1953 (6) TMI 7 - HC - Income Tax

Court rules rental income not business income under Excess Profits Tax Act; Parliament can enact retrospective legislation

Calcutta National Bank Ltd. Versus Commissioner of Income-tax

The court ruled in favor of the assessee regarding the inclusion of rental income as business income under the Excess Profits Tax Act, stating that since ... - Issues Involved:1. Whether the rental income from immovable property was a part of the business income taxable under Section 2(5) with Rule 4, sub-rule (4), of Schedule I attached to the Excess Profits Tax Act, 1940.2. Whether the portion of Section 2 of the Indian Income-tax (Amendment) Act, 1950, which gave retrospective effect to the explanation of Section 9(1)(iv) was ultra vires of the Indian Legislature.Issue-wise Detailed Analysis:1. Rental Income as Business Income:The first issue revolves around the inclusion of rental income from immovable property as part of the business income under Section 2(5) with Rule 4, sub-rule (4), of Schedule I of the Excess Profits Tax Act, 1940. The facts reveal that the assessee, a banking company in liquidation, owned a building, a significant portion of which was let out to tenants, generating an annual rental income of about Rs. 86,000. The Tribunal held that the rental income was part of the business income under sub-rule (4) of Rule 4. The assessee contended that the income could not be charged to excess profits tax as the holding of property was not the main function of the company, as required by the proviso to Section 2(5).The court emphasized that the charge of excess profits tax is laid by Section 4 of the Act, which applies to any business. The definition of 'business' under Section 2(6) includes trade, commerce, manufacture, or any adventure in the nature of trade, commerce, or manufacture. The proviso to Section 2(5) deems the holding of investments or property as a business if it is the main function of the company. The court noted that the assessee's primary function was banking, not holding property.The court rejected the Revenue's reliance on sub-rule (4) of Rule 4, stating that the rules in the Schedule are subordinate and cannot independently charge income to tax. The court concluded that since the holding of property was not the main function of the assessee, the rental income could not be deemed business income under the proviso to Section 2(5). Therefore, the first question was answered in favor of the assessee.2. Retrospective Effect of the Amendment Act:The second issue concerns the validity of the retrospective effect given to the explanation of Section 9(1)(iv) of the Income-tax Act by the Indian Income-tax (Amendment) Act, 1950. The Income-tax Officer had disallowed the assessee's claim for an allowance of the owner's share of municipal taxes as a deduction from the annual value of the properties. The Supreme Court's decision in Commissioner of Income-tax, U.P. v. Gappumal Kanhaiya Lal allowed such a deduction, which was later countered by the Amendment Act, giving retrospective effect to an explanation that excluded such taxes from allowable deductions.The Tribunal held that the retrospective amendment was ultra vires of the Indian Legislature under Article 372(1) of the Constitution, which maintains the continuity of existing laws until altered or repealed by a competent Legislature. The court disagreed, citing the Federal Court's decision in United Provinces v. Aliqua Begum and the Bombay High Court's decision in Jamnadas Prabhudas v. Commissioner of Income-tax, Bombay City. The court clarified that Article 372(1) does not limit the power of Parliament to enact retrospective legislation. The word 'until' in Article 372(1) refers to the effective date of the new law, not the date of its enactment.The court concluded that the Indian Parliament had the power to amend existing laws with retrospective effect, and therefore, the Tribunal's decision was erroneous. The second question was answered in favor of the Commissioner.Conclusion:The court answered both questions in favor of the assessee and the Commissioner, respectively. The rental income was not part of the business income under the Excess Profits Tax Act, and the retrospective amendment to Section 9(1)(iv) was within the legislative competence of the Indian Parliament.