1974 (9) TMI 26 - HC - Income Tax

Court rules assessee not investment company under Income-tax Act, 1961. Additional super-tax levy unjustified.

The court ruled in favor of the assessee, determining that it was not an investment company as defined under section 109(ii) of the Income-tax Act, 1961, ... Business Receipt, Insurance Business, Investment Company Issues Involved:1. Whether the assessee was an investment company within the meaning of section 109(ii) of the Income-tax Act, 1961, for the assessment year 1962-63.2. Whether the levy of additional super-tax under section 104 of the Income-tax Act, 1961, was justified.Detailed Analysis:1. Whether the assessee was an investment company within the meaning of section 109(ii) of the Income-tax Act, 1961, for the assessment year 1962-63:The primary issue was to determine if the assessee was an investment company as defined under section 109(ii) of the Income-tax Act, 1961. The definition provided that an 'investment company' is one whose business consists wholly or mainly in the dealing in or holding of investments.The assessee contended that it was engaged in the business of insurance and, therefore, could not be categorized as an investment company. The facts revealed that the assessee was involved in general insurance business until January 29, 1960, when its certificate of registration was canceled by the Controller of Insurance. Consequently, the company ceased to carry on any insurance business.The Income-tax Officer (ITO) concluded that since the primary source of income for the assessee during the relevant year was from investments, it should be classified as an investment company. This conclusion was based on the fact that more than 90% of the assessed income was derived from investments.The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, noting that the income from insurance business was minimal and represented only 19% of the total income. The Tribunal also supported this view, emphasizing that the nature of the income derived during the relevant year indicated that the assessee was an investment company.The court examined the precedent set by the Supreme Court in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd., which established that section 23A of the Indian Income-tax Act, 1922 (analogous to section 104 of the 1961 Act), was penal in nature. Therefore, the burden was on the revenue to prove that the conditions for classifying the assessee as an investment company were met.The court also referred to the Gujarat High Court decision in Distributors (Baroda) Private Ltd. v. Commissioner of Income-tax, which was approved by the Supreme Court. The decision clarified that merely holding investments does not make a company an investment company unless it systematically engages in the business of holding or dealing in investments.In this case, the court found that the investments were made during the course of the insurance business and continued to be held in compliance with the obligations under the Insurance Act, 1938. There was no evidence of systematic or organized dealing in investments during the relevant year.2. Whether the levy of additional super-tax under section 104 of the Income-tax Act, 1961, was justified:The determination of whether the assessee was an investment company directly impacted the applicability of section 104, which required investment companies to distribute 90% of the distributable income as dividends. The ITO had determined the distributable income to be Rs. 94,622, and since the assessee declared only Rs. 60,000, there was a shortfall of Rs. 25,160.The court held that, based on the facts and circumstances of the case, the assessee could not be classified as an investment company. Consequently, the requirement to distribute 90% of the distributable income did not apply, and the levy of additional super-tax under section 104 was not justified.Conclusion:The court answered the question in the negative, ruling in favor of the assessee. The assessee was not an investment company within the meaning of section 109(ii) of the Income-tax Act, 1961, for the assessment year 1962-63. Therefore, the levy of additional super-tax under section 104 was not justified. The assessee was awarded the costs of the reference.