The judgment of the court was delivered by
SIKRI J.----This appeal by special leave is directed
against the judgment of the High Court of Madhya Pradesh in a reference made to
it under section 46 of the Gwalior War Profits Tax Ordinance, Samvat
2001---hereinafter called the Ordinance. Three questions were referred to the
High Court by the War Profits Tax Commissioner, but we are only concerned with
question No. 1, which reads as follows:
"Whether the dividend income of Rs. 11,09,332
received from the Binod Mills was chargeable under the War Profits Tax Ordinance
?"
When the reference was first heard by the High Court,
three contentions were raised by Messrs. Binodram Balchand of Ujjain,
respondents before us, hereinafter referred to as the assessees. They were:
" (1) The assessees 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 as defined in section 2(5) read with
rule 1 of Schedule 1 of the Gwalior War Profits Tax Ordinance. The business of
the secretaries, 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
was not dependent on their investment in the said company.
(2) The dividend income accrued or arose from the profits
of the Binod Mills Limited, and, as the Ordinance applied to the business
carried on by this company, the dividends were excluded under the Explanation to
rule 3(1) of Schedule I.
(3) The dividend income should be considered as income of
the full accounting period, i.e., from Diwali of 1943 to Diwali of 1944 and
should be apportioned on that basis."
The High Court by its judgment dated April 19, 1957,
accepted the first contention of the assessees and accordingly answered the
question in their favour. It did not deal with contentions Nos. 2 and 3. The
Commissioner appealed to this court and this court by its judgment dated
December 20, 1961, set aside the judgment of the High Court and answered the
first contention in relation to question No. 1 against the assessees and
remanded the case to the High Court for the consideration of the other two
contentions with reference to that question. The High Court on remand accepted
the second contention of the assessees and answered question No. 1, set out
above, in favour of the assessees. The Commissioner having obtained special
leave, the appeal is now before us for disposal.
A few facts may be given in order to appreciate the point
that has been argued before us. The assessees were, at the relevant time, the
managing agents of the Binod Mills Ltd., Ujjain, which was a private limited
company carrying on the business of manufacturing and selling textile goods in
1944. The Ruler of the Gwalior State promulgated the Gwalior War Profits Tax
Ordinance, Samvat 2001, for the purpose of imposing tax on excess profits
arising out of certain businesses. The Ordinance came into force on July 1,
1944, and applied originally to the accounting period falling within the period
commencing on July 1, 1944, and ending on June 30, 1945. By virtue of a
notification the period was extended to June 30, 1946.
The assessees carried on the managing agency business
during the aforesaid period in Gwalior State and being liable to be assessed to
war profits tax submitted a return for the period commencing from July 1, 1944,
to October 16, 1944. It appears that Rs. 11,09,332 was received by the assessees
on July 5, 1944, on account of dividend on shares of the Binod Mills for the
year 1943. The assessees, inter alia, contended before the War Profits Tax
Officer that this sum was not liable to be charged. The War Profits Tax Officer,
however, by order dated July 9, 1951, included this sum of Rs. 11,09,332 in the
taxable income and his view was upheld in appeal by the Appellate Assistant
Commissioner and the Commissioner. As stated above, the Commissioner, at the
instance of the assessees, referred three questions, including the one with
which we are concerned, to the High Court.
It appears that before the High Court the learned counsel
for the Commissioner did not seriously dispute the contention of the assessees
that the dividend income which the assessees had received was exempted by the
Explanation to rule 3 of Schedule I of the Ordinance. The rule as it existed
originally was as follows:
" 3. (1) Income received from investments shall be
included in the profits of a business liable to the war profits tax, unless it
is proved to the satisfaction of the War Profits Tax Officer that the
investments have no connection whatever with the business.
(2) In the case of a business which consists wholly or
mainly in the dealing in or handling of investments, income received from
investments shall be 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 purposes of that part of the
business shall be deemed to be profits of that part of the business."
By section 2 of the Gwalior War Profits Tax (Amendment)
Ordinance, Samvat 2002---hereinafter referred to as Ordinance 2002---rule 3 of
the First Schedule to the Ordinance was amended as follows:
" In rule 3(2) of the First Schedule to the
Ordinance, the following shall be added, namely:----
' Explanation.---The income from investments 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 carrying on a business to the whole of which the
section of the Ordinance imposing the war profis tax applies'. "
This Ordinance was promulgated on February 28, 1946.
Another Ordinance called the Gwalior War Profits Tax (Amendment) Ordinance,
Samvat 2004---hereinafter referred to as Ordinance 2004---was promulgated on
September 6, 1947. This Ordinance amended the Explanation to sub-rule (2) of
rule 3 of Schedule I as follows:
" In the Explanation of sub-rule (2) of rule 3 of
Schedule I of the Gwalior War Profits Tax Ordinance, Samvat 2001, a comma is
added after the words 'from a company carrying on a business' and before the
words 'to the whole of which' and shall be always deemed to be there from the
date from which the said Ordinance came into force. "
The High Court felt no difficulty in holding that the
Explanation applied, and that on its plain terms the dividend income with the
assessees received from the profits of Binod Mills Ltd. was not liable to be
included in the taxable income. The High Court observed :
" The language of the Explanation is very plain, and
it means that if income is received by way of dividends or profits from a
company carrying on a business, to the whole of which the section of the
Ordinance imposing the war profits tax applies, then the income has to be
excluded in the assessment to war profits tax of the assessee receiving that
income. The object of the Explanation is clearly to avoid double taxation. Here
it is not disputed that the dividend income with the assessee received was from
the profits of the Binod Mills Limited and the mills were subject to the burden
of the war profits tax under the Ordinance. That being so, the explanation in
terms applies to the case, and the assessee is entitled to claim that the
dividend income of Rs. 11,09,332 received from Binod Mills could not be included
in the computation of its profits for the purposes of war profits tax and was,
consequently, not chargeable under the War Profits Tax Ordinance. Learned
Advocate-General appearing for the State did not dispute this position."
Mr. Shroff, the learned counsel for the Commissioner,
contends, first, that the Explanation was not in existence at the relevant time,
and, therefore, cannot be taken into consideration; secondly, that the
Explanation is an Explanation to rule 3(2) and not to rule 3(1) and, therefore,
cannot be used to explain rule 3(1). Mr. Shroff complains that the High Court
was wrong in thinking that the Explanation formed part of Ordinance 2001, as it
was originally promulgated. The High Court seems to have been under this
impression because, in the order refusing leave to appeal to this court, the
High Court observed:
" There was no omission at all on our part to
consider the question whether the Explanation was prospective or not. Indeed,
this question was never raised by the learned Advocate-General, appearing for
the department, and it was rightly not raised as the Explanation was not added
subsequent to the promulgation of the Ordinance and the very basis of the
assessment of the income of the assessee was that rule 3 of Schedule I of the
Ordinance together with the Explanation applied to the income received by the
assessee during the period from 1st July, 1944, to 16th October, 1944. "
It seems that Ordinance 2002 and Ordinance 2004 were not
placed before the High Court and for this reason it assumed that the Explanation
was not added subsequent to the promulgation of the Ordinance.
But even if it was added subsequently, in our opinion, the
Explanation applies to the computation of the profits of the chargeable
accounting period July 1, 1944, to October 16, 1944. If we read Ordinance 2002
and Ordinance 2004 together, the legislative intention to make the Explanation
retrospective becomes clear. Apart from Ordinance 2004, it would have been very
arguable that the Explanation inserted by Ordinance 2002 was retrospective
because it dealt with the computation of profits and would apply to all
computation of profits made by the taxing authorities after February 28, 1946.
But we need not go into this question because Ordinance 2004 expressly assumes
that the Explanation was in existence from the date when the Ordinance came into
force and no other meaning can be given to section 2 of Ordinance 2004 because,
by deeming that the comma shall be deemed to be there from the date from which
the Ordinance came into force, it expressly assumes that the Explanation was
also in force from that date. Accordingly we are not inclined to accept the
first contention of Mr. Shroff and we must hold that the Explanation applies to
the computation of profits of the chargeable accounting period July 1, 1944, to
October 16, 1944.
Regarding the second contention, Mr. Shroff says that
Ordinance 2002 expressly provides that the Explanation shall be added in rule
3(2) of the First Schedule to the Ordinance. He further says that this
Explanation is referred in Ordinance 2004 as " Explanation of sub-rule (2)
of rule 3 of Schedule I ". There is no doubt that Ordinance 2002 did
purport to add this Explanation to rule 3(2) but it seems to us that if we look
at the language of the Explanation it was meant to be an Explanation not only to
rule 3(2) but to rule 3(1) also. First, the words " the income from
investments to be included in the profits of the business under the provisions
of this rule " are comprehensive and include income from investments both
under rule 3(1) and rule 3(2). Secondly, there is no reason why any distinction
should have been made between investments mentioned in rule 3(1) and investments
mentioned in rule 3(2). Rule 3(1) is general and deals with all investments from
profits of all businesses and would include investments mentioned in rule 3(2).
Rule 3(2) deals with investments of a certain business, i.e., business which
consists wholly or mainly in the dealing in or holding of investments. We have
not been able to appreciate why, if Mr. Shroff is right, it was necessary to
distinguish between income from investments mentioned in rule 3(1) and income
from investments mentioned in rule 3(2). At any rate, the language of the
Explanation is quite clear and it seems to us that by the words " in rule
3(2) of the First Schedule to the Ordinance, the following shall be added "
what was really meant was to add the Explanation below rule 3(2).
In the result we agree with the High Court that the answer
to the question referred should be in the negative. The appeal accordingly fails
and is dismissed with costs.
Appeal dismissed
