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TMI Blog1995 (1) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... s as contemplated under section 23A of the 1922 Act for the assessment years 1959-60 to 1961-62 and section 104 of the Act of 1961 for the assessment year 1962-63. On the assessee's appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The assessee went on appeal to the Tribunal, The Tribunal ordered on July 23, 1970, for fresh disposal by the Appellate Assistant Commissioner after considering the memorandum and articles of association before holding the assessee an investment company. The Appellate Assistant Commissioner, after complying with the directions of the Tribunal, reiterated his earlier order. The assessee has succeeded, however, in appeal before the Tribunal. The Tribunal has held that the assessee-company should not be treated as an investment company for the purpose of application of the provisions of section 23A of the 1922 Act and section 104 of the 1961 Act. The question before us is whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assesseecompany should not be treated as an investment company for the purpose of application of the provisions of section 23A of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the 1922 Act and the Explanation thereto and the meaning the expression "investment company" should receive for the interregnum after the repeal of the 1922 Act and until a definition was introduced under section 109 of the 1961 Act, the courts accepted that a company, whose business consisted wholly or mainly in the dealing in or holding of investments, was not different from an investment company, and thus when a matter went before the Supreme Court in appeal against a judgment of a High Court (see [1968] 69 ITR 614 (Guj)) on a reference under section 66(1) of the 1922 Act, the Supreme Court in the case of CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377 said as follows : "We have now to see what exactly is the meaning of the expression 'in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments' in the main section 23A and the expression 'in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments' in clause (i) of Explanation 2 to section 23A. The Act contains many mind-twisting formulas but section 23A, along with some other sections, takes the place of pride amongs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expression and it intended to convey some meaning thereby. The expression 'business' is a well-known expression in income-tax law. It means, as observed by this court in Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 : 'some real, substantial and systematic or organised course of activity or conduct with a set purpose'. This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must, therefore, proceed on the basis that the Legislature was aware of the meaning given by courts to that expression when it incorporated section 23A into the Act in 1957. Hence we must hold that when the Legislature speaks of the business of 'holding of investments', it refers to real, substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits." The Supreme Court got another occasion to go into this aspect of the law in the case of Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 and observed this time as follows : " It would be seen that the expression 'company whose business consists wholly or mainly in the dealing in or holding of investments' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. ... Thus the position that emerges from the abovementioned decisions is that the aforesaid expression cannot be limited to companies whose principal business is the acquisition and holding of shares, debentures, stocks or other securities as contended on behalf of the appellant but covers companies whose primary or principal source of income is house property or capital gains as well. The decision in CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377 (SC), on which reliance has been placed by Mr. Mukherjee, is not helpful to the appellant as it turned on the particular facts of that case." The Tribunal had the advantage of both the judgments of the Supreme Court before it but it has sensed, somehow, that in Distributors (Baroda) P. Ltd.'s case [1972] 83 ITR 377, the Supreme Court has laid down such tests, which indicate that a company which held shares in other companies and received dividends but its investment remained steady without change, did not satisfy the requirements of a company whose business consisted wholly or mainly in the holding of investments. Before we advert to the questions that should be addressed and answered by us, we may mention that we have been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Capitalisation of these companies remains the same unless action is taken to change. Open-end funds sell their own new shares to investors, stand ready to buy back their old shares, and are not listed. Open-end funds are so called because their capitalisation is not fixed ; they issue more shares as demanded. A glaring misunderstanding thus about the type of activity which alone will satisfy the rigorous definition-that is real, substantial and systematic or organised course of activity of investment by the Tribunal has resulted in the catastrophic confusion and what should have been understood without any attempt to be pedantic and thus unreal in requiring the satisfaction of the test of real, substantial and systematic or organised course of activity of investment, would have been avoided. We propose to make no effort to go into any details of hair-splitting of the words like "real, substantial and systematic or organised" for it is indeed as simple as has been indicated by the Supreme Court in its judgment in the case of CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377 itself that no one should have any doubts about it. The Supreme Court took notice of the memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total assets of the company by merely referring to the tangible assets used by it. In addition, we have to take into consideration the value of the managing agencies held by the assessee-company. Looked that way, it cannot be said that the assets of the company, used in its share dealings, are far more than its other assets. At any rate, on the basis of the assets used, it cannot be concluded that the assessee's business consisted 'wholly or mainly' in the dealing in investments." It is indeed gratifying to record that the Tribunal has chosen to rely upon the premises as chosen by the Supreme Court in its judgment in CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377. But it is equally shocking to notice that it has brushed aside a clear and comprehensive judgment of the Supreme Court in the case of Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 which has not only indicated the true meaning of the expression of a company whose business consists wholly or mainly in holding of investments, but has indicated how in these matters, the interest of the Revenue should be protected without in any manner burdening a company with the additional tax. It is a clear and categorical ..... X X X X Extracts X X X X X X X X Extracts X X X X
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