Appeal No 225 of 1965
Appeal by special leave from the judgment and order dated September 6 1962 of the Madhya Pradesh High Court in Misc
Civil Case No 108 of 1958
IN Shroff for the appellant
ST Desai section N Andley Rameshwar Nath P L Vohra and Mahinder Narain for the respondent
225 The Judgment of the Court was dilevered by Sikri J
This appeal by special leave is directed against the judgment of the High Court of Madhya Pradesh in a reference made to it under section 46 of the Gwalior War Profits Tax Ordinance Samvat 2001 hereinafter called the Ordinance
Three questions were referred to the High Court by the War Profits Tax Commissioner but we are only concerned with question No 1 which reads as follows Whether the dividend income of Rs 1109332received from the Binod Mills was chargeable under the War Profits Tax When the reference was first heard by the High Court three contentions were raised by Ms Binodram Balchand of Ujjain respondents before us hereinafter referred to as the assessees
They were 1 The assessees did not deal in shares and their holdings in the Binod Mills Limited were purely in the nature of investments having no connections with their business as defined in Section 25 read with Rule 1 of Schedule 1 of the Gwalior War Profits Tax Ordinance
The business of the secretaries treasurers and agents of the Binod Mills Limited which was carried on by them did not require any holding of the shares of the company and was not dependent on their investment in the said company
2The dividend income accrued or arose from the profits of the Binod Mills Limited and as the Ordinance applied to the business carried on by this company the dividends were excluded under the explanation to Rule 31 of Schedule 1
3The dividend income should be considered as income of the full accounting period ie from Diwali of 1943 to Diwali of 1944 and should be apportioned on that basis
The High Court by its judgment dated April 19 1957 accepted the first contention of the assessees and accordingly answered the question in their favour
It did not deal with contentions Nos 2 and 3
The Commissioner appealed to this Court and this Court by its judgment dated December 20 1961 set aside the judgment of the High Court and answered the first contention in relation to question No I against the assessees and remanded the case to the High Court for the consideration of the other two contentions with reference to that question
The High Court on remand accepted the second contention of the assessees and answered question No 1 set out above in favour of the assessees
The Commissioner having obtained special leave the appeal is now before us for disposal
226 A few facts may be given in order to appreciate the point that has been argued before us
The assessees were at the relevant time the Managing Agents of the Binod Mills Ltd Ujjain which was a private limited company carrying on the business of manufacturing and selling textile goods in 1944
The Ruler of the Gwalior State promulgated the Gwalior War Profits Tax Ordinance Samvat 2001 for the purpose of imposing tax on excess profits arising out of certain businesses
The Ordinance came into force on July 1 1944 and applied originally to the counting period falling within the period commencing on July 1 1944 and ending on June 30 1945
By virtue of a notification the period was extended to June 30 1946
The assessees carried on the Managing Agency business during the aforesaid period in Gwalior State and being liable to be assessed to war profits submitted a return for the period commencing from July 1 1944 to October 16 1944
It appears that Rs 1109332 was received by the assessees on July 5 1944 on account of dividend on shares of the Binod Mills for the year 1943
The assessees inter alia contended before the War Profits Tax Officer that this sum was not liable to be charged
The War Profits Tax Officer however by order dated July 9 1951 in clouded this sum of Rs 1109132 in the taxable income and his view was upheld in appeal by the Appellate Assistant Commissioner and the Commissioner
As stated above the Commissioner at the instance of the assessees referred three questions including the one with which we are concerned to the High Court
It appears that before the High Court the learned counsel for the Commissioner did not seriously dispute the contention of the assessees that the dividend income which the assessees had received was exempted by the Explanation to r 3 of Schedule 1 of the Ordinance
The rule as it existed originally was as follows 31 Income received from investments shall be included in the profits of a business liable to the War Profits Tax unless it is proved to satisfaction of the War Profits Tax Officer that the investments have no connec tion whatever with the business
2In the case of business which consists wholly or mainly in the dealing in or handling of investments income received from investments shall be deemed to be profits of that business and in the case of a business a specific part only of which consists in dealing in investments the income received from investments held for the purposes of that part of the business shall be deemed to be profits of that part of the business
227 By section 2 of the Gwalior War Profits Tax Amendment Ordi nance Samvat 2002 hereinafter referred to as Ordinance 2002 r 3 of the First Schedule to the Ordinance was amended as follows In rule 32 of the First Schedule to Ordinance the following shall be added namely Explanation The income from investments to be included in the profits of the business under the provisions of this rule shall be computed exclusive of all income received by way of dividends or distribution of profits from a company carrying on a business to the whole of which the Section of the Ordinance imposing the War Profits Tax applies This Ordinance was promulgated on February 28 1946
Another Ordinance called the Gwalior War Profits Tax Amendment Ordinance Samvat 2004 hereinafter referred to as Ordinance 2004 was promulgated on September 6 1947
This Ordinance amended the Explanation to sub rule 2 of rule 3 of Schedule 1 as follows In the explanation of sub rule 2 of Rule 3 of Schedule 1 of the Gwalior War Profits Tax Ordinance Samvat 2001 a comma is added after the words from a company carrying on a business and before the words to the whole of which and shall be always deemed to be there from the date from which the said Ordinance came into force
The High Court felt no difficulty in holding that the expla nation applied and that on its plain terms the dividend income which the assessees received from the profits of Binod Mills Ltd was not liable to be included in the taxable income
The High Court observed The language of the explanation is very plain and it means that if income is received by way of dividends or profits from a company carrying on a business to the whole of which the section of the Ordinance imposing the War Profits Tax applies then the income has to be excluded in the assessment to War Profits Tax of the assessee receiving that income
The object of the explanation is clearly to avoid double taxation
Here it is not disputed that the dividend income which the assessee received was from the profits of the Binod Mills Limited and the Mills were subject to the burden of the War Profits Tax under the Ordinance
That being so the explanation in terms applies to the case and the assessee is entitled to claim that the dividend income of Rs 1109332 received from Binod Mills could not 228 be included in the computation of its profits for the purposes of War Profits Tax and was consequently not chargeable under the War Profits Tax Ordinance
Learned Advocate General appearing for the State did not dispute this position
Mr Shroff the learned counsel for the Commissioner contends first that the explanation was not in existence at the relevant time and therefore cannot be taken into consideration secondly that the explanation is an explanation to r 32 and not to r 31 and therefore cannot be used to explain r 31
Mr Shroff complains that the High Court was wrong in thinking that the explanation formed part of Ordinance 2001 as it was originally promulgated
The High Court seems to have been under this impression because in the order refusing leave to appeal to this Court the High Court observed There was no omission at all on our part to consider the question whether the explanation was prospective or not
Indeed this question was never raised by the learned Advocate General appearing for the Department and it was rightly not raised as the Explanation was not added subsequent to the promulgation of the Ordinance and the very basis of the assessment of the income of the assessee was that rule 3 of Schedule 1 of the Ordinance together with the Explanation applied to the income received by the assessee during the period from 1st July 1944 to 16th October 1944
It seems that Ordinance 2002 and Ordinance 2004 were not placed before the High Court and for this reason it assumed that the explanation was not added subsequent to the promulgation of the Ordinance
But even if it was added subsequently in our opinion the explanation applies to the computation of the profits of the chargeable accounting period July 1 1944 to October 16 1944
If we read Ordinance 2002 and Ordinance 2004 together the legislative intention to make the explanation retrospective becomes clear
Apart from Ordinance 2004 it would have been very arguable that the explanation inserted by Ordinance 2002 was retrospective because it dealt with the computation of profits and would apply to all computation of profits made by the Taxing authorities after February 28 1946
But we need not go into this question because Ordinance 2004 expressly assumes that the explanation was in existence from the date when the Ordinance came into force and no other meaning can be given to section 2 of Ordinance 2004 because by deeming that the comma shall be deemed to be there from the date from which the Ordinance came into force it expressly assumes that the explanation was also in force from that date
Accordingly we are not inclined to 229 accept the first contention of Mr Shroff and we must hold that the explanation applies to the computation of profits of the chargeable accounting period July 1 1944 to October 16 1944
Regarding the second contention Mr Shroff says that Ordi nance 2002 expressly provides that the explanation shall be added in r 32 of the First Schedule to the Ordinance
He further says that this explanation is referred in Ordinance 2004 as explanation of sub rule 2 of rule 3 of Schedule 1
There is no doubt that Ordinance 2002 did purport to add this explanation to r 32 but it seems to us that if we look at the language of the explanation it was meant to be an explanation not only to r 32 but to r 31 also
First the words the income from investments to be included in the profits of the business under the provisions of this rule are comprehensive and include income from investments both under r 31 and r 32
Secondly there is no reason why any distinction should have been made between investments mentioned in r 31 and investments mentioned in r 32
Rule 31 is general and deals with all investments from profits of all businesses and would include investments mentioned in r 32
Rule 32 deals with investments of a certain business ie business which consists wholly or mainly in the dealing in or holding of investments
We have not been able to appreciate why if Mr Shroff is right was it necessary to distinguish between income from investments mentioned in r 31 and income from investments mentioned in r 32
At any rate the language of the explanation is quite clear and it seems to us that by the words in rule 32 of the First Schedule to the Ordinance the following shall be added what was really meant was to add the explanation below r 32
In the result we agree with the High Court that the answer to the question referred should be in the negative
The appeal accordingly fails and is dismissed with costs
Appeal dismissed


Summary:
The assessee was the managing agent of a Textile Mill in Uj jain
In 1944 the Gwalior State promulgated the Gwalior War Profits Tax Ordinance
In 1946 by the Gwalior War Profits Tax Amendment Ordinance an Explanation was added after r 32 of the First Schedule to the Ordinance of 1944
In 1947 another Amendment Or dinance was promulgated whereby a comma was inserted in the Explanation
In July 1944
the assesses received about Rs 11 lacs as dividend on its shares in the Textile Mill
The War Profits Tax Officer included the amount in the assessee s taxable income and the order was upheld by the Appellate Assistant Commissioner and the Commissioner
On the question whether the dividend income was chargeable to war profits tax the High Court held on a reference that the Explanation applied and that under the Explanation the dividend income was not liable to be included in the assessee s taxable income
In appeal to this Court it was contended that the Explanation was not applicable because i it was not retrospective and ii it was only an Explanation to r 32 and not to r 31 which was the rule applicable to the assessee
HELDThe Explanation applies to the computation of the pro fits of the chargeable accounting period because i the Ordinance of 1947 expressly assumes that the Explanation was in existence from the date when the War Profits Tax Ordinance came into force in 1944 and ii on the language of the Explanation it was meant to be an Explanation not only to r 32 but also to r 31
By the words in r 32 the following shall be added in the amending Ordinance of 1946 all that was meant was that the Explanation should be added below r 32
228 H 229 E