1967 (7) TMI 40 - HC - Income Tax

Whether the assessee is a company whose business consists wholly or mainly in the dealing in or holding of investments within the meaning of clause (i) of the second Explanation to that section - Whether the assessee had any business of holding of investments during the relevant account years

Summary

Issues Involved:
1. Whether the assessee-company is a company whose business consists mainly in dealing in or holding of investments within the meaning of clause (i) of the second Explanation to section 23A of the Income-tax Act, 1922.
2. Whether the Tribunal was justified in law in holding that while determining the undistributed balance of the total income for charging super-tax under the provisions of section 23A of the Act, no deduction can be allowed in respect of the expenses actually incurred by the assessee-company but disallowed for the purposes of computing its assessable income.

Issue-wise Detailed Analysis:

Issue 1: Whether the assessee-company is a company whose business consists mainly in dealing in or holding of investments within the meaning of clause (i) of the second Explanation to section 23A of the Income-tax Act, 1922.
The primary question is whether the assessee is a company "whose business consists wholly or mainly in the dealing in or holding of investments" within the meaning of clause (i) of the second Explanation to section 23A of the Income-tax Act, 1922. The determination of this question turns primarily on the true interpretation of clause (i) of the second Explanation to section 23A.

The court examined the language of clause (i) and concluded that the phrase "dealing in or holding of investments" could refer to either or both activities. The court rejected the contention that the clause required the business to consist wholly or mainly of one of these activities separately. The court also noted that holding of investments can never be a business in the strict sense, as held by the Supreme Court in Bengal and Assam Investors Ltd. v. Commissioner of Income-tax, but the legislative intent was clear in including companies engaged in the systematic activity of making and holding investments.

The court analyzed the assessee's activities and found that the shares of the managed companies were held for the purpose of retaining the managing agencies, not as part of a business activity of holding investments. The court emphasized that merely holding investments is not sufficient to attract the applicability of clause (i); it must be a business activity. The court concluded that the assessee did not have a business of holding investments and the shares of the managed companies were not held as part of any such business.

The court further considered whether the business of dealing in shares constituted the main business of the assessee. It noted that the income from dealing in shares was not substantially larger than the income from managing agency business when considering the income from dividends on shares of managed companies. The court concluded that the revenue had not discharged the burden of showing that the business of the assessee consisted mainly in dealing in shares.

Issue 2: Whether the Tribunal was justified in law in holding that while determining the undistributed balance of the total income for charging super-tax under the provisions of section 23A of the Act, no deduction can be allowed in respect of the expenses actually incurred by the assessee-company but disallowed for the purposes of computing its assessable income.
The second question was not pressed by the learned advocate appearing on behalf of the assessee, and therefore, the court did not consider it necessary to state any facts bearing upon that question.

Conclusion:
The court answered the reframed question in the negative, holding that the assessee-company is not a company whose business consists mainly in dealing in or holding of investments within the meaning of clause (i) of the second Explanation to section 23A of the Income-tax Act, 1922. There was no order as to costs of the reference.