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

The respondent - M/s. Binodiram Balchand is the name under which a Hindu undivided family which was resident in the State of Gwalior carried on various businesses in that State. Profits derived from businesses carried in the State were charged to War Profits Tax under the Ordinance. Among the businesses carried on by the respondent was its employment as the Secretary, Treasurer and Managing agent of a textile mill which was a limited company bearing the name of Binod Mills Company Limited, Ujjain. The appeal is concerned with the computation of the profits of the respondent to War Profits Tax under the Ordinance, which it might be stated at the outset, was on lines very similar to the Indian Excess Profits Tax Act, 19403. The chargeable accounting period with which the appeal is concerned, is the period commencing from July 1, 1944, to October 16, 1944. The respondent - assessee submitted its return and thereafter the War Profits Tax Officer by his assessment order dated July 9, 1951, determined the taxable income of the assessee for this chargeable accounting period at Rupees 12,16,145/- and assessed it to tax in the sum of Rs. 2,02,691/-. Several points were raised in relation to this assessment order by the respondent, and one of them related to the inclusion in its assessable profits of a sum of Rs. 11,09,332/- which was received by the respondent on July 5, 1944, being the dividend declared and paid by the Binod Mills Ltd. for 1943 on the shares held by the respondent. It was the contention of the respondent that this sum was its income from an investment pure and simple and was not "profits from business, and so could not be included in its taxable profits on a proper construction of the relevant provisions of the Ordinance. From the assessment order the respondent filed an appeal to the appellate authority which however was unsuccessful. A revision to the Commissioner of War Profits Tax met with the same fate and thereafter the respondent prayed for a reference to the High Court under S. 46 (1) of the Ordinance which ran thus:"46 (1) If, in the course of any assessment under this Ordinance or any proceeding in connection therewith, a question of law arises, the Commissioner, may, either on his own motion or on reference from any War Profits Tax authority subordinate to him, draw up a statement of the case and refer it with his own opinion thereon to the High Court.The Commissioner acceded to this request and referred for the opinion of the High Court three questions:"(1) Whether the dividend income of Rs. 11,09,332/- received from the Binod Mills was chargeable under the War Profits Tax Ordinance?(2) Whether certain bad debts written off by the assessees could be allowed as deductions in computing profits for war tax purpose?(3) Whether the expenses of assessees branch at Gwalior which was defunct, could be allowed as admissible expenses?The High Court answered questions 2 and 3 in favour of the department, but the first question was answered in the negative and in favour of the assessee. There is now no dispute as regards question 2 and 3 and the appeal is confined to the correctness of the answer to the first question.

Court's reasoning:
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.