Case: The War Profits Tax Commissioner Vs. M/S. Binodiram Balchand

Ordinance reads:"This Ordinance might be called the Gwalior War Profits Tax (Amendment) Ordinance Samvat 2004. 11. We do not consider it necessary to dilate on the point as we are clearly of the opinion that the Schedule was part of the Ordinance and has therefore to be read not as subordinate legislation under S. 50 but as part and parcel of the Ordinance itself. 12. The whole basis therefore of the reasoning upon which the learned Judges of the High Court proceeded falls to the ground and the only question is whether accepting the respondents case that the shares held by it in the Binod Mills Ltd. were really part of its investments, these investments have "any connection with its business. It is common ground that the respondent was the Secretary, Treasurer and Managing agent of the Binod Mills and what we are now concerned with are the shares held by it in that company. In the case of every assessee who carries on a business activity and is in receipt of profits from that business, on the terms of R. 3 (1) income from every investment held by him is liable to be included in the profits assessable to tax unless such person was able to satisfy the revenue authorities that the investments had "no connection whatever with his business. Mr. Viswanatha Sastri, learned Counsel for the respondent sought to overcome this position by submitting that the "connection contemplated by the rule was a direct "connection and not a remote or fanciful one and that in the present case there was really no connection between the respondents ownership of these shares and the office of managing-agent which it held, His contention was that except the fact that the recipient of the profits from the "business of managing agency and of the dividend income was the same, there was no other connection between the one and the other. In further elaboration of his point, he invited us to hold that the "connection would be direct only where the investment was related to a business activity as cause and effect or as a sine qua non. Thus if it was a requirement either of the Articles of Association of the company or of the Managing Agency Agreement, that the managing agent should be a share-holder, or the holder of a specified number of shares, then alone, learned Counsel contended, the managing agency being dependent on the share-holding, there would be that connection which would bring the dividend income within the expanded definition of profits from business under R. 3 (1). In all the other cases where shares were held, without the assessee being obliged to hold them for the purpose of his business activity, no distinction, Counsel submitted, could be drawn between the investment in the shares of a company with which he had nothing to do, and a company which he managed under an agreement. Learned Counsel further stressed that the case of the respondent was stronger because the Managing Agency Agreement with the respondent was to last so long as the respondent-firm existed and carried on business in that name and could not be terminated by the company "save and except when the agent being found guilty of fraud in the management or in the discharge of their duties, and having regard to this security of tenure which the respondent enjoyed, the holding of these shares had no connection whatever with the business of managing agency. We find ourselves unable to accept this interpretation of R. 3 (1).The relevant words in the rule being "any connection whatever, it would not be giving proper effect to the meaning of the words "any and "whatever to restrict it to cases of "direct connection in the sense suggested on behalf of the respondent. But this apart, by the number of shares which the respondent owned in the mills it is admitted that it obtained a controlling interest - it held the majority of the shares in the company. The respondent was therefore enabled by reason of this investment to control the action of the company which was the other party under the Managing Agency Agreement. This control was capable of being used to further the interests of the Managing-agent in its relations with the company and whether or not this was used for obtaining advantages, it would certainly be available for avoiding any disadvantages arising from misunderstandings with the company. It could not be denied that the control would certainly be useful to keep the relations between the company and the Managing-agent smooth so as to enable the Managing-agent to earn his commission etc. without differences or disputes. Even if therefore the word "connection in R. 3 (1) meant a "direct connection - a construction which we do not adopt - it appears to us that the present case satisfied even that test. In any event the "connection is not anything remote, fanciful or imaginary, but on the other hand real and capable of being turned to good account. It certainly cannot be equated with the holding of shares by the respondent in a company with which he had no connection other than as a share-holder. 13. We are therefore of the opinion that the dividend received by the respondent from the Binod Mills Ltd., was properly included by the assessing authorities in the computation of the taxable profit of the respondent under the Ordinance and that the High Court erred in answering the reference in favour of the assessee. We have already pointed out that the High Court did not deal with or express any opinion on the two subsidiary contentions urged by the respondent with reference to the first question. Those points were also naturally not argued before us and we do not express any opinion on them. It is obvious that the reference cannot be disposed of without deciding these contentions and the case would have to be remanded to the High Court for dealing with these subsidiary points.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]The learned Judges of the High Court dealt only with the first of the above contentions, and having accepted it, considered it unnecessary to express any opinion on the other two12. The whole basis therefore of the reasoning upon which the learned Judges of the High Court proceeded falls to the ground and the only question is whether accepting the respondents case that the shares held by it in the Binod Mills Ltd. were really part of its investments, these investments have "any connection with its business. It is common ground that the respondent was the Secretary, Treasurer and Managing agent of the Binod Mills and what we are now concerned with are the shares held by it in that company. In the case of every assessee who carries on a business activity and is in receipt of profits from that business, on the terms of R. 3 (1) income from every investment held by him is liable to be included in the profits assessable to tax unless such person was able to satisfy the revenue authorities that the investments had "no connection whatever with his businessWe find ourselves unable to accept this interpretation of R. 3 (1).The relevant words in the rule being "any connection whatever, it would not be giving proper effect to the meaning of the words "any and "whatever to restrict it to cases of "direct connection in the sense suggested on behalf of the respondent. But this apart, by the number of shares which the respondent owned in the mills it is admitted that it obtained a controlling interest - it held the majority of the shares in the company. The respondent was therefore enabled by reason of this investment to control the action of the company which was the other party under the Managing Agency Agreement. This control was capable of being used to further the interests of the Managing-agent in its relations with the company and whether or not this was used for obtaining advantages, it would certainly be available for avoiding any disadvantages arising from misunderstandings with the company. It could not be denied that the control would certainly be useful to keep the relations between the company and the Managing-agent smooth so as to enable the Managing-agent to earn his commission etc. without differences or disputes. Even if therefore the word "connection in R. 3 (1) meant a "direct connection - a construction which we do not adopt - it appears to us that the present case satisfied even that test. In any event the "connection is not anything remote, fanciful or imaginary, but on the other hand real and capable of being turned to good account. It certainly cannot be equated with the holding of shares by the respondent in a company with which he had no connection other than as a share-holder13. We are therefore of the opinion that the dividend received by the respondent from the Binod Mills Ltd., was properly included by the assessing authorities in the computation of the taxable profit of the respondent under the Ordinance and that the High Court erred in answering the reference in favour of the assessee. We have already pointed out that the High Court did not deal with or express any opinion on the two subsidiary contentions urged by the respondent with reference to the first question. Those points were also naturally not argued before us and we do not express any opinion on them. It is obvious that the reference cannot be disposed of without deciding these contentions and the case would have to be remanded to the High Court for dealing with these subsidiary points.