Investment company test fails where shareholdings are passive and not part of a systematic profit-oriented business.

A company is treated as one whose business consists wholly or mainly in holding investments only where the investment activity is a real, substantial, systematic and organised business directed to earning profits. On the facts, the assessee's investments remained substantially steady, with no material change in pattern or extent, and dividend income was only an ordinary consequence of shareholding. The required organised investment activity was not established, so the assessee did not fall within the class of investment companies for the relevant assessment years and the super-tax assessments on undistributed income could not be sustained.

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Issues: Whether the assessee was a company whose business consisted wholly or mainly in holding of investments so as to attract super-tax on undistributed income.

Analysis: The applicable test was whether the assessee carried on a real, substantial, systematic or organized course of investment activity for the purpose of earning profits. The facts showed that the investments remained substantially steady over the years, with no material change in the pattern or extent of investment activity. The income from dividends was found to be an ordinary consequence of holding the shares and not proof that the investments were made as a business activity. On the facts, the requisite organized investment activity was not established.

Conclusion: The assessee was not a company whose business consisted wholly or mainly in holding of investments.

Final Conclusion: The assessments to super-tax on undistributed income could not be sustained and were directed to be revised on the basis that the assessee did not fall within the class of investment companies for the relevant assessment years.

Ratio Decidendi: A company is treated as one whose business consists wholly or mainly in holding of investments only where the investment activity is shown to be a real, substantial, systematic and organized business activity directed to earning profits.

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