The judgment of the court was delivered by
AYYANGAR J.---This appeal comes before us by virtue of a
certificate of fitness granted by the High Court of Madhya Pradesh under section
47(2) of the Gwalior War Profits Ordinance, Samvat 2001 (hereafter 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 rule 3(1) of the Schedule of the Ordinance. The
respondent---M/s. Binodiram Balchand is the name under which a Hindu undivided
family which was resident in the State of Gwalior carried on various businesses
in that State. Profits derived from business carried on in the State were
charged to war profits tax under the Ordinance. Among the businesses carried on
by the respondent was its employment as the secretary, treasurer and
managing-agent of a textile mill which was a limited company bearing the name of
Binod Mills Company Limited, Ujjain. The appeal is concerned with the
computation of the profits of the respondent to war profits tax under the
Ordinance, which, it might be stated at the outset, was on lines very similar to
the Indian Excess Profits Tax Act, 1940.
The chargeable accounting period 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
Officer by his assessment order dated July 9, 1951, determined the taxable
income of the assessee for 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 was
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 investment
pure and simple and was not " profits " from business, and so could
not be included in its taxable profits on a proper construction of the relevant
provisions of the Ordinance. From the assessment order the respondent filed an
appeal to the appellate authority which however was unsuccessful. A revision to
the Commissioner of War Profits Tax met with the same fate and thereafter the
respondent prayed for a reference to the High Court under section 46(1) of the
Ordinance which ran thus :
"46. (1) If, in the course of any assessment under
this Ordinance or any proceeding in connection therewith, a question of law
arises, the Commissioner, 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 High Court three questions :
" (1) Whether the dividend income of Rs. 11,09,332
received from the Binod Mills was chargeable under the War Profits Tax Ordinance
?
(2) Whether certain bad debts written off by the assessees
could be allowed as deductions in computing profits for war tax purpose ?
(3) Whether the expenses of assessees' branch at Gwalior
which was defunct, could be allowed as admissible expenses ? "
The High Court answered questions Nos. 2 and 3 in favour
of the department, but the first question was answered in the negative and in
favour of the assessee. There is now no dispute as regards questions 2 and 3 and
the appeal is confined to the correctness of the answer to the first question.
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 by section 4(1) which is the charging section
which enacts :
"4. (1) Subject to the provisions 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 excess profits tax (in this
Ordinance referred to as the 'war profits tax') which shall 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 section 2(5) in these terms
:
" 2. (5) 'business' includes any trade, commerce or
manufacture or any adventure in the nature of trade, commerce or manufacture 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 mainly 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 consists wholly or mainly in the
holding of investments or other property or both, the holding thereof shall be
deemed for the purpose of this definition to be a business carried on by such
company or society :
Provided further that all businesses to which this
Ordinance applies carried on by the same person shall be treated as one business
for the purposes of this Ordinance. "
There are two further definitions which are of some
relevance to the arguments addressed to us and might therefore be set out at
this stage. Section 2(14) defines the expression " prescribed " as
meaning " prescribed by rules made under the Ordinance ; " section 50
being the provision empowering the Government to make rules and this section ran
:
"50. (1) Subject to the provisions of this Ordinance,
Government may make rules for carrying out the purposes of this ordinance.
(2) Rules 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 expression "
profits " which is defined in section 2(16) as :
"profits as determined in accordance with the
provisions of this Ordinance and its first Schedule."
There is a first schedule which follows the Ordinance and
which is headed. 'Rules for the computation of profits for the purposes of war
profits tax', and of these the one pertinent to the matter in controversy in the
appeal is rule 3 of which sub-rules (1) and (2) have been relied on in the
course of arguments.
They run :
" 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 holding 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.
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 profits tax applies'.
Pausing 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 assessee three contentions were raised on behalf of the
respondent which are thus set out in the judgment under appeal :
" (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 I 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 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 learned judges of the High Court dealt only with the
first of the above contentions, and, having accepted it, considered it
unnecessary to express 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 though the
provisions 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 reality rules made by Government under the rule making power
conferred on it by section 50 of the Ordinance. This argument was accepted
apparently being 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 section 4(1) was on the 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
charging section read in conjunction with the definition of " profits
" in section 2(5). The next question was whether 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 the
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 characterised 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, whether rule 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 rule
3(1) of the First Schedule was beyond the power of the rule-making authority
under section 50 of the Ordinance and answered the first question referred to
them in favour of the assessee.
Mr. Sen, learned counsel for the appellant has, however,
placed before us material to show that Schedule I containing the rules for the
computation of profits were not rules made by the Government under section 50 of
the Ordinance but was really part of the Ordinance itself. In the first place,
it has to be noted that section 2(16) speaks of Schedule I to the Ordinance, and
admittedly besides the one now produced before us there was no other Schedule
attached to the Ordinance. It is impossible to hold that with section 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 a similar Schedule headed " Rules for the computation of
profits " and the Schedule formed part of that Act. The only ground for
even a suspicion that Schedule I was not a part of the Ordinance itself is the
reference to section 2(14) in the heading of these Rules just below the words
Schedule I, but very little assistance can be sought from this reference,
because section 2(14) is not itself the source of power for making rules which
is section 50 of the Ordinance and, in fact, rules have been made under the
power conferred by section 50 of the Ordinance : vide War Profits Tax Rules,
Samvat 2001, No. 65 dated December 26, 1944, which carries the recital in the
following terms :
" In exercise of the powers conferred by section 50
of the War Profits Tax Ordinance the Government of Gwalior are pleased to make
the following rules... "
It is obvious therefore that " section 2(14) "
in Schedule I is a mistake or a misprint for " section 2(16) " and it
might be noted that in the corresponding Schedule to the Indian Excess Profits
Tax Act, 1940, immediately after the title " Schedule I " occur the
words " See section 2(19) " which in that enactment corresponds to
section 2(16) of the Ordinance.
There are other Circumstances to which MT. Sen has drawn
our attention which also point to the Schedule being part of the Ordinance and
not rules made under it under section 50. The Schedule was the subject of
amendments more than once and each time this was done it is significant that
this was done not by virtue of the exercise of the rulemaking power under
section 50 of the Ordinance but by further ordinances showing clearly that the
Schedule was part of the Ordinance itself. To give just a few examples, the
Explanation to rule 3(2) which we have extracted earlier was not in the Schedule
as originally enacted but was introduced as an amendment by Ordinance No. 42
dated February 28, 1946. The short title of this Ordinance runs :
" This Ordinance might be called the Gwalior War
Profits Tax (Amendment) Act, Samvat 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 by Ordinance 5 of Samvat 2004 and the short title
of this second Ordinance reads :
" This Ordinance might be called the Gwalior War
Profits Tax (Amendment) Ordinance Samvat 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 rule 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 really 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 and what we are now concerned with are the shares held by it in that
company. In the case of every assessee who carTies on a business activity and is
in receipt of profits from that business, on the terms of rule 3(1) income from
every investment held by him is liable to be included in the profits assessable
to tax unless such person was able to satisfy the revenue authorities that the
investments had " no connection whatever " with his business. Mr.
Viswanatha Sastri, learned counsel for the respondent, sought to overcome this
position by submitting that the " connection " contemplated by the
rule was a direct " connection " and not a remote or fanciful one and
that in the present case there was really no connection between the respondent'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 managing agency and of the dividend income was the
same, there was no other connection between the one 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 cause and effect or as a sine qua non. Thus if it was a requirement
either of the articles of association of the company or of the managing agency
agreement, that the managing agent should be a shareholder, or the holder of a
specified number of shares, then alone, learned counsel contended, the managing
agency being dependent on the shareholding, there would be that connection which
would bring the dividend income within the expanded definition of profits from
business under rule 3(1). In all other cases where shares were held, without the
assessee being obliged to hold them for the purpose of his business activity, no
distinction, counsel submitted, could be drawn between the investment in the
shares of a company with which he had nothing to do, and a company which he
managed under an agreement. Learned counsel further stressed that the case of
the respondent was stronger because the managing agency agreement with the
respondent was to last so long as the respondent firm existed and carried on
business in that name and could not be terminated by the company " save and
except when the agent being found guilty of fraud in the management or in the
discharge of their duties, " and 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 ourselves unable to
accept this interpretation of rule 3(1). The relevant words in the rule being
" any connection whatever ", it would not be giving proper effect to
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
interest---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 managing agent
in its relations with the company and whether or not this was used for obtaining
advantages, it would certainly be available for avoiding any disadvantages
arising from misunderstandings with the company. It could not be denied that the
control would certainly be useful to keep the relations between the company 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 word
" connection " in rule 3(1) meant a " direct " connections
construction which we do not adopt---it appears to us that the present case
satisfies even that test. In any event the " connection " is not
anything remote, fanciful or imaginary, but on the other hand real and capable
of being turned to good account. It 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 shareholder.
We are therefore of the opinion that the dividend received
by the respondent from the Binod Mills Ltd. was properly included by the
assessing authorities in the computation of the taxable profit of the respondent
under the Ordinance and that the High Court erred in answering the reference in
favour of the assessee. We have already pointed out that the High Court did not
deal with or express any opinion on the two subsidiary contentions urged by the
respondent with reference to the first question. Those points were also
naturally not argued before us and we do not express any opinion on them. It is
obvious that the reference cannot be disposed of without deciding these
contentions and the case would have to be remanded to the High Court for dealing
with these subsidiary points.
The appeal will accordingly be allowed, the judgment of
the High Court set aside and the first contention in relation to question No. 1
answered against the assessee and in favour of the appellant and the case
remanded to the High Court for the consideration of the other contentions with
reference to that question. The appellant will be entitled to his costs here.
The costs in the High Court will be provided in its final order.
Appeal allowed and case remanded
