Investment company test turns on actual business activity, not memorandum alone, where shareholdings are maintained for dividend income.

Sections 23A of the 1922 Act and 104 of the 1961 Act were treated as operating on substantially similar footing for determining whether a company was one whose business consisted wholly or mainly in holding investments. The controlling test was whether the company's primary business was a real, substantial and systematic activity of dealing in or holding investments; the memorandum of association was not conclusive. The inquiry turned on the actual nature of the business, the source and character of income, and the purpose of maintaining the shareholdings. On the stated facts, continued holding of shares and receipt of dividends without any other business activity brought the company within the definition of an investment company.

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Issues: Whether the assessee-company was a company whose business consisted wholly or mainly in the holding of investments and was therefore liable to be treated as an investment company for the purpose of section 23A of the Indian Income-tax Act, 1922, and section 104 of the Income-tax Act, 1961.

Analysis: The provisions in section 23A of the 1922 Act and section 104 of the 1961 Act were treated as substantially similar in their operation. The controlling test drawn from the Supreme Court authorities was that the company must have as its primary business a real, substantial and systematic activity of dealing in or holding investments. The memorandum of association was not conclusive by itself, and the inquiry had to focus on the actual nature of the assessee's business, the source and character of its income, and the purpose for which the shareholdings were maintained. On the facts, the assessee had consistently held shares and derived dividends, and there was nothing to show any business activity other than maintaining the investments and receiving returns from them. The Tribunal's approach was held to have wrongly read the Supreme Court decisions as requiring something more than continued investment activity for profit.

Conclusion: The assessee-company was an investment company within the meaning of the relevant provisions, and the question referred was answered in the negative.

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