Case Note & Summary
The appeal before the Supreme Court arose from a reference under Section 66(1) of the Indian Income-tax Act, 1922, concerning the liability of a banking company in liquidation to excess profits tax on rental income. The assessee, Calcutta National Bank Ltd (in liquidation), owned a six-storeyed building in Calcutta, used the ground floor and part of the sixth floor for its banking business, and let out the remaining portion, earning an annual rent of about Rs. 86,000. The let-out area was four to five times the area occupied by the bank. For the accounting period ending March 31, 1946, the Excess Profits Tax Officer assessed this rental income under Rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940. The Appellate Assistant Commissioner upheld the assessment under Rule 4(2), and the Income-tax Appellate Tribunal confirmed, finding that the premises were built partly for the bank's own use and partly for letting, and that such activity was within the objects of the company's Memorandum of Association. On a reference, the Calcutta High Court reversed the Tribunal, holding that the rental income was not taxable as business income because the company's functions did not consist wholly or mainly in holding investments or property, as required by the first proviso to Section 2(5) of the Excess Profits Tax Act. The primary legal issue was whether the rental income from immovable property was part of business income taxable under Section 2(5) read with Rule 4(4) of Schedule I. The appellant Commissioner argued that the definition of 'business' under the Act was wider than under the Income-tax Act, that the property was held as an investment, and that the income was includible under Rule 4(4). The respondent contended that its essential business was banking, that letting out surplus property was neither wholly nor partly its business, and that Rule 4(4) could not apply independently of the first proviso. The majority, comprising Sinha and Hidayatullah JJ., held that the High Court had erred by focusing solely on the first proviso and ignoring the main provision of Section 2(5). The term 'business' was of wide import and included activities which might be quiescent. The Memorandum of Association provided the key to business objects, and the relevant clause clearly permitted the company to acquire, manage, and let out property. Rule 4(4) of Schedule I had independent and wider application than the first proviso, and its use of 'partly' was not in excess of the statute. English precedents were applied, including Commissioners of Inland Revenue v. Desoutter Bros. Ltd. and Inland Revenue Commissioners v. Gittus. Kapur J. dissented, holding that the essential function of the bank was dealing in money and credit, not holding or letting property, and that the rental income did not fall within the definition of profits. The Supreme Court allowed the appeal, reversed the High Court, and answered the referred question in the affirmative, holding that the rental income of Rs. 86,000 was liable to excess profits tax under Section 2(5) read with Rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940.
Headnote
A) Taxation - Excess Profits Tax - Definition of 'Business' - Excess Profits Tax Act, 1940, Section 2(5) - The assessee bank, in liquidation, derived rental income of Rs.86,000 from letting out surplus portions of its six-storeyed headquarters building while using the rest for its banking business. The Income-tax Appellate Tribunal held the income taxable, but the Calcutta High Court reversed, holding that the bank's functions did not consist wholly or mainly in holding investments or property as required by the first proviso to Section 2(5). Held that the High Court erred by overlooking the main provision of Section 2(5), which defines 'business' more widely than under the Indian Income-tax Act and encompasses the holding and letting of property as business activity when within the company's objects (Pages 1-6). B) Taxation - Excess Profits Tax - Rule 4(4) of Schedule I - Excess Profits Tax Act, 1940, Schedule I Rule 4(4) - Rule 4(4) provides for including rental income from property in computing profits of a business. The majority held that Rule 4(4) is not limited to companies whose functions consist wholly or mainly in holding investments or property; it has independent and wider application, and applies where a company's business partly consists of holding or letting property. Held that the rental income was includible in computation of profits under Rule 4(4) even though the assessee's principal business was banking (Pages 4-6). C) Company Law - Objects Clause - Business Purposes - Excess Profits Tax Act, 1940, Section 2(5) read with Memorandum of Association - The Memorandum of Association of the respondent company contained a clause permitting acquisition, construction, and management of movable and immovable property necessary or convenient for its business, including letting. The court held that the memorandum provides the key to business objects, and the clause clearly showed managing property and realising rents were within the company's objects. Held that rental income fell within business profits as objects included property management and realisation of rents (Pages 4-6). D) Statutory Interpretation - Provisos and Rules - Construction and Application - Excess Profits Tax Act, 1940, Section 2(5) provisos and Schedule I Rule 4(4) - The court rejected the argument that if rental income were covered by the main clause of Section 2(5), the first proviso would become redundant. Rule 4(4) did not derive its operative force solely from the first proviso, and its use of 'partly' rather than 'mainly' was not in excess of the statute. Held that the rule and the proviso operate independently, and the rule applies to a company whose business only partly consists of letting property (Pages 5-6). E) Taxation - Excess Profits Tax - Dissenting View - Excess Profits Tax Act, 1940, Sections 2(5), 2(19), 4 - Kapur J. dissented, holding that the word 'business' in Section 2(5) either meant the main provision or the extended meaning under the first proviso; in either case, the respondent's essential function was dealing in money and credit, not letting property, and the letting out of surplus property was neither wholly nor partly its business. Held that the rental income did not fall within the definition of 'profits' in Section 2(19) and was not chargeable to excess profits tax under Section 4 (Pages 6-8).
Issue of Consideration
Whether rental income from immovable property (Rs. 86,000) received by a banking company by letting out surplus portion of its own building is part of business income taxable under Section 2(5) read with Rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940.
Final Decision
Appeal allowed; the Supreme Court reversed the Calcutta High Court and answered the referred question in the affirmative. The rental income of Rs. 86,000 was held liable to excess profits tax under Section 2(5) read with Rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940. Majority per Sinha and Hidayatullah JJ.; Kapur J. dissented.
Law Points
- Legal points not extracted
- Definition of 'business' under Section 2(5) of Excess Profits Tax Act is wide and includes quiescent activities
- Rule 4(4) of Schedule I has independent and wider application than first proviso
- Memorandum of Association provides key to business objects
- rental income from surplus property can be business profits when within objects.
