COMMISSIONER OF INCOME TAX, GUJARAT vs. DISTRIBUTORS (BARODA) (P) LTD.

CIVIL APPEAL No. 2350/1968Supreme Court[1972] 1 S.C.R. 72616 September 1971Bench: 2 JudgesAuthor: K.S. HEGDE, A.N. GROVER COMMISSIONER OF10 pages
AI SummaryDismissed

What were the facts?

The assessee, a private limited company, was the Managing Agent for two other companies, New India Industries Ltd. and Cotton Fabrics Private Ltd. All shares held by the assessee as investments were in these two managed companies. The Income-tax authorities classified the assessee as an 'investment company' under Section 23A of the Indian Income-tax Act, 1922, and levied super tax on its undistributed income. The assessee appealed, and the Income-tax Appellate Tribunal upheld the authorities' decision. The High Court, however, ruled in favor of the assessee. The Revenue appealed this decision to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the assessee company cannot be considered an 'investment company' within the scope of Section 23A of the Indian Income-tax Act, 1922. The Court reasoned that the phrase 'business consists wholly or mainly in the dealing in or holding of investments' implies a primary business activity. The assessee's investments in the shares of the managed companies were made for the collateral purpose of securing its managing agency business, not as a primary investment activity. When the income from managing agency commission and dividends from managed companies was considered together, it was significantly higher than the income from share dealings. Furthermore, when the value of managing agencies was factored in, it could not be concluded that the assets used in share dealings were 'wholly or mainly' more than other assets. Therefore, the assessee's business did not consist 'wholly or mainly' in dealing in or holding investments. The High Court's decision in favor of the assessee was upheld.

What were the issues?

1. Whether, on the facts and circumstances of the case, the assessee company is an 'investment company' for the purposes of Section 23A of the Indian Income-tax Act, 1922, considering its business activities and the nature of its investments. Assessee's Contention: The assessee argued that its primary business was managing agencies, and the investments in the shares of the managed companies were made for a collateral purpose, i.e., to secure its managing agency business. Therefore, its business did not consist 'wholly or mainly' in dealing in or holding investments. Revenue's Contention: The Revenue contended that the income from investments and the assets employed in share dealings were substantial enough to classify the assessee as an 'investment company' under Section 23A. The Income-tax Officer's finding was that the income from 'dealing in or holding of investments' was much more than income from managing agencies, and a large portion of assets were used in the former activity.

Which sections of the Income-tax Act were involved?

Section 23A

AI-generated summary — verify with the full judgment below

726 COMMISSIONER OF INCOME TAX, GUJAR4T A v. DISTRIBUTORS (BARODA) (P) LTD.

September l 6, 1971 [K. S. HEGDE AND A. N. GROVER, JJ.J Jndian Income.Jax Act, 1922, s. 23A-"ln the case of a co111pany lVhose business consists wholly or mainly in the dealing in or holding of jnvesunent", nzeaning of-Whether holding share of only flVo atnnpanies of ·which it is the Managing Agent is an 'investment company' lrithin the scope of the section. B The assessee is a private limited company and was the Nfanaging Agent of two other companies.

All the shares held by the assessee com- C pany 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 s. 23A of the Act and ordered the company to pay super tax as provided under s. 23A( I). The High Court in refer- ence held in favour of the assessee.

Dismis~ing the appeals, HELD: (I) In the facts and circumstances of the present ease, the a~cssee company cannot be said to be an 'investment company· corning D within the scope of s. 23A of the Aet.

The meaning of the expression ''in the case of" a comp.any \.\·hose busi-

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 23A

All 45 judgments and leading authorities on Section 23A →

Recent GST High Court judgments

Search GST case law →