1959 (4) TMI 2 - SC - Income Tax

Whether in this case the rental income from immovable property is part of the business income taxable under section 2(5) read with rule 4(4) of Schedule I attached to the Excess Profits Tax Act, 1940? Held that - In view of the considerations it must be held that the realisation of rental income by the assessee bank, was in the course of its business in prosecution of one of the objects in its memorandum ; it was, therefore, liable to be included in its business profits, and thus was assessable to excess profits tax. The appeal must, therefore, be allowed.

Issues Involved:
1. Liability to excess profits tax on rental income.
2. Definition and scope of "business" under the Excess Profits Tax Act.
3. Application of rule 4(4) of Schedule I to the Act.
4. Interpretation of the proviso to section 2(5) of the Act.
5. Relevance of the Income-tax Act definitions and provisions.

Detailed Analysis:

1. Liability to Excess Profits Tax on Rental Income:
The primary issue was whether the assessee, a banking company in liquidation, was liable to excess profits tax on Rs. 86,000 received as rental income from its headquarters building. The Department and the Income-tax Appellate Tribunal affirmed this liability, but the Calcutta High Court reversed it, leading to the appeal.

2. Definition and Scope of "Business" under the Excess Profits Tax Act:
The Act defines "business" broadly to include trade, commerce, manufacture, or any adventure in the nature of trade, commerce, or manufacture, and any profession or vocation. The proviso to section 2(5) extends this definition to include the holding of investments or other property as a business for incorporated companies. The Supreme Court had to determine whether the rental income from the building could be considered part of the banking company's business activities.

3. Application of Rule 4(4) of Schedule I to the Act:
Rule 4(4) of Schedule I states that in the case of a business that includes letting out property on hire, the income from the property should be included in the business profits. The Tribunal and the Department relied on this rule to justify the inclusion of rental income in the excess profits tax assessment.

4. Interpretation of the Proviso to Section 2(5) of the Act:
The High Court held that the proviso to section 2(5) was not satisfied because the bank's functions did not consist wholly or mainly in the holding of investments or other property. Therefore, the rental income could not be included in the business profits. The Supreme Court, however, found that the High Court erred by excluding the main clause of the definition of "business" and focusing solely on the proviso.

5. Relevance of the Income-tax Act Definitions and Provisions:
The Supreme Court noted that the definition of "business" under the Excess Profits Tax Act is broader than under the Income-tax Act. The Court emphasized that income from property, even if not chargeable under section 10 of the Income-tax Act, could still be considered business profits under the Excess Profits Tax Act. The Court also referenced previous cases to support this broader interpretation.

Conclusion:
The Supreme Court concluded that the rental income from the building was part of the business income of the bank and was liable to excess profits tax. The Court allowed the appeal, setting aside the High Court's decision and affirming the orders of the Department and the Tribunal. The majority opinion emphasized that the realization of rental income was within the business activities of the bank, as outlined in its memorandum of association, and thus fell within the scope of the Act. The appeal was allowed with costs awarded to the appellant.

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