Commissioner of Income-Tax, West Bengal vs Calcutta National Bank Limited (In Liquidation)

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 4 of 1956

Decision Date: 20/04/1959

Coram: Bhuvneshwar P. Sinha, J.L. Kapur, M. Hidayatullah

In this matter, the Commissioner of Income-Tax for West Bengal instituted proceedings against Calcutta National Bank Limited, which was then in liquidation. The case was reported in the year 1959 and the judgment was delivered on the twentieth of April, 1959. The Supreme Court bench comprised Justice Bhuvneshwar P. Sinha, Justice J. L. Kapur and Justice M. Hidayatullah. The citation of the decision appears in the All India Reporter at volume 928 of the year 1959 and also in the Supreme Court Supplement, part 2, page 660. The dispute centred on the applicability of the Excess Profits Tax Act of 1940, specifically section 2(5) together with Schedule I, rule 4(4), to a sum of rupees 86,000 which the bank had received as rent for letting out a substantial portion of a six-storeyed building that it owned and had constructed. The building was partly occupied by the bank’s own headquarters in Calcutta, while the remaining portion was let to tenants. The Department of Revenue and the Income-Tax Appellate Tribunal held that the bank was liable to pay the excess profits tax on that rent. However, on a reference made under section 66(1) of the Income Tax Act, the High Court reversed the findings of the lower authorities, thereby creating a question of law for the Supreme Court to resolve.

The bank’s Memorandum of Association contained, among other objects, a clause authorising the company “to purchase, take on lease or in exchange or otherwise acquire any moveable or immoveable property … which the company may think necessary or convenient for the purpose of its business, and to construct, maintain and alter any buildings or works necessary or convenient for the purpose of the Company.” The question referred to the Supreme Court was whether the rent received from letting out the building formed part of the bank’s business income taxable under section 2(5) read with rule 4(4) of Schedule I to the Excess Profits Tax Act. The High Court had concluded that, because the bank’s principal functions did not consist wholly or mainly in the holding of investments or other property as required by the first proviso to section 2(5), rule 4(4) could not be applied. The Supreme Court, however, disagreed. Justice Sinha, speaking for himself and Justice Hidayatullah, held that the High Court erred in giving excessive weight to the first proviso. He observed that the main provision of section 2(5) defined “business” in a broader sense than the corresponding provision in the Indian Income-Tax Act and that the applicability of rule 4(4) did not depend solely on the first proviso. Citing Commissioners of Inland Revenue v. Desoutter Bros. Ltd. (1945) 29 T.C. 158, the Court explained that the term “business” must be given a wide import, determined by the particular kind of activity or occupation of the assessee. Even if the bank’s principal activity was banking, the possession and letting of immoveable property formed a part of its business objects as reflected in its memorandum. Consequently, the rent earned from the leased portion of the building fell within the scope of business income and was liable to be taxed under rule 4(4) of Schedule I to the Excess Profits Tax Act. The Court therefore reversed the High Court’s decision and affirmed the tax liability of the respondent.

In this case the Court observed that the term “business” ordinarily refers to a particular trade or avocation, yet it may also encompass an activity described as “quiescent”. The Court cited Commissioner of Inland Revenue v. The South Behar Railway Co., Ltd., (1923) 12 T. C. 687 and Commissioner of Inland Revenue v. The Korean Syndicate, Ltd., (1921) 12 T. C. 181 for this proposition. The memorandum of association of a company, the Court held, reveals the essential objects of the company; in the present matter the memorandum expressly authorised the management of property and the realisation of rents, and therefore such rents must be taken into account when computing the company's profits under rule 4(4) of Schedule I to the Act. The Court rejected the suggestion that substituting the word “partly” for “mainly” in the first proviso to section 2(5) exceeded the statutory limits. It explained that rule 4(4) does not depend on that proviso, which applies only to a particular type of incorporated body, but has a broader reach, as shown by its own language and by the second proviso to section 2(5). The Court referred to Punjab Co-operative Bank Ltd. v. Commissioner of Income-Tax, Punjab, (1940) A.C. 1055; [1940] 8 I.T.R. 636 and Sardar Indra Singh and Sons, Ltd. v. Commissioner of Income-Tax, West Bengal, [1954] S.C.R. 167 in support of this view. The Court further held that it was incorrect to argue that if rental income fell within the main clause of section 2(5) the first proviso would become redundant, citing Commissioner of Inland Revenue v. The Tyre Investment Trust, Ltd., (1924) 12 T. C. 646. Moreover, the Court dismissed the contention that “business” could not include rental income, noting that United Commercial Bank Ltd., Calcutta v. Commissioner of Income-Tax, West Bengal, [1958] S.C.R. 79 was held inapplicable.

Justice Kapur, speaking for a portion of the Court, explained that the word “business” may be given its ordinary meaning as set out in the principal provision of section 2(5) or it may acquire the extended meaning found in the first proviso. In either interpretation, the term was found inapplicable to the respondent because the respondent’s essential function was dealing in money and credit, and the letting out of property was neither wholly nor even partly its business. Consequently, the rent received by the respondent did not fall within the definition of “profits” contained in section 2(19) of the Act and was not liable to excess-profits tax under section 4 of the Act. The Court referred to Salisbury House Estate Ltd. v. Fry, (1930) 15 T. C. 266, Mellows v. Buxton Palace Hotel Ltd., (1943) 25 T.C. 507 and Commissioner of Inland Revenue v. Buxton Palace Hotel Ltd., (1948) 29 T.C. 329 in support of this construction. In construing the first proviso, the Court stressed that every word must be given effect. Thus, if the mere ownership of immoveable property and the letting out of that property when it was not required for the company’s own use were intended to be covered by the proviso, the language “wholly” or “mainly” would become redundant.

The Court observed that if the definition were to employ the expressions “wholly” or “mainly,” those words would become superfluous because the definition already covered the intended scope. Rule 4 (4) of the First Schedule to the Act did not alter the ordinary meaning of the term “business” as it related to the holding of property. Before the rule could be invoked, the Court said, the activities of the company had to correspond to those activities that fall within the statutory definition of business contained in the Act itself. According to Justice Hidayatullah, the rents earned by the respondent had to be treated as profits derived from property held as an investment and therefore had to be taken into account in the profit computation prescribed by Rule 4 (4) of the First Schedule. The Court noted an unmistakable distinction between the wording of the Schedule and the wording of the Act, observing that the Schedule was intended to broaden the meaning of “business” so that the letting of property for the purpose of earning rent would be included. Consequently, the Court concluded that the definition set out in the Act did not entirely dominate the Schedule, and that Rule 4 (4) must be given effect. The Court relied upon the authority in Inland Revenue Commissioners v Gittus (1920) 1 K.B. 563 and also referred to Gittus v Commissioners of Inland Revenue (1921) 2 A.C. 81.

The judgment was delivered in the Civil Appellate Jurisdiction in Civil Appeal No 4 of 1956, arising from a special leave granted against the order of the Calcutta High Court dated 10 June 1953 in Income-Tax Reference No 39 of 1952. Counsel for the appellant comprised senior counsel for the Department, while counsel for the respondent represented Calcutta National Bank Ltd. (in liquidation). The matters were heard on 20 April 1959, with the opinion authored by Justice Sinha. The central question for determination was whether the assessee, Calcutta National Bank Ltd. (in liquidation), was liable to Excess Profits Tax on the sum of Rs 86,000 that it had received as rent from the building that housed its headquarters in Calcutta for the accounting year ending 31 March 1946. Both the Revenue Department and the Income-Tax Appellate Tribunal had answered the question affirmatively. However, on a reference made to the High Court under section 66 (1) of the Income-Tax Act, a bench consisting of the Chief Justice Chakravartti and Justice Lahiri reversed those findings and held the tax not payable, also refusing to grant the required certificate of fitness. The appellant therefore sought and obtained special leave to appeal by an order dated 27 September 1954. The factual backdrop was straightforward: the assessee was a banking enterprise that owned a six-storeyed building. Its own offices occupied the ground floor and a portion of the sixth floor, while the remaining floors were rented out to third-party tenants, generating an annual rental income of approximately Rs 86,000. The Tribunal had observed that the leased area was roughly four to five times larger than the area occupied by the bank for its own business activities.

In 1949, on 31 March, the Excess Profits Tax Officer issued an assessment against the respondent. The assessment was based on rental income earned from the portion of the building that the respondent let to tenants. The assessment covered the accounting period that ended on 31 March 1946 and was made under sub-rule (4) of rule 4 of Schedule I to the Excess Profits Tax Act, 1940 (referred to as the Act). The respondent challenged the assessment. The Appellate Assistant Commissioner considered the appeal and, on 3 January 1950, confirmed the assessment. In his order, the Commissioner relied on sub-rule (2) of rule 4 of Schedule I to the Act. He observed that the assessee, being a banking undertaking, carried on a business that included the holding of investments. Accordingly, he held that rental income derived from the assessee’s investment in immovable property formed part of its business income, even though such income was not subject to tax under section 10 of the Income-Tax Act. The Commissioner further noted that income from securities such as shares and other property was chargeable to tax under sections 8, 9 and 12 of the Income-Tax Act, and that the same head of income was treated as business profit for the purposes of the Act. He also pointed out that the assessee had itself taken the value of the immovable assets into account when computing its capital for the purpose of claiming standard profits, a method that had been accepted in previous years and which the bank had consistently applied. The respondent then appealed to the Appellate Tribunal. The Tribunal examined the construction of the premises and held that there was no doubt that the building had been erected partly to accommodate the head office of the bank and partly to be let out to third-party tenants, and therefore constituted an investment in immovable property. The Tribunal further observed that such a construction was permissible under the Memorandum of Association of the respondent company. By an order dated 22 March 1951, the Tribunal concluded that the portion of the building not occupied by the bank for its own operations was let out as part of the bank’s business, and that the rental receipts therefore fell within the definition of taxable business profit under the Act. The Tribunal specifically relied upon sub-rule (4) of rule 4 of Schedule I, although the Department had also invoked sub-rule (2) of the same rule. The Tribunal thereafter directed that the matter be stated before the High Court, and the question was referred to that Court under section 66(1) of the Income-Tax Act. The question presented to the High Court was whether the rental income from the immovable property formed part of the business income chargeable under section 2(5) read with rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940. The High Court considered the question and rendered its decision, which is reflected in the earlier discussion. Consequently, a special leave appeal was filed. The record shows that excess profits are not taxable under the Act unless the income in question can be characterised as business profit.

The Court explained that section 2 (5) of the Act provided a comprehensive definition of the term “business”. It stated that “business” embraced any trade, commerce, manufacture, or any venture having the character of trade, commerce or manufacture, as well as any profession or vocation. However, the definition expressly excluded a profession pursued by an individual or by a partnership when the profits of that profession depended wholly or mainly on the personal qualifications of the individual or partners. An exception to this exclusion was included for professions that consisted wholly or mainly of making contracts on behalf of other persons or of giving commercial advice to others in connection with the making of contracts. The provision further added that when the functions of a company or a society incorporated under any enactment consisted wholly or mainly in holding investments or other property, such holding of the investment or property would be deemed, for the purposes of the definition, to be a business carried on by that company or society. Moreover, the statute prescribed that all businesses carried on by the same person would be treated as a single business for the purposes of the Act. The Court noted that this definition of “business” under the Act was broader than the definition of the same term contained in the Income-Tax Act, section 2 (4). Section 2 (19) of the Act defined “profits” as the profits determined in accordance with the First Schedule, while section 2 (20) defined “standard profits” as the standard profits computed in accordance with the provisions of section 6. The charging provision, section 4 of the Act, declared that for any business to which the Act applied, excess profits—meaning profits during a chargeable accounting period that exceeded the standard profits—were to be charged, levied and paid. Section 5 further provided that the Act applied to every business of which any part of the profits earned during the chargeable accounting period was chargeable to income-tax by virtue of the specified sub-clauses of clause (b) of sub-section (1) of section 4 of the Indian Income-Tax Act, 1922, or of clause (c) of that sub-section. The provision added that the Act would not apply to any business whose entire profits accrued or arose outside British India when such business was carried on by, or on behalf of, a person who was resident but not ordinarily resident in British India, unless the business was controlled in India. It also stated that where only a part of a business carried on by a person not resident in British India, or not ordinarily resident there, earned profits that accrued or arose in British India—or were deemed to do so under the Indian Income-Tax Act, 1922—then, except where the business of a resident but not ordinarily resident person was controlled in India, the Act would apply only to that part of the business, and that part would be deemed for all purposes of the Act to be a separate business.

The statute provided that the provisions would apply only to that specific part of a business which generated the profits in question, and that such part would, for every purpose under the Act, be treated as a separate business. The legislation further stipulated that the Act would not apply to any business whose entire profits were earned or arose within an Indian State. Moreover, if only a portion of a business earned profits in an Indian State, that portion would, for the purposes of the provision, be considered a separate business whose whole profits arose in the Indian State, while the remaining portion of the business would, for all intents and purposes of the Act, be deemed a separate business distinct from the former. The First Schedule, which sets out the rules for computing profits, contained a rule identified as sub-rule 4 of rule 4. That rule stated: “In the case of a business which consists wholly or partly in the letting out of property on hire, the income from the property shall be included in the profits of the business whether or not it has been charged to income-tax under Section 9 of the Indian Income-tax Act, 1922, or under any other section of that Act.” After outlining these relevant statutory provisions, the Court turned to the principal question of whether the letting out of the premises in dispute could be characterised as a business activity of the respondent bank. The legal definition of “business” was noted to be inclusive, encompassing any sort of trade, commerce or manufacture. The Court considered whether income derived from the bank’s investments—whether in shares, securities or immovable property—could be excluded from the bank’s business. The Court observed that it would be unduly restrictive to regard such activities as outside the scope of a banking corporation’s business functions. The Memorandum of Association of the respondent bank set out its objects, which included: (a) to carry on all kinds of banking business generally undertaken by joint-stock banks; (b) to conduct banking in all its branches and departments, encompassing borrowing, raising or taking up money, lending or advancing money, securities or properties, acquiring, holding, issuing and dealing with investments of all kinds, and managing properties; and (c) to purchase, lease, exchange or otherwise acquire any movable or immovable property that the company deemed necessary or convenient for its business, and to construct, maintain and alter any buildings or works required for the company’s purposes. From these provisions, it was apparent that the bank had constructed a six-storeyed building not merely for its own occupancy but, as found by the Appellate Tribunal, primarily to generate rental income from tenants. Where land in

In a large metropolis such as Calcutta, the construction of a multi-storeyed edifice is widely understood to constitute an investment in itself, while at the same time furnishing the bank with premises that enable it to conduct its business, display its advertisements, and accommodate its head office and record-keeping facilities. The High Court considered the reference question and answered in the negative, reasoning that although the income in question was derived from the ownership of property, the activities of the assessee-company were not wholly or principally the holding of investments or other property, which is the condition prescribed by the proviso to section 2(5) of the Act. Because the requirement of the first proviso to section 2(5) was not fulfilled, the Court held that no issue could arise concerning the applicability of sub-rule (4) of rule 4; and even if such an issue could arise, the term “business” employed in that sub-rule must be interpreted in accordance with the main provisions of the section. This conclusion was articulated by the learned Chief Justice, who delivered the Court’s opinion by commencing with the premise that, for the purpose of ascertaining the nature of the company’s income, it was unnecessary to refer to the definition of “business” contained in the main clause of section 2(5), a definition that was assumed to correspond to the meaning of the term “business” under the Indian Income-Tax Act. Having thereby excluded, without providing any justification, the provisions of the main clause of the definition of “business” as set out in the Act, the learned Chief Justice proceeded to examine whether the first proviso to the definition clause—an ancillary provision—could govern the facts of the case and bring the matter within the scope of the type of business to which the Act is applicable. He correctly observed that the first proviso is limited to incorporated bodies and does not extend to individuals. He further remarked: “It is to be noticed that in the contemplation of this proviso, property is something different from investments, for it speaks of investments or other property.” He added that if the conditions of the proviso are satisfied, “the holding of investments or other property shall be deemed to be a business,” which suggests that such holding is not ordinarily a business and would fall outside the general definition absent the special provisions of the proviso. While these observations may be open to doubt, the discussion is predominantly concerned with the main provisions of the definition clause, namely section 2(5), rather than with the proviso. The learned Chief Justice then summarized his view, stating: “It appears to me that the first matter to which we must address ourselves in answering…”

In this case the Court was asked to determine whether the activities of the assessee company were such that the possession of the building or buildings and other property, together with any investments, should be treated as the company’s business for the purposes of the Excess Profits Tax Act, as contemplated by the first proviso to section 2(5). For the Revenue to succeed, it was necessary to establish that the holding of investments or other property constituted the only or the principal function of the assessee company. The Court noted that the company in question was a banking company engaged in a large-scale business. It further observed that there was no dispute before the Court that the holding of investments or other property was neither the sole nor the primary occupation of the company, and that this was especially true of the specific building that was the subject of the dispute.

The Court identified two fundamental defects in the reasoning of the High Court. First, the High Court had disregarded the main clause of the definition provision, treating it as irrelevant to the controversy. Second, the High Court had considered only the proviso in answering the question, without analysing the main clause of the definition. The Court rejected the observation of the learned Chief Justice that the definition of “business” in the Excess Profits Tax Act simply followed the definition in the Indian Income-Tax Act. It explained that the definition in the Excess Profits Tax Act is broader than that in the Income-Tax Act because it expressly includes certain professions and vocations. Although a full comparison of the two statutes’ schemes was not required for the present decision, the Court pointed out that the broader connotation of “business” under the Excess Profits Tax Act must be taken into account.

The Court also criticised the learned Chief Justice for omitting the provisions of the main clause of section 2(5) from his analysis and for failing to give reasons for that omission. Ordinarily, a Court must first examine whether the main clause of the definition of “business” applies to the facts before turning to any additional provisions. The first proviso, which is an ancillary provision intended to bring certain types of income within the ambit of the definition that would otherwise be excluded, can be invoked only after the Court has concluded that the main clause does not govern the situation. Assuming, as the Court does, that the holding of investments or other property is not the whole or main business of the respondent company, the first proviso would be set aside. However, that assumption alone does not lead to the inference that the principal provision of the definition clause cannot be applied to the respondent. The Court therefore retained the possibility that the main definition could still encompass the respondent’s activities, despite the High Court’s focus on the proviso alone.

In this case, counsel for the respondent referred to an argument that had previously been rejected by Lord Greene, Master of the Rolls, in the decision of Commissioners of Inland Revenue v. Desoutter Bros., Ltd. (1). That earlier case concerned the interpretation of subsection (4) of section 12 of the Finance (No 2) Act, 1939, which dealt with the Excess Profits Tax and was before the Court of Appeal. The learned Master of the Rolls examined the issue and set out observations that are fully applicable to the arguments presented before the High Court. He began by stating that the first line of attack relied on the wording of Section 12(4) of the Finance (No 2) Act, 1939. He noted that the opening subsection referred to “the profits arising in any chargeable accounting period from any trade or business to which this section applies”. He explained that the tax liability was to be measured on those profits and that the statutory language expressly limited itself to profits arising from “any trade or business”. He then quoted subsection (4), which provided that “Where the functions of a company or society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this section to be a business carried on by the company or society”. The Master of Rolls observed that the purpose of this provision was clear. In his view, Parliament intended to bring within the tax net a type of corporation that might otherwise escape it. He identified the typical corporation contemplated by the provision as a trust-investment company, whose principal activity consisted of holding investments and deriving income therefrom. Such a corporation, he said, would not ordinarily be described as carrying on a “trade or business” within the meaning of subsection (1). Nonetheless, if any doubt remained, subsection (4) unequivocally brought that sort of corporation within the definition of a business, and that was the sole aim of the provision. The Master of Rolls concluded that the opposing argument effectively claimed that, by implication, profits from investments or property held by any other sort of corporation were excluded. He could find no basis for such a contention and held that the argument collapsed completely once the true significance of subsection (4) was appreciated. The Court of Appeal’s reasoning and conclusion, as quoted above, were therefore respectfully adopted. Consequently, it follows that the first proviso to section 2(5) does not resolve the controversy in the present case. This finding overturns the ratio expressed by the High Court, but it does not yet answer the question that was referred to it. The next step, therefore, is to determine whether the main definition clause in section 2(5) can be applied to answer the issue at hand.

The issue before the Court was whether the main definition clause in section two five could be employed to answer the question referred for the opinion of the High Court. The term business was described as a word of very wide, though not precisely defined, scope. It has been correctly observed in several high-authority judicial decisions that it is neither practical nor desirable to attempt to limit the ambit of its meaning. Accordingly, each case must be examined with reference to the specific kind of activity and occupation of the person concerned. Although business usually implies a continuous activity carried on in a particular trade or avocation, it may also encompass an activity that could be described as quiescent. This principle was illustrated by the House of Lords decision in The Commissioners of Inland Revenue v. The South Behar Railway Co., Ltd. The facts were that up to 1906 the South Behar Railway was owned by the respondent company and operated by another company on behalf of the Secretary of State for India, with the respondent entitled to a share of the profits for supplying funds and materials for construction. In 1906 the respondent relinquished possession of the railway to the Secretary of State, on the condition that, until the purchase option was exercised, a fixed annuity of thirty thousand pounds would be paid to the company in lieu of the profit share. After that arrangement the company performed no activity other than receiving and distributing the annuity to its shareholders. The House of Lords held that the company was carrying on a trade or business and therefore liable to corporation profits tax. While affirming the Court of Appeal’s decision, the Lords observed that the Commissioners’ finding, which had been reversed, was not a pure factual finding but a legal inference drawn from the specific facts, and thus the decision was open to review. The Lords further noted that the 1906 agreement had transformed the company’s previously fluctuating profit-share income into a fixed annuity irrespective of the railway’s earnings, and that this change did not materially alter the company’s status as a business concern. The House of Lords also approved the decision in The Commissioners of Inland Revenue v. The Korean Syndicate Ltd. In that case a syndicate was registered in 1905 as a company for acquiring and working concessions, turning them to account, and investing any surplus monies. The syndicate’s activities later were limited to receiving bank interest and royalties and distributing that income among its shareholders. The Lords concluded that the syndicate was indeed carrying on a business and that its profits were liable to excess profits tax. To determine a company’s business, the Court explained, one must examine the company’s memorandum, which reveals the objects of the company and whether those objects continue to be pursued.

In the earlier case, a syndicate that had been incorporated in 1905 obtained a portion of a concession in Korea that included a gold mine, and in 1908 it transferred those rights to another company under a lease agreement that required the payment of royalties which, in substance, represented a percentage of the profits earned from working the property. In 1911 the syndicate placed, with a bank, certain sums of money that had been received from the sale of shares which the syndicate had obtained in exchange for other shares, and during the period in question the syndicate’s only activities consisted of receiving interest on bank deposits and receiving the aforementioned royalties and then distributing that income among its shareholders. The learned judge, Rowlatt, J., held that the company was not carrying on a business, but on appeal the higher court reversed that finding, concluding that the syndicate was indeed carrying on a business and that the profits derived therefrom were liable to the Excess Profits Tax.

The Court explained that to determine whether a company is carrying on a business, one must examine the company’s Memorandum of Association because the Memorandum sets out the objects of the company and indicates whether those objects are still being pursued. The relevant clauses of the Memorandum of Association were reproduced, and there was no doubt that the management of property and the realisation of rents from that property fell within the objects of the company, if such activities were necessary or convenient for the conduct of its business. Even if the realisation of rent was not the predominant activity, the Court held that when rent constitutes one source of business income, it must be included in the computation of profits for the purposes of the Act, as made clear by reference to sub-rule (4) of rule 4. The Court rejected the contention that the words “wholly or partly” in the Rule exceeded the provisions of section 2(5), where the first proviso uses the expression “wholly or mainly”. The Court observed that this argument rested on an unfounded assumption, because a comparison of the provisions of the Act and the Income-tax Act shows that rule 4(4) does not necessarily derive its operative force from the first proviso to the definition in section 2(5). The proviso is limited to a particular type of incorporated body and refers to “holding of investments or other property”, whereas rule 4(4) applies more generally to a business that consists “wholly or partly in the letting out of property on hire”. Moreover, the reference in the rule to section 9 of the Indian Income-tax Act makes clear that the rule is concerned with property. Consequently, the Court concluded that the wording of the rule is consistent with the statutory scheme and that the inclusion of “partly” does not go beyond the authority of the statute.

The Court observed that the basis for taxing property under section 9 of the Income-tax Act differed from the basis for taxing income from property under the Act, and that the latter applied irrespective of whether such income had been charged under the Income-tax Act. It further explained that the second proviso of the definition was relevant because it indicated that a person could carry on several different kinds of businesses, and for the purposes of the Act all those distinct lines of business had to be treated as a single business. Accordingly, the Court stated that the Bank might be engaged in the business of holding deposits, securities and other property, as well as in lending money against various securities, and that the income from each of those activities had to be taken into account to determine the Bank’s total business profits. The Court then referred to a similar question that arose in Punjab Co-operative Bank, Ltd. v. Commissioner of Income-tax, Punjab (1), a case that reached the Judicial Committee of the Privy Council. In that case the issue was whether the realisation of higher values by the Bank through the purchase and sale of shares and securities could be characterised as business profits and therefore taxable under the Indian Income-tax Act. The Bank had consistently contended, without success, that such realisations were not a separate business but formed part of its ordinary banking activity of dealing with money and credit, and that it always needed cash and easily realisable securities to meet possible depositor demands. However, the evidence showed that the Bank sold shares and securities not only for the purpose of meeting depositor demands but also to augment its reserve funds. The Judicial Committee held, relying on the Department’s and the High Court’s earlier decision, that the purchase and sale of shares and securities formed part of the Bank’s banking business and that the profits so realised were liable to income-tax, citing (I) (1940) A C 1055; [1940] 8 I.T.R. 635. Their Lordships further observed that it was unnecessary to prove that the Bank carried on a distinct business of buying and selling shares and investments in order to tax the profits obtained from such transactions. Once it was established that the Bank entered into those transactions not merely to change investments but with a view to earning profits, the Court concluded that the Bank was indeed carrying on a business within the meaning of the Income-tax Act. Following this decision of the Privy Council, this Court decided in the

In the decision of Sardar Indra Singh and Sons Ltd. v. Commissioner of Income-tax, West Bengal (1) the Court explained that determining whether a particular receipt constitutes profit from business rather than a mere appreciation of capital arising from a change of investment requires answering a further question. That further question is whether the receipt was so connected with the assessee’s business that it may fairly be described as arising from the normal working of that business. The Court held that it was not necessary to demonstrate that the income resulted from a course of dealing which, by itself, would amount to the carrying on of a business. In the case under consideration, the assessee company had, among its stated objects, the business of acting as financiers and of purchasing and selling stock, shares, business concerns and other undertakings. To give effect to that object, the company held a large number of shares in other companies, regularly realised its holdings and acquired new shares. On the basis of these facts a Bench of five Judges of this Court held that the profits earned from the sale of such investments and from embarking on fresh investments were assessable to income-tax. While delivering the judgment, Chief Justice Patanjali Sastri, speaking for the Court, made several important observations. He stated that the principle applicable in all such cases is well settled and that the inquiry always turns on whether the sales which produced the surplus were so connected with the carrying on of the assessee’s business that it could fairly be said that the surplus is the profit and gain of that business. He explained that it is not necessary for the surplus to have resulted from a course of dealing in securities that, in itself, would amount to a business of buying and selling securities. It is sufficient if such sales were carried out in the ordinary course of the business, or, using the words of the Privy Council in Punjab Co-operative Bank Ltd. v. Income-Tax Commissioner, Lahore (1), if the realisation of securities is a normal step in carrying on the assessee’s business. Although the cited case arose out of the assessment of a banking business, the Court emphasized that the test is of general application in determining whether the surplus arising from such transactions is a capital receipt or a trading profit.

The learned counsel for the respondent bank argued that, in the present matter, the receipt of rental income by the bank could not fall within section 10 of the Income-tax Act, and that the definition of “business” in that Act and in the Income-tax Act, insofar as they are relevant to the case, must be identical. In other words, counsel submitted that because the realisation of rents from the bank’s house-property could not be brought within the ambit of section 10 of the Income-tax Act, it consequently could not be brought within the scope of the Act that is presently before the Court.

The Court observed that the argument that rental income could not fall within the scope of the present Act because it does not fall within section 10 of the Income-tax Act is fundamentally mistaken. The Court explained that the two statutes have different schemes. The Income-tax Act, unlike the Act under consideration, taxes not only the income normally described as business income but also income from a variety of other sources. Sections 3 and 4 of the Income-tax Act make “all income, profits and gains from whatever source derived” liable to tax, and section 6 classifies those incomes into distinct heads. The first head is salaries, the manner of charging which is prescribed in section 7; the second head is interest on securities, charged under section 8; the third head is income from property, taxed in accordance with the provisions of section 9; and the fourth head consists of profits and gains from business, profession or avocation, taxed according to section 10. The Court noted that the fifth and sixth heads of income are not relevant to the present discussion and were therefore omitted. By contrast, the Act that is the subject of this case imposes tax only on excess profits that arise from certain specified businesses. It does not seek to tax every kind of income; it taxes only those profits that exceed a prescribed standard and that arise from the business described in section 5. Under that Act the term “business” does encompass the fourth head of income, although not its entirety, and it also embraces, at least in part, the second and third heads set out above, though perhaps not the whole of them. Consequently, the Court rejected the proposition that anything falling outside the ambit of section 10 of the Income-tax Act would automatically fall outside the ambit of the present Act. On a proper construction of the provisions, the Court held that the matters covered by sections 8, 9 and 10 of the Income-tax Act, at least in part, come within the purview of the Act in question. The Court clarified that this statement was not intended to be a comprehensive comparison of the two statutes, but it was sufficient to defeat the contention that the concept of “business” under the Act is entirely synonymous with the provisions of section 10 of the Income-tax Act. The Court then turned to another argument raised by counsel for the respondent, which sought to exclude rental income from the scope of the Act on the basis that the first proviso to section 2(5) would become redundant if rental income were covered by the main clause of the definition. The Court found that this argument overlooked essential words of the proviso, which refer only to “holding of investments or other property,” a phrase that is not identical to dealing with shares, investments or other property, and therefore does not render the proviso redundant.

The Court observed that the language of the proviso refers only to “holding of investments or other property,” which is not identical to the activity of dealing in shares, investments or other property. The provision was likely inserted with great caution in order to defeat arguments such as those presented in The Commissioners of Inland Revenue v. The Tyre Investment Trust Ltd. In that case, the Respondent Company had been incorporated in 1917, with the main objects of acquiring and holding shares and related assets, as recorded in the citation [1924] 12 T.C, 646. Its purpose was essentially to acquire shares in two foreign companies and then sell those shares to an English company that was expected to be interested. After the shares were purchased, the Company took an active interest in the affairs of the two foreign enterprises, and by 1920 negotiations were underway for the sale of those shares. The Company was assessed to Excess Profits Duty. On appeal, the Special Commissioners accepted the Company’s argument that it was not carrying on a trade or business within the meaning of the taxing statute, contending that it was merely a holding company comparable to an individual who had acquired and held investments. However, on further appeal by the Revenue, the King’s Bench Division held that the principal business of the Company consisted of making investments and, consequently, it was liable to Excess Profits Duty.

In support of the respondent’s second argument that rental income should not be regarded as “business,” counsel referred to the Court’s decision in The United Commercial Bank Ltd., Calcutta v. The Commissioner of Income-tax, West Bengal, citing the observation on page 97 that the various heads of income, profits and gains under the Income-tax Act are intended to be mutually exclusive, each head covering income from a specific source. The Court clarified that the matter before those judges dealt solely with the question of set-off of a loss carried over from the previous year and was concerned only with the classification scheme of the Income-tax Act. It did not address the provisions now under consideration and therefore did not illuminate the interpretation of the term “business.” Considering the foregoing analysis, the Court concluded that the realization of rental income by the assessee bank occurred in the course of pursuing one of the objects enumerated in its memorandum of association. Accordingly, the rental receipts were to be treated as part of the bank’s business profits and were therefore assessable to Excess Profits Tax. The appeal was consequently allowed, with costs awarded to the successful party both in this Court and below. Justice Kapur noted that he had reviewed the judgment drafted by his colleague, Justice Sinha, but respectfully disagreed with its conclusions, stating that the sole question for decision was whether…

In the present matter, the issue was whether a sum of Rs 86,000 received by the respondent during the chargeable accounting period ending on 31 March 1946, as rent from its building in Calcutta, could be treated as part of the profits of its business for the purpose of the Excess Profits Tax. The respondent, who was a banking company that had at one time carried on a substantial banking business but had subsequently entered into liquidation, owned a six-storeyed building situated in a commercial locality of Calcutta. During the period in question the bank occupied the ground floor and a portion of the sixth floor of that building, and let out the remaining premises to various tenants, from whom it collected the disputed amount of Rs 86,000 as rent. The question of liability for the Excess Profits Tax with respect to this rent depended upon the construction of the provisions contained in the Excess Profits Tax Act (Act XV of 1940), which will hereinafter be referred to simply as “the Act”. The object of the Act was to levy a tax on excess profits, a term that, by its very nature, must refer to profits that arise from a business activity. Accordingly, the Act prescribed a method for computing such profits, and the scheme of the Act comprised a definition section (Section 2), a charging provision (Section 4), an application clause (Section 5), and a provision for determining standard profits (Section 6). Under the Act, the Excess Profits Tax was payable on the amount by which profits earned during a chargeable accounting period exceeded the standard profits calculated for a standard period. Section 5 of the Act stipulated that the legislation would apply to every business of which any portion of the profits earned during the chargeable accounting period was liable to income-tax pursuant to sub-clause (i) or sub-clause (ii) of clause (b) of sub-section (1) of Section 4 of the Indian Income-Tax Act, 1922. The charging provision, contained in Section 4, provided that, subject to the provisions of the Act, a tax would be levied on the amount by which the profits of any business to which the Act applied, during a chargeable accounting period, exceeded the standard profits. Thus, the Act was intended to apply to every business for which any part of the profits was chargeable to income-tax, and, in respect of such a business, the excess profits tax would be charged on the surplus of profits over the standard profits. The tax therefore became exigible only on those profits that satisfied the statutory criteria. Consequently, in order to ascertain whether the rent received during the chargeable accounting period constituted “profits” arising out of “business” within the meaning of the Act, it became necessary to examine the definitions of the terms “business” and “profits”. The next stage of the analysis would therefore involve a detailed consideration of the statutory language defining those expressions.

The Court explained that the expressions “business” and “profits” required clarification. Section 2(5) of the Act defined “business” in the following manner: “Business includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but does not include a profession carried on by an individual or by individuals in partnership if the profits of the profession depend wholly or mainly on his or their personal qualifications unless such profession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts. Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this definition to be a business carried on by such company or society. Provided further that all business to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act.” The Court noted that this definition in section 2(5) closely resembled the definition of “business” found in section 2(4) of the Income-Tax Act, but the first proviso to section 2(5) broadened the scope of “business” when it concerned companies and societies incorporated under any enactment. The language “deemed to be” operated to treat certain activities as “business” even though they would not otherwise qualify as such.

Accordingly, for an incorporated company the term “business” under the Act was not limited to the conventional idea of trade, commerce, manufacture, or an adventure of that nature. It also embraced activities that the first proviso to section 2(5) classified as business, namely the holding of investments or other property, provided that either of two conditions was satisfied: (i) the company’s functions consisted wholly or mainly in holding investments; or (ii) the company’s functions consisted wholly or mainly in holding other property. The Court observed that without the first proviso, “business” would be confined to what the Income-Tax Act permitted, and activities such as holding investments or other property would fall outside the Act’s operation. Consequently, heads of income covered by sections 6(ii), 6(iii) and 6(v) of the Income-Tax Act—interest on securities, income from property, and income from other sources—were not regarded as “business” under the Income-Tax Act and therefore would not constitute “business” within the present Act. The Court referred to its earlier decision in United Commercial Bank Ltd. v. Commissioner of Income-Tax (1), where it had held that the heads of income mentioned in section 6 were mutually exclusive, each head covering a distinct source. The Court concluded that even if securities were held as trading assets or dealt with in the ordinary course of business by a banker or a dealer, the interest earned had to be charged under the head “Interest on securities” in section 8 of the Income-Tax Act, and not as business profits under section 10 of that Act. This broader interpretation of “business” in the Act was intended to bring within its net those incorporated societies and companies that might otherwise have escaped its ambit.

The Court observed that the heads of income enumerated in section 6 of the Income-tax Act are mutually exclusive, each head being designed to cover income that arises from a specific source. Consequently, even when securities are held as trading assets or dealt with in the course of a business by a banker or a dealer in securities, the interest earned on such securities must be charged and computed under the head “Interest on securities” pursuant to section 8 of the Income-tax Act, and not as business profits under section 10 of that Act. The Court explained that this broader interpretation of the word “business” in the Act was deliberately intended to bring within its sweep those incorporated societies and companies that might otherwise escape its operation. One example cited was a trust investment company whose business consists of holding investments and deriving profit therefrom; such a company cannot be said to be carrying on any trade, commerce or manufacture within the meaning of the principal provision, namely section 2(5), but the proviso makes clear that this type of company is included and its operations are to be regarded as carrying on a “business”. The Court also referred to Commissioners of Inland Revenue v. Desoutter Bros., Ltd. (1) as another authority. A further illustration was a housing society or company that owns houses for the purpose of letting them on rent; although this entity does not fall within the definition of business in the main clause of section 2(5), the proviso again deems it to be carrying on a “business”. In both of these situations, the Court held that the profits of such entities would be chargeable to excess-profits tax. The word “profits” in section 2(19) of the Act means “profits as determined in accordance with the First Schedule”, which sets out the method of computing profits. Rule 4 of that Schedule deals with income from investments and reads as follows: “(1) Income received from investments shall be included in the profits in the cases and to the extent provided in sub-rules (2), (2A) and (4) of this rule and not otherwise. (2) In the case of the business of a building society, or of a money-lending business, banking business, insurance business or business consisting wholly or mainly in dealing in or holding of investments, the profits shall include all income received from investments, whether or not such income is included in the profits charged under section 10 of the Indian Income Tax Act, 1922, or is charged under any other section of that Act, or has been subjected to deduction of tax at source or is free of or exempt from income-tax. (2A) In the case of a business part of which consists in banking, insurance or dealing in investments, not being a business …”

The rule states that where sub-rule (2) applies, profits must include every amount received from investments that are held for that specific part of the business and that are beneficially entitled to the persons carrying on the business. Sub-rule (1) pertains to businesses whose activities consist wholly or mainly of dealing in or holding investments, as applied to various classes of companies mentioned earlier. Sub-rule (2A) addresses, inter alia, the particular circumstances of banking enterprises, providing guidance on how investment income is to be treated for such entities. The respondent, being a banking company, conducts its core operations in the handling of money and the extension of credit. A banking company must always maintain cash, realizable securities, and other readily marketable investments in order to satisfy depositors’ withdrawal demands. Consequently, the possession of such securities and other marketable assets constitutes the holding of “investments,” which represents the normal and principal activity of the bank. This principle was affirmed in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, Punjab, and is reflected in Section 277F of the Companies Act, now incorporated into the Banking Companies Act. Accordingly, the respondent, by virtue of holding these types of investments, was engaged in business under proviso (1) to Section 2(5) of the Act. However, that particular form of business is not the subject of the dispute presently before the Court. The Court must decide whether rent received from a part of the respondent’s Calcutta building, which the bank did not require for its own purposes, is profit within Section 2(19). If the rent is regarded as profit, it would be chargeable under Section 4 of the Act. Two arguments were advanced in support of the view that such rent represents business profit within the Act. The first argument asserted that allocating money to construct a multi-storeyed building itself amounts to an investment. The second argument contended that even if the bank’s business includes a component of property letting, the income derived from that property must be treated as profit under the Act. To support the first contention, counsel pointed out that the Memorandum of Association of the bank contains an object to acquire immovable property that the company may deem necessary or convenient for its business. Accordingly, it was submitted that the erection of a multi-storeyed building falls within that object and therefore qualifies as an investment. The counsel cited clause (e) of the Memorandum of Association, which authorises the purchase, lease, exchange or any other acquisition of movable or immovable property that the company may deem necessary or convenient. The same clause also permits the construction, maintenance and alteration of any building or works that are necessary or convenient for the company’s purpose. The Court observed, however, that this line of reasoning overlooks the fact that the legislature deliberately employed the distinct terms “investments” and “other property” connected by the disjunctive “or”. Both terms must be given separate meanings, because it cannot be said that one term merely duplicates or substitutes for the other.

In this case the Court examined the meaning of the word “investments” and referred to earlier authority that defined an investment as “something acquired as a result of laying out money”. The definition was cited from Commissioners of Inland Revenue v. Rolls Royce Ltd. (1). However, the Court noted that this general test had been rejected in a later decision, Commissioners of Inland Revenue v. Desoutter Bros Ltd. (2) at page 161, where Lord Greene observed that he was “always disinclined to accept any general definition or test for the purpose of solving this type of question”. He added that the question of whether a particular piece of income derived from an investment must be decided based on the facts of each case. Accordingly, the Court emphasized that the factual circumstances must first be established before it can be determined whether the profits arising from a particular activity constitute business profits within the Act.

The Court then explained that the essential function of a banking company consists in dealing with money and credit. To perform those functions, a banking company must hold investments, which under the Income-Tax Act fall within sections 8 and 12. The Court also referred to section 277F of the Companies Act of 1913, now incorporated in the Banking Companies Act, as supporting authority. While the term “property” has a wide meaning that includes movable and immovable assets, interests therein and even investments, the Court held that in the present context the word would not be understood to include “investments”. The Court observed that if a banking company constructs a multi-storeyed building, uses part of it for its own purposes and lets out the remaining portion, this activity does not transform the company’s business into a property-letting enterprise. The primary purpose of a banking company remains the handling of money and credit, and its investments are typically readily realizable securities rather than immovable property.

Finally, the Court considered the Excess Profits Tax, describing it as a taxing measure whose purpose is to tax excess profits. It concluded that the words “investment” and “property” when used in relation to a banking company should be interpreted in the same sense as in the Income-Tax Act. However, if the holding of such assets becomes the sole or main function of the company, those holdings would be deemed to be part of the business, rendering the income derived from them chargeable to the Excess Profits Tax even if they might not otherwise be taxable. The Court noted that the two enactments are pari materia and are intended to levy tax only on income, profits and gains, with the Act confined to “profits of business” as defined, while income tax applies to all incomes, profits and gains.

The Court explained that the Excess Profits Tax is confined to “profits” of “business” as defined in the statute, whereas income-tax is chargeable on all incomes, profits and gains. It observed that if the simple ownership of immoveable property and the letting out of that portion which is not needed for the company's own use were intended to be covered by the definition of business, then the expression “wholly or mainly” would become wholly redundant. In construing the proviso, the Court stressed that effect must be given to every word used. The word “functions” is defined in the dictionary to mean “activities appropriate to any business”. If that definition is substituted in the proviso to section 2(5), the clause would read: “where the activities appropriate to any business … consist wholly or mainly in the holding of investments or other property”. The Court then asked whether it could be said that the activities appropriate to the business of a banking company consist wholly or mainly in the holding of a multi-storeyed building or other property for the purpose of letting out the unused portion on hire. The obvious answer, the Court held, is in the negative. It is manifest that rents received from the multi-storeyed property are not income received from a “business” within the Act. Such rent is not a trading receipt in the case of a banking company. Under the Income-tax Act the rent falls under section 9, and there is nothing in the definition of the word “business” given in the main portion of section 2(5) that would give it a different complexion. The Court referred to the case of hotel proprietors, where it was held that compensation paid by the Crown for requisitioning hotel premises during the war was not trading profit (Salisbury House Estate Ltd. v. Fry (1); Mellows v. Buxton Palace Hotel Ltd. (2)). It also noted that, even under the enactment imposing Profits Tax corresponding to the Excess Profits Tax, such receipts were held not to be income receivable from “investments or other property” (Commissioners of Inland Revenue v. Buxton Palace Hotel Ltd. (3)). The Court then considered the contention that sub-rule (4) of rule 4 of Schedule I lays down a different method of computation and qualifies the qualities of a business when it relates to the holding of property. Sub-rule (4) of rule 4 states: “In the case of a business which consists wholly or partly in the letting out of property on hire, the income from the property shall be included in the profits of the business whether or not it has been charged to income-tax under section 9 of the Indian Income-tax Act, 1922, or under any other section of that Act”. However, the Court emphasized that before this rule can become applicable, the functions of the company must fall within the definition of “business” as given in the Act. The definition contained in Schedule I is confined to the computation of profits and therefore relates only to that aspect of the statute.

The Court observed that reference to section 2(19) of the Act could not be employed to alter the meaning of the term “business” as it is used in the statute. The provision merely indicates that when a company’s functions – that is, the activities appropriate to any business – consist wholly or mainly in holding “other property,” then, for that part of the business which involves the letting of property for hire, the income earned from such letting must be included in “profits” even though the same income may already have been assessed under section 9 of the Income-Tax Act. The Court stressed that this interpretation does not amount to a modification of the definition of “business” by sub-rule (4) of rule 4. Instead, the sub-rule applies only to a business whose specific activity is the letting out of property. Consequently, the word “business” can be understood either as the expression contained in the main provision of section 2(5) or as the broader meaning given by the first proviso of that section, but in either sense it is inapplicable to the respondent in the present case. The Court concluded that it could not be said that letting out of property constituted either wholly or even partly the “business of the respondent.” Accordingly, the income derived from the rent of the portion of the building let out on hire, amounting to Rs 86,000, does not fall within the definition of “profits” as used in the Act and therefore is not liable to Excess Profits Tax. The judgment of the High Court was held to be sound, and the appeal was dismissed with costs.

Justice Hidayatullah, after reviewing the opinions of his learned colleagues, Sinha and Kapur, expressed agreement with Justice Sinha that the appeal should be allowed with costs both in this Court and below. The matter before the Calcutta High Court had concerned whether, for the purposes of section 2(5) read with rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940, the rental income earned from immovable property formed part of the business income liable to tax. In the Court’s view, the question required an affirmative answer. The Calcutta National Bank Limited, which was in liquidation, had previously carried on banking business and its income had been subject to excess profits tax in earlier years. The period under consideration was the chargeable accounting period ending 31 March 1946. The Bank had constructed a six-storeyed building, occupying the ground floor and the top floors, while the intermediate floors were let out to tenants. During the relevant accounting period the Bank received rent receipts totalling Rs 86,000. The central issue was whether this rental income was subject to excess profits tax under the Act.

Justice Sinha expressed a view that differed from that of Justice Kapur. He held that, under the Act, the levy of excess profits tax applied to any business to which the Act was applicable. Although the Act did not provide an exhaustive definition of “business”, it set out a description of what could be included. The definition, which in part mirrors the definition contained in the Indian Income-Tax Act, is expanded by a proviso that reads: “Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this definition to be a business carried on by such company or society.” The provision that actually imposes the tax is section 4, which provides that the tax is charged on the amount by which the profits of a chargeable accounting period exceed the standard profits of a business. For the purpose of determining those profits, the Act refers to a definition of “profits” that must be ascertained in accordance with the First Schedule of the Act. Within that Schedule, rule 4(4) – the rule that was cited in the question – states: “In the case of a business which consists wholly or partly in the letting out of property on hire, the income from the property shall be included in the profits of the business whether or not it has been charged to income-tax under section 9 of the Indian Income-Tax Act, 1922, or under any other section of that Act.” The distinction between the definition of “business” and the rule quoted is that the former requires the business to consist wholly or mainly of the holding of investments or other property, whereas the latter requires only that a business which consists wholly or partly of letting out property must include the rental income in its profits. Justice Kapur contended that the Bank’s business was essentially different, and therefore the rule could not be applied, because the definition mandates that the assessee’s business must be wholly or mainly the holding of investments or other property. He further maintained that there was neither a holding of an investment nor a holding of property as an investment in the Bank’s activities.

Justice Kapur also observed that, although the definition of “business” in the Act is useful where it applies, it is not exhaustive and therefore cannot exclude an activity that can appropriately be described as a business. He noted that the opening words of the definition indicate an intention to encompass most activities aimed at generating income, profits, or gain. Accordingly, the Memorandum of Association of the Bank permits it to acquire property in the same manner that it may acquire investments for its business purposes. Specifically, clause (e) authorises the Bank to purchase, take on lease, exchange, or otherwise acquire any movable or immovable property that the Bank may consider necessary or convenient for the purposes of its business, and to construct, maintain, or alter any buildings or works required for that purpose. Hence, the acquisition of a six-storeyed building fell within the scope of the Memorandum, and the remaining issue was whether the rental income derived from leasing out part of that building could be treated as part of the Bank’s profits for the purpose of excess profits tax. The definition’s reference to the “holding of investments or other property” suggests that “other property” must be held as an investment for the purpose of earning profits; otherwise the definition would not apply. The term “investments” carries a broad meaning, encompassing any application of money intended to yield a return in the form of interest, income, or profit. Consequently, when the Bank constructs a building that exceeds its own operational requirements and intends to earn rent from the surplus space, that activity falls within the ambit of an investment and, by extension, within the definition of a business under the Act.

In this case the Bank was authorised, under its memorandum of association, to undertake any actions that it deemed necessary or convenient for the purpose of its business, including the power to construct, maintain and alter any buildings or works that were necessary or convenient for the Bank’s operations. Accordingly, the purchase of a six-storey building fell within the powers conferred by the memorandum, and the only remaining issue for the Court was whether the rent received from that building, if it were let out, could be treated as profits of the Bank for the purpose of the excess profits tax. The statutory definition of “business” refers to the holding of investments or other property, and the expression “other property” must be read in the context of the preceding word “investments”. Consequently, the holding of other property must itself constitute an investment intended to generate profit; otherwise the definition would not be applicable. The term “investments” therefore carries considerable weight. In a broad sense, any deployment of money that is intended to yield a return in the form of interest, income or profit qualifies as an investment. When the Bank constructs a building that exceeds the space required for its own use and does so with the intention of earning rental income, that building must be regarded as an investment. In other words, the Bank is holding “other property” within the meaning of the definition, in addition to the ordinary investments that form the usual business of a Bank. In the view expressed, the income derived from such property should be treated as profit arising from property held as an investment, and that profit must be computed in accordance with Schedule 1, rule 4(4). The difficulty that arises relates to the difference in language between the definition and the rule: the definition speaks of a business that is wholly or mainly the holding of investments or other property, whereas the rule refers to a part of the business consisting of the letting out of property. Kapur, J. held that the provision defining the word “business” must prevail, because the Schedule was enacted solely for the purpose of computing profits as laid down in the definition and as indicated by the heading of the Schedule. While it is undeniable that a distinction exists between the Act and the Schedule, the question that naturally arises is whether the Schedule can be given independent effect in the circumstances of the present case. The Schedule, for the purpose of revenue collection, tends to enlarge the definition of a business to include any letting of property for the purpose of earning rents. The rule to be applied was articulated by Lord Sterndale, M. R., in Inland Revenue Commissioners v. Gittus, wherein he stated that two principles of interpretation should be applied to the combination of Act and Schedule. He explained that if the Act provides that the Schedule is to be used for a particular purpose and the heading of the relevant part of the Schedule shows that it is prima facie intended for that purpose, then the Act and the Schedule should be read as if the Schedule operates for that purpose, and the language of the Schedule should be given effect unless it clearly extends beyond that purpose.

In this case, the Court explained that when a schedule is devoted to a particular purpose, the Act and the schedule must be read together as if the schedule were operating for that purpose, and the language of the relevant section should be applied without extending it beyond that purpose. However, the Court added that if, despite this approach, the language of the schedule contains words or terms that clearly go outside the stated purpose, those words must be given effect and they cannot be treated as limited by the heading of that part of the schedule or by the purpose mentioned in the Act for which the schedule is prima facie intended. The Court emphasized that clear words may not be ignored merely because they appear, at first glance, to be restricted by the schedule’s heading or by the definition of the schedule’s purpose contained in the Act.

The Court then expressed the view that the second of the two propositions set out by Lord Sterndale, M. R., was the appropriate rule for interpreting the Schedule that was before the Court. It was noted that Lord Sterndale’s decision had been accepted without question by the House of Lords in Gittus v. Commissioners of Inland Revenue(1), an appeal from the Court of Appeal’s earlier judgment. Although the Schedule’s heading and the definition of “profits” indicated that the Schedule was meant to assist in computing profits, the reference to other kinds of businesses in rule 4, together with an incomplete definition of the term in the Act, showed that the legislature was defining the term “business” as required and was laying down rules for calculating the profits of a business. The legislature was therefore including various kinds of businesses within the Act and indicating how profits should be calculated in those situations.

The Court concluded that the definition of “profits” given in the Act could not be said to control everything in the Schedule, despite the definition of “profits” and the heading of the Schedule. As previously stated, the Court held that the second alternative was the one that applied to the present facts. For those reasons, and for the reasons set out by Sinha, J., the Court held that the appeal should be allowed with costs awarded both here and below. Accordingly, in accordance with the judgment of the majority, the decision under appeal was set aside and the appeal was allowed with costs here and below.