1965 (11) TMI 31 - SC - Income Tax

Whether, in the case of the assessee, an investment company, its dividend income is part of its profits and gains chargeable to tax under section 10 of the Indian Income-tax Act, 1922 ? Held that - No facts have been brought out in this case to show that the company was in any way carrying on business in respect of shares. Its position, on the facts placed before us, is in no way different from an individual merely buying shares with a view to holding them for the purpose of earning dividends. No authority has been cited before us that in the case of an individual to acquire and hold shares with the object of receiving dividends is to carry on business. We are unable to hold that if a company does the same, it carried on business within section 10 of the Act. Appeal dismissed.

Summary

Issues Involved:
1. Whether the assessee company is an investment holding company or an investment dealing company.
2. Whether the dividends earned by the company should be assessed under the head 'profits and gains of business' under section 10 of the Indian Income-tax Act, 1922.
3. Whether the loss brought forward from preceding years under section 24(2) of the Indian Income-tax Act should be set off against the dividends earned by the assessee-company during the year in question.

Detailed Analysis:

1. Whether the assessee company is an investment holding company or an investment dealing company:
The assessee, an investment company, was incorporated with the objects of acquiring and holding shares, stocks, debentures, bonds, and other securities. The company commenced its business in 1947 and incurred losses in the initial years. The Income-tax Officer treated the losses as unabsorbed business losses. However, the Appellate Assistant Commissioner held that the dividend income was not business income but assessable under section 12 of the Act, thereby determining the loss from other sources and ruling that it could not be carried forward. The Appellate Tribunal upheld this view, concluding that the company was an investment company and not a dealer in shares.

2. Whether the dividends earned by the company should be assessed under the head 'profits and gains of business' under section 10 of the Indian Income-tax Act, 1922:
The primary question referred to the High Court was whether the dividend income of the assessee, an investment company, should be assessed under section 10 or section 12 of the Act. The High Court held that the dividend income had to be computed under section 12 and not section 10, as the company was holding shares as investments and not as stock-in-trade. The Supreme Court affirmed this view, stating that for dividends on shares to be assessed under section 10, the assessee must carry on business in respect of shares, i.e., deal in those shares. The Court clarified that merely holding shares to earn dividends does not constitute carrying on a business.

3. Whether the loss brought forward from preceding years under section 24(2) of the Indian Income-tax Act should be set off against the dividends earned by the assessee-company during the year in question:
The assessee contended that the dividend income should be considered business income for the purpose of section 24(2), allowing the set-off of losses from preceding years. However, the Supreme Court rejected this argument, emphasizing that the dividend income must be computed under section 12, and therefore, the losses from earlier years could not be set off against the dividend income. The Court noted that the objects of the company as laid down in the memorandum of association do not conclusively determine whether the activities amount to carrying on a business.

Conclusion:
The Supreme Court upheld the High Court's decision, concluding that the dividend income of the assessee, an investment company, should be assessed under section 12 and not section 10 of the Indian Income-tax Act, 1922. Consequently, the losses from preceding years could not be set off against the dividend income. The appeal was dismissed with costs.