P L D 1962 Supreme Court 128 (PLP)

S. A. RAHMAN, J.

This appeal comes to us, on a certificate of fitness, granted by the High Court at Dacca, under sections 109 and 110 of the Civil Procedure Code. It arises out of a reference made to the High Court under section 66 (1) of the Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, East Pakistan. The question referred to the High Court is in the following terms:- "Whether in the facts and circumstances of the case income from interest from moneys kept in banks earned by the Company within the year ended on 31st March 1917, would be classed as income from business ?" The question was answered in the negative by the High Court and the Commissioner of Income-tax assails the correctness of that answer in the present appeal. The respondent to the appeal is Khulna-Bagerhat Railway Co. Ltd., Ahmadabad. It was incorporated in the year 1916 and entered into an agreement with the Secretary of State for India-in Council on the 14th of April 1916, for the construction of a Railway, in what Is now East Pakistan, and its management. Under that agreement, the State was entitled to acquire the Railway by giving the prescribed notice. In pursuance of this stipulation in the agreement, the Government of Pakistan acquired the Railway and took over its management on the 31st of March 1948. The Company filed a return of its income on the 15th December 1950, for the year ending on the 31st of March 1948. In this return, the income for the relevant year was declared to be Rs. 70,938 and exemption was claimed from the tax for that year under subsections (3) and (4) of section 25 of the Income-tax Act, in accordance with the applications already submitted for that purpose. The Income-tax Officer found that the Company was in existence during the year ending with the 31st March 1917, though the Railway line was not completed till the middle of 1918. The Income-tax Officer did not allow the benefit of the exemption claimed, on the ground that the Company's case attracted the Proviso to subsections (3) and (4) of section 25 of the Act. This view was based on the finding that the respondent Company would have been chargeable to Income-tax for the assessment year 1917-18, in respect of the income of the year ended on the 31st of March 1918. For calculating the Income of that year the Income-tax Officer took into account the receipts by way of interest on moneys deposited by the Company in banks, amounting to Rs. 2,766, as shown in its balance-sheet dated the 31st March 1919, on the assumption that investment of monies formed part of the legitimate business activities of the Company. But for this interest income, the Company would not have been assessable to tax in the year ending the 31st March 1948. On appeal, the Appellate Assistant Commissioner reversed the decision of the Income-tax Officer and held that the interest received by the Company on bank deposits was not a part of its business income and, therefore, the proviso above-mentioned did not apply to them. The decision was further upheld on appeal, by the Income-tax Appellate Tribunal, Dacca. The question set out in the beginning of this judgment was then referred at the instance of the Income-tax Commissioner to the High Court. The main ground that prevailed with the Appellate Assistant Commissioner and the Appellate Income-tax Tribunal was that the primary object of the Company, as revealed by Arts. 2 and 3 of the Memorandum of Association, was the construction of a Railway and its maintenance between Khulna and Bagerhat. Another Article (Art. 26) undoubtedly authorized the Company to "lend, invest or otherwise employ moneys, belonging to or entr1isted to the Company upon securities and shares, or without security, upon such terms as may be thought proper", but ft was held that the interest accruing from such investments was not a part of the Company's normal business. This view was upheld by the High Court. The material parts of subsections (3) and (4) of section 25 of the Act and of the proviso to these subsections are reproduced below :- "(3) Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918; is discontinued then, unless there has been a succession by virtue of which the provisions of sub section (4) have been rendered applicable, no tax shall be payable fn respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference. (4) Where the person who was at the commencement of the Indian Income-tax (Amendment) Act, 1939, carrying on any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918, is succeeded in such capacity by another person, the change not being merely a change in the constitution of a partnership, no tax shall be payable by the first mentioned person in respect of the income, profits and gains of the period between the end of the previous year and the date of such succession, and such person may further claim that the income, profits and gains of the previous year shall be deemed J to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and, if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference Provided that subsections (3) and (4) shall not apply- (a) to super-tax except where the income, profits and gains of the business, profession or vocation were assessed to super tax for the first time either for the year beginning on the 1st day of April 1920, or for the year beginning on the 1st day of April 1921 ; (b) to a business, profession or vocation on which income tax was at any time charged in the hands of a company under the Indian Income-tax Act, 1886, or on which Income-tax would have been charged in the hands of a company for the assessment year ending on the 31st day of March 1918, if the company having been in existence in that year had also been in existence in the year ending on the 31st day of March 1917." It is common ground between the parties that the Company had ceased Its functions from the 31st of March 1948 and had been succeeded by the Government of Pakistan. Prima facie, therefore, it has the right to claim exemption under subsections (3) and (4) of section 25 of the Act. The question is whether the application of these subsections is excluded by the proviso. The answer to this question depends on whether the income received by the Company, by way of interest, on bank deposits, was a part of Its normal business-income or not. The High Court relied for their finding that this income was not a part of their regular business-income inter alia on certain observations of Rowlatt, J. in the case of Commissioners of Inland Revenue v. Korean Syndicate Limited (1 K B D 598, at p. 603). These observations are quoted below:

"If what the company is doing-namely, receiving interest and royalties-was done by an individual no one would say that the Individual was carrying on a business, and it does not become a business merely because 1t is done by an artificial body like a company and not by an individual. But I wish to make this reservation. It does not follow that, whenever at some particular moment a company is doing nothing but receiving an income from its investments, it is not carrying on a business. The business of a company may be the investing of money, and there may be times when the company's money is all satisfactorily invested and the company does nothing but receive the dividends. It may be that in a case of that sort although the company was not actively doing anything, the right conclusion of fact would be that the company was nevertheless carrying on a business." In accordance with the principle thus laid down, the High Court found that the income in question was not a part of the company's business income, but may be described as "income from other sources" within the meaning of that expression in section 6 of the Act. Mr. Mesbahuddin, on behalf of the appellant, has drawn our attention to the fact that the decision in the case from which the observations of Rowlatt, J. were cited by the High Court had been reversed by the Court of Appeal. The appellate decision is reported as Commissioners of Inland Revenue v. Korean Syndicate, Limited ((1921) 3 K B D 258 at p. 277). The facts of the case were that the Korean Syndicate had been incorporated as a limited company, having for its principal object the acquisition and working of concessions and turning the same to account. In appeal, the question seems to have been raised whether at the relevant time the assessee Company could be said to be carrying on business at all, and if so, what the nature of that business was. On the facts of the case, it was held that the Company was in fact carrying on business and that consisted of the collection and distribution of income derived from two sources, viz., a percentage of profits paid by lessees of a concession belonging to the Company and interest on a certain sum of money on deposit at a Bank. The decision seems to have proceeded on the particular facts of that case and, it was held that the Company was liable to be assessed to excess profits duty under section 39 of the Finance (No. 2) Act, 1915. It was a Company whose business, ft was found, consisted mainly in making investments and the interest earned on the deposit was treated as part of the profits of the Company. The principle enunciated by Rowlatt, 3. was not affected by that particular case though that principle w.-.s not found to be appli cable to the facts of that case. We have considered the various Articles by which this Company was governed. We have no hesitation in agreeing with the view of the High Court that the normal business of the Company was the construction and the running of the Railway and not investment of its moneys on interest. Other power were also given to the Company by the Articles of Association but it is not contended that all those powers pertained to the earning of normal business-income. If the Company, instead of retaining its surplus moneys in idle condition, invested them under, the powers given to them by their Articles of Association, it would not follow that the income so derived would be part of the Company's normal business-income. Each case must be decided on its own facts anti, in the instant case, the circumstances brought out in the evidence do not. indicate that the receiving of interest on invested money was really included in the business-d income of the Company. We are, therefore, of the opinion that; the view taken by the High Court is not open to any legal exception. The appeal fails and is hereby dismissed with costs. M. N./A. H. Appeal dismissed.