COMMISSIONER OF INCOME-TAX, WEST BENGAL vs. CALCUTTA NATIONAL BANK LIMITED (IN LIQUIDATION)

CIVIL APPEAL No. 4/1956Supreme Court1959 INSC 3820 April 1959Bench: 3 JudgesAuthor: BHUVNESHWAR PRASAD SINHA, J.L. KAPUR, M. HIDAYATULLAH33 pages
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What were the facts?

The assessee, Calcutta National Bank Limited (in liquidation), a banking company, owned a six-storeyed building in Calcutta. It occupied the ground floor and a portion of the 6th floor for its headquarters, while the remaining four to five times the floor area was let out, generating an annual rental income of Rs. 86,000. The Excess Profits Tax Officer assessed this rental income, and the Income-tax Appellate Tribunal upheld this. However, the Calcutta High Court, on a reference, reversed this decision. The appeal is before the Supreme Court after the High Court refused a certificate of fitness. The assessment year is for the period ending March 31, 1946.

What did the Supreme Court hold?

The Supreme Court, by a majority of 2:1, held that the rental income is taxable as business income. The majority (Sinha and Hidayatullah, JJ.) reasoned that the High Court erred in overlooking the main provision of Section 2(5) and that the term 'business' is of wide import. The Memorandum of Association clearly showed that managing property and realizing rents were within the company's objects. Schedule I, Rule 4(4) was interpreted to widen the definition of business to include letting of property for earning rents, and this rule should be given effect to, even if its language appears to go beyond the first proviso of Section 2(5). The principle cited is that if the language of the schedule clearly goes outside the purpose indicated by the Act, effect must be given to it. Kapur, J. (dissenting) held that letting out property was neither wholly nor partly the business of the respondent bank, and therefore, the rental income did not fall within the definition of 'profits' chargeable to excess profits tax.

What were the issues?

1. Whether the rental income of Rs. 86,000 earned by the assessee from letting out a part of its owned building constitutes business income taxable under Section 2(5) read with Schedule I, Rule 4(4) of the Excess Profits Tax Act, 1940. Assessee's Contentions (implied by High Court's decision and dissenting opinion): The income derived from holding property and letting it out is not business income unless the company's functions consist wholly or mainly in holding investments or other property, as per the first proviso to Section 2(5). Letting out surplus property is incidental and not the primary business of a banking company. Revenue's Contentions (implied by Tribunal's decision and majority opinion): The term 'business' is of wide import. The Memorandum of Association clearly includes managing property and realizing rents as an object. Schedule I, Rule 4(4) widens the definition of business to include letting of property for earning rents, and this rule should be given effect to, irrespective of the limitations in the main definition of 'business' in Section 2(5).

Which sections of the Income-tax Act were involved?

Section 2(5),Section 66(1)

AI-generated summary — verify with the full judgment below

r959 Ap,.il 20. 660 SUPREME COURT REPORTS [1959] Supp. COMMISSIONER OF INCOME-TAX, WEST BENGAL v. CALCUTTA NATIONAL BANK LIMITED (IN LIQUIDATION) (B. P. SINHA, J. L. KAPUR and M. HIDAYATULLAH, JJ.)

Excess Profits Tax-Rental income-Banking Company letting out a part of its own premises-Liability-Excess Profits Tax Act, I940 (XV of I940), s. 2(5). Sch. I, r. 4(4).

The respondent was a banking company and the question was whether it was liable to pay excess profits tax on a sum of Rs. 86,ooo received by it as rent in respect of the major part of a six-storeyed building owned and constructed by it, which it had let out, the rest being occupied by its headquarters in Cal- cutta. The Department and the Income-tax Appellate Tribunal found against the respondent but the High Court, on a reference under s. 66(r) of the Income Tax Act, reversed their decision.

The Memorandum of Association of the Company provided as one of its objects as follows,- " (e) To purchase, take on lease or in exchange or other- wise acquire any moveable or iinmoveable property, .............. . which the company may think necessary or convenient for the purpose of its business, and to constr

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