l Appeals Nos
2350 to 2353 of 1968 and 1313 to 1316 of 1971
727 Appeals by certificate from the judgment and order dated July 7 1967 of the Gujarat High Court in Income tax Reference No 22 of 1965
section C Manchanda R N Sachthey and B D Sharma for the appellant in all the appeals
section T Desai and I N Shroff for the respondent in all the appeals
The Judgment of the Court was delivered by Hegde J
These are some of the appeals where the appellant unfortunately had to file two different appeals in respect of the same matter
Civil Appeals Nos 2350 2353 of 1968 were brought on the strength of the certificates granted by the High Court of Gujarat
No reasons were given in support of those certificates
Hence those certificates must be considered as having not been properly granted
The resulting position was that the appeals brought on the strength of those certificates became unsustainable
To get over that difficulty the Commissioner of Income tax Gujarat
invoked our jurisdiction under article 136 of the Constitution to appeal against the judgment of the High Court
Civil Appeals Nos
1313 1316 of 1971
The assessee is a Private Limited Company and the concerned assessment years are 1957 58 1959 60 1960 61 and 1961 62
The only question for decision in these appeals is whether the assessee company comes within the scope of section 23 A of the Indian Income tax Act 1922 to be hereinafter referred to as the Act  The assessee company was incorporated on October 11 1941 The object clause in the memorandum of association contains the usual string of objects Confining ourselves to the objects relevant for our present purpose
we get in Clause 3 of the memorandum power to acquire and hold shares stocks debentures debenture stocks bonds obligations and securities issued or guaranteed by any company constituted or carrying on business in British India
Sub cl
p of that Clause empowers the company to take part in the formation management supervision or control of the business or operation of any company or undertaking and for that purpose to appoint and remunerate any directors
accountants or other experts or agents
Clause q provides power to carry on all or any of the following businesses  Agents Chief agents or licensed agents of any company   We are not concerned with the other objects mentioned in the memorandum
728 In July 1942 the assessee company promoted a company known as New India Industries Ltd By an agreement dated July 24 1942 the assessee company was appointed as managing agents of the said New India Industries Ltd In 1956 the said managing agency was renewed for a period of five years in view of the provisions of the 
The group of persons who had floated the assessee company had earlier in the year 1940 floated a company called the Cotton Fabrics Private Ltd
By an agreement dated April 22 1943 the assessee company was appointed the managing agent of the said Cotton Fabrics Private Ltd
In 1956 the said managing agency agreement was also renewed for a period of five years for the very reason referred to earlier
We have already noted that the assessee company is a Private Company
As such it is not a company in which the public is substantially interested
The Income tax Officer was of the opinion that as during the company s income from its business activity in the dealing in or holding of investments was very much more than that its income from its managing agencies and further as it had used a very large portion of its assets in the former activity it must be considered as an investment company an expression not found in the Act
Basing himself on that finding he reasoned thus  Statutory percentage of profits to be declared as dividends by such a company under section 23A was 100 per cent in the first two assessment years and 90 per cent in the remaining two assessment years
The dividends declared by the assesssee company fell much below that percentage
Hence it was liable under section 23A to pay super tax at the rate of 50 per cent on the undistributed balance of the total income reduced as provided in section 23A 1 accordingly
In appeal this decision was affirmed by the Assistant Appellate Commissioner excepting in regard to certain deductions with which we are not concerned
Aggrieved by the order of the Assistant Appellate Commis sioner the assessee took up the matter in second appeal to the Income tax Appellate Tribunal
The Tribunal agreed with the conclusions reached by the Assistant Appellate Commissioner Thereafter at the instance of the assessee the following two questions were referred to the High Court under section 661 of the Act
Whether on the facts and circumstances of the case the Tribunal was justified in holding that the assessee company is an investment company for purposes of section 23A of the Income tax Act 1922  729 2
Whether the Tribunal was justified in law in holding that while determining the undistributed balance of the total income for charging super tax under the provisions of section 23A of the Act no deduction can be allowed in respect of the expenses actually incurred by the assessee company but disallowed for the purposes of computing its assessable income  Before the High Court Counsel for the assessee did not press an answer to the second question
Hence the High Court did consider that question
Nor are we called upon to consider at question
The High Court reframed the first question thus Whether on the facts and circumstances of the case the Tribunal was justified in holding that the assessee company is a company whose business consists mainly in dealing in or holding of investments within the meaning of clause i of the second Explanation to section 23A of the Income Tax Act 1922  The High Court answered that question in the negative and in favour of the assessee
It is the correctness of that decision that is in issue before us
We have now to consider whether the High Court was right in concluding that the assessee company did not come within the scope of section 23A
In arriving at its conclusion the High Court had approached the question before it from three different angles viz 1 the objects of the company as mentioned in its memorandum of association 2 the profits earned the company during the relevant previous years from its various activities and 3 the assets used by the company in those years for the purpose of holding the shares of the managed companies dealing with the shares of other companies and in collection with its other business activities
Section 23A to the extent relevant for our present purpose reads   1 Where the Income Tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that pre vious year are less than the statutory percentage of the total income of the company of that previous year as reduced by a      b       c     730 The Income tax Officer shall unless he is satisfied that having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year the payment of a dividend or a larger dividend than that declared would be unreasonable make an order in writing that the company shall apart from the sum determined as payable by it on the basis of the assessment under section 23 be liable to pay super tax at the rate of fifty per cent
In the case of a company whose business consists wholly or mainly in the dealing in or holding of investments and at the rate of thirtyseven percent in the case of any other company on the undistributed balance of the total income of the previous year that is to say on the total income as reduced by the amounts if any referred to in clause a clause b or clause c and the dividends actually distributed if any  Explanation 2 to that section says For the purposes of this section statutory percentage means i in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments 100    We have now to see what exactly is the meaning of the expression in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments in the main section 23A and the expression in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments in cl
i of Explanation 2 to section 23A
The Act contains many mind twisting formulaes but section 23A along with some other sections takes the place of pride amongst them
Section 109 of the 1961 Income tax Act which has taken the place of old section 23A of the Act is more understandable and less abstruse
But in these appeals we are left with s23A of the Act
Clause i of Explanation 2 to section 23A concerns itself with a company whose business consists wholy or mainly in the dealing in or holding of investments
The word mainly in that clause as well as in the main section 23A must necessarily take its colour from the word wholly preceding that word in those provisions
In other words the company which comes within the scope of those provisions must be one whose primary business must be in the dealing in or holding of investments
If a company engages itself in two or more equally or nearly equally important business 731 activities then it cannot be said that the company s business consists wholly or mainly in dealing in a particular thing
Further even in cases where a company has more than one business activity and one of its activity is more substantial than the others unless that activity is the primary activity of the company it cannot be said that that company is engaged in wholly or mainly in any one of its business activities
Section 23A in our opinion applies only to cases where the primary activity of tile company is in the dealing in or holding of investments 
We shall presently see whether on the facts found by the Tribunal it can be said that the assessee company s business in the relevant years consisted of mainly in the dealing in or holding of investments as it was not the case of the Revenue that it was wholly engaged in that business
We next come across with another expression which is far more difficult to comprehend than the one that we were considering till now
Section 23A speaks of the business of holding of investments
Here comes the enigma
It is easier to understand when the section speaks of a company having the business of dealing in investments though to say that the company is dealing in investments may at first sight look somewhat incongruous
When the legislature spoke of dealings in investments it meant dealing in shares stocks and securities etc
But when a person invests
in the share of some of the companies it is difficult to say that his business is one of investing
In commercial circles investing is not considered as business
An investor may feel perplexed if he is called a businessman
This Court in Bengal and Assam Investors Ltd vs Commis sioner of Income tax West Bengal1 came to the conclusion that an individual who merely invests in shares for the purpose of earning dividend does not carry on a business and that the only way he can come under section 10 of the Act is by converting the shares acquired by him into stock in trade ie by carrying on the business of dealing in stocks and shares
In that case this Court was considering whether the dividend income of the assessee company therein could be considered as business income under section 10 of the Act
Therein this Court was not considering the scope of section 23A
But all the same in that case this Court proceeded on the basis that no one can make a business of investing
But then section 23A speaks of the business of holding of investments
We were told by the Counsel for the assessee that that expression is an incongruous one and that we should following the decision of this Court in Bengal and Assam Investors Ltd1 hold that there is nothing like a business of holding of investments
We feel unable to accede to that contention
We cannot say that the 1 732 legislature did not know its own mind when it used that expression in section 23A We must give some reasonable meaning to that expression
No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying
We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby
The expression  business is a well known expression in income tax law
It means as observed by this Court in Narain Swadesh Weaving Mills vs Commissioner of Excess Profits Tax 1   some real substantial and systematic or organised course of activity or conduct with a set purpose
is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee
We must therefore proceed on the basis that the legislature was aware of the meaning given by courts to that expression when it incorporated section 23A into the Act in 1957
Hence we must hold that when the legislature speaks of the business of holding of investments  it refers to real substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits
Now let us leave section 23A and proceed to examine the facts of the case to find out whether the assessee company can be held to come within the scope of section 23A in the light of our interpretation of that provision
We have earlier referred to the objects clause in the memo randum of association
The memorandum permits the assessee company to take up the management of the other companies to invest in the shares of the other companies and to deal in the shares of the companies
Therefore it cannot be said that the assessee company was incorporated primarily with the object of carrying on the business of the dealing in or holding of investments
The objects of the assessee company are many fold
The object of carrying on the business of dealing in or holding of investments is only one of them
Hence the memorandum of association does not assist us in deciding whether the business of the assessee company consists of wholly or mainly in the dealing in or holding of investments
 We shall now take up the question of the profits earned by the assessee company during the relevant previous years
The High Court has in its judgment set out a statement showing the profits I earned by the assessee company through its various activities
It would be convenient to set out the same now 1 733 ASSESSMENT YEAR 1957 58 1959 60 196061 196162 Rs Rs Rs Rs 1
Managing Agency 209999 256315241705196384 2
Dividend on shares of managed companies 195179 258511 321746 312251 3
Income from shares held as stock in trade i interest on debentures 369 342 309 312  ii Dividends 340695468775548325553999 iii Dealing in shares 23867167552832922100 iv Share transfer fee 10 10 10 10 Total of Nos
i to iv364941 485882576973576421 4
Income from interest 459533581527623617 In order to find out the implications of this statement we have to first decide whether the assessee company can be said to be a company engaged in the business activity of holding of investments
 The finding of the Tribunal on this point is stated thus We agree with the assessee that the shares in the managed companies were acquired with a view to safely hold the managing agencies but we do not agree that for that reason only those shares cannot be taken into account for the purpose of a business of dealing in or hold ing of investments
All the shares held by the assessee company as its investments were the shares of the two company which it was managing agent
It invested in no other shares
The Tribunal has found that the managed company s shares were acquired by the assessee company for the purpose of safeguarding its managing agency business
Therefore it is quite clear that those investments were made not in the course of any business of investment but for the purpose of securing its managing agencies
Those investments were made for a collateral purpose viz to have a firm grip over its managing agency business
If we are correct in this finding Jr we think we are then it follows that the dividend income from shares of the managed companies cannot be taken into consideration in finding out whether the assessee company s business consisted wholly or mainly in the dealing in or holding of investments
The investments made by the assessee company in the shares of the managed companies are essentially linked with its I managing agencies and not with the dealing of that company in shares of the other companies
In other words those investments form part of the assessee company s managing agency business 734 activity
If we add the dividend income of the shares of the managed companies to the managing agency commission the total income from those two sources is much more than the income earned by the assessee company from its share dealings in each one of the assessment years
Hence viewed from the point of view of profits earned by the assessee company it cannot be said that in the relevant previous years the assessee company s business consisted wholly or mainly in the dealing in or holding of investments
Now let us look at the question from the point of view of the assets employed by the assessee company
Here again we can take assistance from the schedule given in the judgment of the High Court setting out in details the assets used by the assessee company in its several business activities
That Schedule reads thus  SHARES OF MANAGED COMPANIES Treated by the Income Tax Department as investments not forming part of the business of dealing in shares
New India Indus tries 691084 696883 696883 696883 2Cotton Fabrics Ltd i Ordinary shares 369285 369285369285369275 ii Preference shares 88463884639048390483 Total 1148832115463111566511156651 Shares of other companies Treated by the Income tax Department as held for dealing in shares stock in trade 2507969301351829889463607063 Total investment as per balance sheet 3656801416814941455974763714 It is true that the assets used by the assessee company in its share dealing are far more than that used by it for investment in the shares of the managed company
But then we have to bear in mind that we do not exhaust the total assets of the company by merely referring to the tangible assets used by it
In addition we have to take into consideration the value of the managing agencies held by the assessee company
Looked that way it cannot be said that the assets of the company used in its share dealings are far more than its other assets
At any rate on the basis of the assets used it cannot be concluded that the assessee s business consisted wholly or mainly in the dealing in investments
735 It follows from the conclusions reached by us earlier that our answer to the question before us must be the same as that given by the High Court
We not only agree with the conclusions reached by the High Court but also with premises on the basis of which those conclusions were reached
In the result Civil Appeals Nos 1313 to 1316 of 1971 are dismissed on merits with costs one set of fees and Civil Appeals Nos
2350 2353 of 1968 are dismissed as being not maintainable but without any order as to costs
section C Appeals dismissed


Summary:
The assessee is a private limited company and was the Managing Agent of two other companies
All the shares held by the assessee company as its investments were the shares of those two companies
The Income tax authorities held that the assessee company was an investment company  within the scope of section 23A of the Act and ordered the company to pay super tax as provided under section 23A1
The High Court in reference held in favour of the assessee
Dismissing the appeals HELD  1 In the facts and circumstances of the present case the assessee company cannot be said to be an investment company  coming within the scope of section 23A of the Act
The meaning of the expression in the case of a company whose business consists wholly or mainly in the dealing in or holding of investments both in the main section 23A and in the Explanation concerns itself with a company whose business consists wholly or mainly in the dealing in or holding of investments
The word mainly must necessarily take its colour from the word wholly preceding that word
 In other words the company which comes within the scope of those provisions must be a company whose primary business is in the dealing in or holding of investments and only in such cases section 23A applies
And the expression business of holding of investments  in the said section refers to a real substantial and systematic or organised course of activity of investment carried on by an assesses for a set purpose such as earning profits
730 H 731 D All the shares held by the assessee company as its investments were the shares of the two companies of which it was the Managing Agent
These investments were made for a collateral purpose viz to have a firm grip over its Managing Agency business
The investments made by the assessee company in the shares of the managed companies are essentially linked with its Managing Agencies and not with the dealing of that company in shares of other companies
The company s total income from dividend income of the shares of the managed companies and the Managing Agency commission together is much more than the income earned by the company from its share dealings
Further the assets of the company used in its share dealings are not more that its other assets
Therefore it cannot be said that the assessee company s business consisted wholly or mainly in the dealing in investments
733 F Bengal Assam Investors Ltd vs CIT West Bengal and Narain Swadesh
Weaving Mills vs Commissioner of Excess Profits Tax  referred to