DISTRIBUTORS BARODA PRIVATE LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference arises out of an order made upon the assessee under section 23A of the Income -tax Act, 1922, for the assessment years 1957 -58, 1959 -60, 1960 -61 and 1961 -62 and raises a short and interesting point. The assessee is a private limited company admittedly governed by the provisions of section 23A and the question at issue 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 that section. If it is, the statutory percentage applicable will be 100, whereas,if it is not, the statutory percentage applicable will be 60 and that has a material effect on the tax liability of the assessee.

(2.) THE assessee was incorporated on 11th October, 1941, and its original subscribed and paid up capital was Rs. 2,00,000. It appears that at some point of time prior to 20th May, 1957, - the exact date does not appear on the record - the subscribed and paid up capital was increased and during the relevant account years, it was Rs. 18,00,000. Soon after its incorporation in July, 1942, the assessee promoted a new company called New India Industries Limited and the assessee was appointed managing agent of that company under an agreement dated 24th July, 1942. The assessee was also appointed managing agent of another company called Cotton Fabrics Private Limited which was floated earlier by the same group of persons who floated the assessee and that was done under an agreement dated 22nd April 1943. The managing agencies of both the companies continued to subsist in the relevant account years. The assessee held a considerable number of shares of the managed companies during the relevant years of account and according to the finding of fact recorded by the Tribunal, these shares were held by the assessee for the purpose of safely retaining the managing agencies of the managed companies. Besides the shares of the managed companies, the assessee admittedly did not hold any other shares as investments, but a business of dealing in shares was carried on by the assessee and in the course of that business the assessee held diverse shares from time to time and earned dividend on those shares. Two statements were filed by the assessee before the Tribunal, one containing the particulars of the shares held by the assessee and the other showing the income derived by the assessee from various sources during the relevant account years. The statement showing the income was not accurate since the dividend income which it disclosed consisted of net dividends received from the companies and not the grossed up amount of the dividends. The figures of dividends in the statement were, therefore, corrected before us and a revised statement showing the correct gross income was put in by consent of parties. According to the revised statement, the income derived by the assessee from different sources during the relevant account years was as follows :

(3.) THE second question was not pressed by Mr. Kaji, learned advocate appearing on behalf of the assessee and, therefore, we have not considered it necessary to state any facts bearing upon that question. The first question was the only question which formed the subject -matter of controversy between the parties and we shall presently examine the rival arguments bearing upon it, but before we do so, it is necessary to point out that the question as framed does not bring out properly the real controversy between the parties. There is no expression like an 'investment company' used in section 23A or for the matter of that in any other part of the Act and the use of that expression is, therefore, not appropriate in the question. The real controversy between the parties is whether the assessee falls within clause (i) of the second Explanation to section 23A and it is, therefore, necessary to reframe the question as follows :