Commissioner vs Binodiram Balchand

This appeal comes before us by virtue of a certificate of fitness granted by the High Court of Madhya Pradesh u/s 47 (2) of the Gwalior War Profits Ordinance, Samvat 2001 (hereafter called the Ordinance) on the ground that the appeal involves a substantial question of law.

The question of law which arises in the appeal relates to the proper construction of R. 3 (1) of the Schedule of the Ordinance. The Respondent M/s Binodiram Balchand is the name under which a Hindu undivided family which was resident in the State of Gwalior carried on various businesses in that State. Profits derived from businesses carried in the State were charged to War Profits Tax under the Ordinance. Among the businesses carried on by the Respondent was its employment as the Secretary, treasurer and managing agent of a textile mill which was a limited company bearing the name of Binod Mills Company Limited, Ujjain. The appeal is concerned with the computation of the profits of the Respondent to War Profits Tax under the Ordinance, which it might be stated at the outset, was or lines very similar to the Indian Excess Profits Tax Act, 1940.

The chargeable accounting period with which the appeal is concerned, is the period commencing from July 1, 1944, to October 16, 1944.

The Respondent-assesee submitted its return and thereafter the War Profits Tax Officer by his assessment order dated July 9, 1951, determined the taxable income of the Assessee for this chargeable accounting period at Rupees 12,16,145 and assessed it to tax in the sum of Rs. 2,02,691. Several points were raised in relation to this assessment order by the Respondent, and one of them related to the inclusion in its assessable profits of a sum of Rs. 11,09,332 which was received by the Respondent on July 5, 1914, being the dividend declared and paid by the Binod Mills Ltd. for 1943 on the shares held by the Respondent. It was the contention of the Respondent that this sum was its income from an investment pure and simple and was not "profits" from business, and so could not be included in its taxable profits on a proper construction of the relevant provisions of the Ordinance. From the assessment order the Respondent filed an appeal to the appellate authority which however was unsuccessful. A revision to the Commissioner of War Profits Tax met with the same fate and thereafter the Respondent prayed for a reference to the High Court u/s 46 (1) of the Ordinance which ran thus:

46 (1) If, in the course of any assessment under this Ordinance or any proceeding in connection therewith, a question of law arises, the Commissioner may either on his own motion or on reference from any War Profits Tax authority subordinate to him, draw up a statement of the case and refer it with his own opinion thereon to the High Court.

The Commissioner acceded to this request and referred for the opinion of the High Court three questions:

(1) Whether the dividend income of Rs. 11,09,332 received from the Binod Mills was chargeable under the War Profits Tax Ordinance?

(2) Whether certain bad debts written off by the Assessees could be allowed as deductions in computing profits for war tax purpose?

(3) Whether the expenses of Assessees' branch at Gwalior which was defunct could be allowed as admissible expenses?

The High Court answered questions 2 and 3 in favour of the department, but the first question was answered fin the negative and in favour of the Assessee. There is now no dispute as regards questions 2 and 3 and the appeal is confined to the correctness of the answer to the first question.

Before setting out the grounds upon which the High Court decided the reference in favour of the Respondent it is necessary to read a few of the provisions of the relevant law which bear upon the point arising for consideration. The preamble to the Ordinance recites that it was enacted to impose a tax on "excess profits arising out of certain businesses" and this intention is carried out by S. 4 (1) which is the charging section which enacts:

4 (1) Subject to the provisions of this Ordinance, there shall, in respect of any business to which this Ordinance applies, be charged levied and paid on the amount by which the profits during any chargeable period axceed the standard profits, an excess profits tax (in this Ordinance referred to as the 'War Profits Tax') which shall be equal to 60 per cent of the aforesaid amount.

The expression 'business', the profits derived from which are thus brought

to charge is defined by S. 2 (5) in these terms.

2 (5) 'business' includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but does not include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications, unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts:

Provided that where the functions of a company or of a society in corporated by or under any enactment consist wholly or mainly in the holding of investments or other property or both, the holding thereof shall be deemed for the purpose of this definition to be a business carried on by such company or society;

Provided further that all business to which this Ordinance applies carried on by the same person shall be treated as one businesses for the purposes of this Ordinance;

There are two further definitions which are of some relevance to the arguments addressed to us and might therefore be set out at this stage. Section 2 (14) defines the expression 'prescribed' as meaning "prescribed by rules made under the Ordinanc.' S. 50 being the provision empowering the Government to make rules and this section ran

50 (1) Subject to the provision of this Ordinance Government may make rules for carrying out the purposes of this Ordinance. (2) Rules made under this section shall be published in the Official Gazette and shall thereupon have effect as if enacted in this Ordinance.

The other relevant definition is of the expression 'profits' which is defined in S. 2 (16) as;

profits as determined in accordance with the provisions of this Ordinance and its First Schedule;

There is a first Schedule which follows the Ordinance and which is headed 'Rules for the computation of profits for the purposes of War Profit Tax', and of these the one pertinent to the matter in controversy in the appeal is R. 3 of which sub-Rr. (1) and (2) have been relied on in the course of arguments. They run:

3 (1) Income received from investment shall be included in the profits of a business liable to the War Profits Tax. unless it is proved to satisfaction of the War Profits Tax Officer that the investments lave no connection whatever with the business.

(2) In the case of a business which consists wholly or mainly in the dealing in or holding of investments, income received from investments shall be deemed to be profits of that business, and in the case of a business, a specific part only of which consists in dealingi in investments, the income received from investments.