Investment company test turns on total income, not dissected trading receipts, in share-dealing dividend cases.

A company engaged in share-dealing and dividend-stripping was held not to be an investment company for the relevant period because the statutory comparison was with its total income as computed for tax purposes, not with a dividend element extracted from trading profit. Dividends received in the course of the share-dealing business formed part of trading receipts, but once that trading profit was ascertained it could not be dissected and re-characterised as investment income for the investment-company test under section 257(2). The surtax direction therefore could not stand.

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Issues: Whether a company carrying on share-dealing and dividend-stripping operations was an "investment company" within section 257(2) of the Income Tax Act, 1952, so as to sustain a surtax direction under section 245, and whether dividends received in the course of that trade could be treated as investment income rather than trading receipts.

Analysis: The company's first accounting period had to be assessed on its actual income from all sources, computed for income-tax purposes. The dividends received from the acquired companies were part of the company's trading receipts in its business of dealing in shares, but the court held that this did not make them income charged under Schedule D in the sense required by section 525(1)(c). Once the company's total income for the period was ascertained as trading profit, that trading profit could not be dissected further to isolate the dividend element and re-characterise it as investment income for the purpose of section 257(2). The statutory comparison was between investment income and the company's total income, not between investment income and a component of trading profit.

Conclusion: The company was not shown to be an investment company for the relevant period, and the surtax direction could not stand.

Ratio Decidendi: For the purpose of determining whether a company is an investment company under section 257(2), the inquiry is directed to the company's total income as computed for tax purposes, and trading profit already ascertained cannot be re-opened by dissecting it into constituent receipts and treating part of it as investment income.

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