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Madhya Pradesh State Industries Corporation Ltd. v. Commissioner Of Income-Tax, M.P
Judicial Opinion Summary — Dixit, C.J.
Factual and Procedural Background
This reference was made under section 256(1) of the Income-tax Act, 1961 at the instance of the assessee, Madhya Pradesh State Industries Corporation Ltd., and asks whether a sum received as interest should be taxed as business income under section 28 or as income from “other sources” under section 56. The assessee is a Government private limited company incorporated on 11 April 1961 to take over and run certain government concerns. During the accounting year ending 31 March 1962 (assessment year 1962-63) the company did not carry on production or business; it was in a period of capital expenditure and installation of plant and machinery.
The company received share money from the Madhya Pradesh Government, the Madhya Pradesh Electricity Board and the Director of Industries, which, being surplus, it deposited in call-deposits with banks and earned interest. The opinion records the amounts involved: in one passage the interest received in the accounting year is given as Rs. 20,763.92 and the referred question in the reference frames the sum as Rs. 20,856.
Procedurally, the Income-tax Officer treated the interest as income from “other sources” under section 56 (allowing part of the expenses), the assessee's appeal to the Appellate Assistant Commissioner failed, and the Income-tax Appellate Tribunal dismissed the second appeal. The present reference to the Court arises from that rejection and requests a decision on whether the interest should be treated as business income (s.28) or as income from other sources (s.56).
Legal Issues Presented
- “Whether, on the facts and in the circumstances of this case, the sum of Rs. 20,856 received by way of interest by the assessee should be taxed under section 28 as business income or under section 56 as income from ‘other sources’?”
Arguments of the Parties
Assessee's Arguments
- The assessee contended before the Income-tax Officer that being a newly established undertaking it had no business income liable to tax, and that the interest receipts should be assessed as income from business because the company was authorised by clause 13 of its memorandum of association to carry on money-lending business.
- Before the Court, learned counsel (Shri Chitaley) did not press the argument that the interest was income from money-lending. Instead he argued that the share monies were monies relating to the business of the assessee and that any interest thereon would be business income because the company was authorised under sub-clause (20) of clause III of the memorandum and article 72(1) of the articles of association to invest and deal with the money of the company. The counsel relied on the Supreme Court decision in Commissioner of Income-tax v. Calcutta National Bank Ltd. [1959] 37 I.T.R. 171.
Revenue / Income-tax Officer and Tribunal Position
- The Income-tax Officer held that although the company was authorised to do money-lending business, the placing of surplus funds in bank call-deposits was not lending money (i.e., not money-lending business) and treated the interest as income from “other sources” under section 56, allowing deduction of part of the expenses attributable to earning that interest.
- The Appellate Assistant Commissioner upheld the Income-tax Officer's view. The Income-tax Appellate Tribunal dismissed the appeal, stating that the deposits were investments made in accordance with clause 20 of the memorandum and article 72(1) of the articles and that placing moneys in call-deposits or fixed deposits with banks could not be said to be lending moneys to the bank. The Tribunal described the receipts in the accounts as ‘interest on deposits’ and concluded that the department was correct in assessing the interest under the head ‘other sources’. The Tribunal also upheld the quantum of expenses allowed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 I.T.E. 765, 773 | Support for the proposition that “business” requires some real, substantial and systematic or organised course of activity or conduct with a set purpose. | The court invoked this definition to explain that mere deposit of share capital in bank call-deposits does not constitute the organised activity required to amount to “business”. |
| Commissioners of Inland Revenue v. South Behar Railway Company | To ascertain a company’s business one must look at its memorandum and see for what business it provides and whether its objects are being pursued. | The Court relied on this authority to support the approach of examining whether the particular act was done in pursuance of the company’s memoranda objects; it used the principle to determine that bank deposits were not acts in pursuance of the company’s principal objects. |
| Seksaria Biswan Sugar Factory v. Commissioner of Income-tax | In each case one must determine whether the act was a normal step in carrying on the business and whether it was in pursuance of the memorandum or articles of association. | The Court cited this statement to reinforce that the specific nature of the act (depositing share capital in bank) must be tested against whether it is a normal and object-related step of the company’s business—finding that it was not. |
| Lakshminarayan Ram Gopal and Sons Ltd. v. Government of Hyderabad [1954] 25 I.T.R. 449 | Supports the proposition that one must determine whether an act is done in pursuance of the objects enumerated in the memorandum or articles of association. | The Court treated this authority as consistent with the other authorities and relied on it to support the conclusion that the deposits were not within the company’s business objects as practised in the year in question. |
| Commissioner of Income-tax v. Calcutta National Bank Ltd. [1959] 37 I.T.R. 171 | Holds that for a banking company the management of property and realisation of rent (or income from investments) may be within the business; the Excess Profits Tax Act had a wider definition of “business” relevant there. | The Court explained that the assessee relied on this case but found it inapplicable: in Calcutta National Bank the assessee was a banking company and the statutory context (Excess Profits Tax Act) and facts were materially different, so the principle there did not assist the present assessee (which was not a banking company and whose deposits were transactions in respect of share capital). |
Court's Reasoning and Analysis
The Court proceeded in the following analytical steps (as reflected in the opinion):
- Identified the precise question referred under section 256(1): whether the interest sum should be taxed under section 28 (profits and gains of business or profession) or under section 56 (income from other sources).
- Examined the material facts: the company was newly incorporated to take over and run government concerns; it had not gone into production in the accounting year; share capital receipts were surplus to immediate requirements and were deposited in banks, producing interest.
- Reviewed the relevant constitutional documents of the company: clause III(13) authorises money-lending; clause III(20) authorises investment and dealing with company moneys; article 72(1) confers power on directors to invest company moneys in securities approved by the Governor.
- Considered the statutory definitions and scope: section 28 charges profits and gains of any business or profession carried on during the previous year; section 2(13) (definition of “business”) is inclusive but requires “some real, substantial and systematic or organised course of activity or conduct with a set purpose” (citing Narain Swadeshi Weaving Mills).
- Applied established authorities (South Behar Railway, Seksaria Biswan Sugar Factory, Lakshminarayan Ram Gopal and Sons) emphasizing that it is not enough that a memorandum authorises an activity—one must determine whether the particular act was done in pursuance of those objects and whether it was a normal step in carrying on the business.
- Evaluated the nature of the deposits: concluded that depositing share capital in current or deposit accounts with banks could not, by stretching the meaning of money-lending, be equated with lending money or carrying on an organised money-lending or investment business. The company was not a banking company and its principal business related to taking over and running projects; the deposits represented a transaction relating to share capital not an act in the course of its ordinary investment business under clause 20 or article 72(1).
- Noted how the company itself treated the receipts in its accounts—interest was described as “interest on deposits” and shown as “cash and bank balances”—which supported characterising the receipts as incidental to holding surplus capital rather than proceeds of business operations.
- Distinguished the Calcutta National Bank decision relied upon by the assessee: that case concerned a banking company and a different statutory scheme (Excess Profits Tax Act) with a wider definition of “business”; it therefore did not apply to the present facts.
- Concluded that the interest income was not income from business and thus fell within income from “other sources” under section 56.
Holding and Implications
Holding: The Court answered the referred question by holding that the sum received by way of interest by the assessee is chargeable to income-tax under section 56 of the Income-tax Act, 1961 as “income from other sources” and cannot be taxed under section 28 of the Act as business income.
Consequences and immediate effect:
- The interest receipts in question are taxable as income from other sources (s.56), not as business income (s.28), for the assessment year in question.
- The assessee was ordered to pay the costs of the reference; counsel’s fee was fixed at Rs. 200.
The opinion does not state or assert that it establishes a novel general precedent beyond applying established principles to the facts of this case; its reasoning is presented as an application of prior authorities and statutory provisions to the specific transactions and company structure before the Court.
Dixit, C.J:— In this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the question which has been referred for decision is:
“Whether, on the facts and in the circumstances of this case, the sum of Rs. 20,856 received by way of interest by the assessee should be taxed under section 28 as business income or under section 56 as income from ‘other sources’?”
2. The material facts are that the assessee, the Madhya Pradesh State Industries Corporation Ltd., is a Government private limited company. It was incorporated on 11th April, 1961, for taking over and running certain concerns of the Government of Madhya Pradesh, namely, the Ratlam Power Alcohol Project, Spinning Mill, Sanawad, and the Cottonseed Solvent Extraction Project, Ujjain. The shares in the company are held by the Government of Madhya Pradesh, the Madhya Pradesh Electricity Board, and the Director of Industries, M.P Government. During the period covered by the assessment year 1962-63, of which the accounting year ended on 31st March, 1962, the company did not actually carry on any business; there was also no production. This was a period of capital expenditure and installation of machinery and plant. The share money, which the company received from the Madhya Pradesh Government, the Madhya Pradesh Electricity Board, and the Director of Industries, not being immediately required by it, was deposited in call-deposits in certain banks. On these deposits the company received in the accounting year a total amount of Rs. 20,763/92 as interest. The company showed this amount of interest as “cash and bank balances” in its accounts as on 31st March, 1962. In the profit and loss account, the amount was shown as “interest on deposits”. In its return of income for the assessment year in question, the assessee showed a total loss of Rs. 15,110. Before the Income-tax Officer, the assessee contended that being a newly established undertaking, it had not income liable to tax, and further that the interest receipts should be assessed as income from business as it was authorised to do money-lending business under clause 13 of the memorandum of association. The claim for treating the interest amount received as income from business was obviously made for the purpose of deduction of a major portion of the expenses incurred, such as, salaries to the directors, rent, etc. The Income-tax Officer held that though the company was authorised to do money-lending business, the interest received by it on deposits from the banks was not any income received from money-lending business. He treated the interest income as income from “other sources” under section 56 of the Act. He allowed deduction of a part of the expenses incurred in earning this interest income.
3. The assessee's appeal before the Appellate Assistant Commissioner failed. Thereupon, it filed a second appeal before the Income-tax Appellate Tribunal, which was also dismissed. While dismissing the appeal, the Tribunal observed:
“In this case it is common ground that the projects had not gone into production and in that sense there was no business carried on by the assessee. Therefore, the short question is whether the making of deposits with the banks of the surplus moneys was business carried on in money-lending by the assessee-company? No doubt clause 13 enables the company to carry on business of money-lending. But what appears to have been done in this case is to invest the company's moneys in accordance with clause 20 of the memorandum and article 72(1) of the articles of association. Placing moneys in call-deposits or fixed deposits with banks cannot be said to be lending moneys to the bank. The nature of these investments has been correctly described in the profit and loss account as ‘interest on deposits’. The department was therefore correct in having assessed these interest under the head ‘other sources’ under section 12 of the Act. As regards quantum, the expenses so far allowed by the department for earning this income are adequate and does not justify any interference.”
4. At the outset, it is necessary to refer to the relevant clauses of the memorandum of association of the company in order to ascertain the business of the company. Clause III of the memorandum of association sets out the objects for which the company has been established. One of the objects stated in sub-clause (13) of clause III is:
“To lend money on mortgage of immovable property or on hypothecation or pledge of movable property or without security to such persons and on such terms as may seem expedient and in particular to customers of and persons having dealings with the company.”
5. Then sub-clause (20) says:
“To invest and deal with the money of the company in any securities, investments, properties, movable or immovable, and in such manner as may, from time to time, be determined and to sell, transfer or deal with the same.”
6. Clause 72(1) of the articles of association, which is also material here, runs as follows:
“72. Without prejudice to the general powers conferred by the last preceding article, and the other powers conferred by these articles, and subject to the provisions of the Act, the directors shall have the following powers, that is to say, powers:
(1) to invest in such securities as may be approved by the Governor and deal with any of the moneys of the company upon such investments authorised by the memorandum of association of the company (not being shares in this company) and in such manner as they think fit, and from time to time to vary or realise such investments.”
7. Now, section 28 of the Act describes the income which is chargeable to income-tax under the head “profits and gains of business or profession”. Under that provision, the profits and gains of any business or profession, which was carried on by the assessee at any time during the previous year, is income chargeable to tax under the head “profits and gains of business or profession”. We are not concerned with clause (ii) of section 28 as the interest received by the assessee in the present case is not any amount of compensation or payment falling under that clause. “Business” has been defined by section 2(13) as including “any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manu facture”. This definition is inclusive and not exhaustive, and the words used in the definition are wide. But it is only “some real, substantial and systematic or organised course of activity or conduct with a set purpose” that constitutes “business” (see Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 I.T.E 765, 773). As one of the objects of the assessee, as stated in its memorandum, is “to lend money on mortgage of immovable property”, an organised money-lending activity carried on by the assessee would no doubt be business. But the deposit of the share capital of the assessee in current account or in deposit with any bank cannot by any stretching of the meaning of the term “money-lending” be said to be an act of money-lending.
8. Shri Chitaley, learned counsel appearing for the assessee, did not press before us the argument that the interest received by the assessee from the bank was receipt of income from money-lending activity. He, however, contended that share moneys were moneys relating to the business of the assessee and any interest thereon would be business income as the assessee was authorised under sub-clause 20 of clause III of its memorandum of association and article 72(1) of the articles of association to invest in and deal with the money of the company in any securities, investments, etc Learned counsel relied on the decision of the Supreme Court in Commissioner of Income-tax v. Calcutta National Bank Ltd. [1959] 37 I.T.R 171
9. We are unable to accept this contention. For determining whether an act done by a company was one done by it in carrying on its business, it is not sufficient merely to look at the memorandum of association and to find out what business it provides. It is also necessary to determine further whether the particular act done by the company was done in pursuance of the objects enumerated in the memorandum or the articles of association. The decisions in Commissioners of Inland Revenue v. South Behar Railway Company, Seksaria Biswan Sugar Factory v. Commissioner of Income-tax and Lakshminarayan Ram Gopal and Sons Ltd. v. Government of Hyderabad [1954] 25 I.T.R 449 fully support this proposition. In Commissioners of Inland Revenue v. South Behar Railway Company, Lord Sumner said:
“To ascertain the business of a limited liability company one must look first at its memorandum and see for what business that provides and whether its objects are still being pursued.”
10. In Seksaria Biswan Sugar Factory's case, Chagla C.J observed:
“………in every particular case you have to determine whether in doing what the company did it was taking a step which was a normal step in carrying on its business, and further whether the particular act can be described as being in pursuance of the objects enumerated in the memorandum or articles of association.”
11. In the present case, one of the objects of the assessee-company is no doubt to “invest and deal with the money of the company in any securities, investments, properties…….”. The assessee could have carried on this business. But the question to be determined is whether the act of the assessee-company in keeping the amount of share-money in current account or in deposit with bank and earning interest thereon was one done in pursuance of the object of the company enumerated in sub-clause (20) of clause III of the memorandum of association or article 72(1) of the articles of association. In our opinion, On the facts of the case it is impossible to hold that the deposit of share-money in certain bank was an investment made by the assessee-company pursuant to the object specified in the aforesaid two clauses. The assessee-company is not a banking company. As is evident from the memorandum of association, the main activity and business of the company is the taking over from the Government of Madhya Pradesh certain projects and industries and running them, and the development of new industries, industrial areas, estates and establishments. Before the Tribunal, it was common ground that the projects, which the assessee-company took over, had not gone into production in the year of account. The share capital, which the assessee-company obtained from the Madhya Pradesh Government, the M.P Electricity Board and the Director of Industries, was not immediately required for expenditure. The assessee company, therefore, deposited the surplus share money in a certain bank and earned interest thereon. The moneys deposited by the company with the bank were plainly not in the ordinary course of its business of making investments under sub-clause (20) of clause III of the memorandum of association or article 72(1) of the articles of association. It was merely a transaction relating to its share capital, and not an act in the course of its business. The assessee-company itself showed in its profit and loss account the amount of interest on its deposits with bank as “interest on deposits”; and in its accounts as on 31st March, 1962, the amount of interest was shown as “cash and bank balances”. If, therefore, the deposits made by the assessee in a certain bank did not constitute any business of the company, then it follows that the interest earned by the assessee on those deposits cannot be regarded as income under the head “profits and gains of business or profession” under section 28 of the Act. The decision of the Supreme Court in Commissioner of Income-tax v. Calcutta National Bank Ltd., cited by the learned counsel for the assessee, has no applicability here. In that case, the assessee was a banking company. It owned a building and realised income by way of rent for the portion of the building let out. One of the objects stated in the memorandum of association of the company was “to purchase or take on lease or in exchange or otherwise acquire any movable or immovable property… which the company may think necessary or convenient, maintain and alter any buildings or works necessary or convenient for the purpose of the company”. The question raised in that case was whether the income realised by the assessee by way of rent was liable to excess profits tax and could be included in the profits of the business under rule 4(4) of the First Schedule to the Excess Profits Tax Act, 1940. The Supreme Court held that the realisation of rental income by the assessee was in the course of its business in prosecution of one of its objects in its memorandum and was, therefore, liable to be included in its business profits and was assessable to excess profits tax; and that management of property and realisation of rent therefrom, was within the objects of the company. In that case, the Supreme Court pointed out that the definition of the term “business” under the Excess Profits Tax Act, 1940, was wider than that under the Income-tax Act and the schemes of the two Acts were different; and that it was within the ambit of the business activities of the assessee, a banking company, to realise income from its investments which may be either in share, securities or in immovable properties. Thus, there is a material distinction between the present case and the case before the Supreme Court in that here the assessee-company is not a banking company. That being so, it cannot be urged that the bare fact that the assessee deposited money in the bank was by itself sufficient to show that the deposits were made with a view to carrying on business in the sense of earning profits by investments.
12. If, as we think, the interest income earned by the assessee is not any income from business, then clearly it is income from “other sources” falling under section 56 of the Act.
13. For these reasons, our answer to the question referred is that the sum of Rs. 20,856, received by way of interest by the assessee, is chargeable to income-tax under section 56 of the Act as “income from other sources”. It cannot be taxed under section 28 of the Act as business income. The assessee shall pay costs of this reference. Counsel's fee is fixed at Rs. 200.
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