the War Profits Tax Commissioner v. M/s. Binodieram Balchand

Judgment

THE WAR PROFITS TAX COMMISSIONER ~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 income- I'ambilily as busine.s8 profits-War Profits Tax Ordinance- Schedule, 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_ natuftof 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, '11lt 'War Profits T., Commis•lcatr JI (s. s; .... ;,.,. BlkMsid 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 oertifioattof fitngranted by the High Court of lhdhy& Pr&de•h under •.47(2) of the 2 s.c.R. summ: COURT REPORTS 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 M/8. Binod,ram Balchand "-"""'"' J. Tiit h· .. , Pruf1ls ·r t1X Cl)mmiJJOlltr M /s Bi,.,,Jiram Bi.lclumd "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. 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 chargeis 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 Tl1t War Profits Tax Commissioner 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 oxprOB- sion '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 comput1- tion 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 SUPREME COURT RETJRTS 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. Tiu lt·a, l'rof11J Tu CommiuiontT .\Ifs. BiMdiran1 Brliclaand SUl'REME COCRT REPOR'.fS [llJ6:.!) SUPP. was not dependent on their investment in the said -company.

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 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 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 ~I/,, BinoJtram Balc/a,r.d .. ,, .. ,,,, J, 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 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 M / 1. JJinodiram Bale hand Ayyangar J, 111111 n. w., Profits T•x ('4'""';SJioru, 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. 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. The W or Profits Tax c,,mmissioner M/s. Binodirom Balchand Ayyangar J. IHI n •. w.,. P,,fi T tvt CMrin iss iDnn 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.