which is chanreable under that
head under clause
(ii) of subsection (2) of section 56 of the Income
Tax Act, and
xx
xx
xx"
H
810
SUPREME COURT REPORTS
[1977) 1 S.C.R.
A
Clause (ii)of section 109 was again amended by Finance Act,
1968 (Act 19 of 1968) with effect from April 1, 1969. As a result
of this amendment, the clause read as under :-
"Investment company" means a company whose gross
total income consists mainly of income which is chargeable
under the heads 'interest, or securities, income from house
B
property, capital gains and income from other sources."
c
D
In view of the foregoing discussion, we are clearly of opinion that
the High Court was right in holding that the appellant is a company
whose business consisted wholly or mainly in holding of in~stments.
Assuming without holding that the aforesaid expression as Uied
in section 23A of the Act has a legal character, it would n<¥ make any
difference in -the result as the expression 'investment companies' has
been defined in 'Dictionary of English Law' by Earl Jowitt (Volume
II) (1959 Edition) as "companies whose income consist&
mainly
of investment income i.e. income which in the hands of an individual
would not be earned income."
In the result, the appeals fail and are hereby dismissed but in the
circumstances of the case without any order as to costs.
P.H.P.
Appeal dismissed.
•