A) ABSTRACT / HEADNOTE

The case of Commissioner of Income Tax, West Bengal v. Calcutta National Bank Limited (In Liquidation), [1959] Supp. 660 S.C.R. examines the application of the Excess Profits Tax Act, 1940 to a rental income derived by a banking company. The core dispute revolved around whether the rental income received from letting out a substantial portion of the company’s building was assessable to excess profits tax under Section 2(5) and Rule 4(4) of Schedule I of the Act. The Income Tax Appellate Tribunal had held in favour of taxation, but the High Court reversed it. The Supreme Court ultimately allowed the appeal, holding that such rental income constituted part of business profits for the purposes of taxation under the said Act.

The majority judgment delivered by Justice B.P. Sinha with the concurrence of Justice M. Hidayatullah interpreted the definition of “business” under Section 2(5) in a broader sense, aligning it with a company’s memorandum of association. Dissenting, Justice J.L. Kapur held that the primary function of a banking company did not include property letting, thereby excluding the rental income from the scope of business profits.

This case set a precedent by interpreting the definition of “business” in fiscal statutes broadly and endorsed the inclusion of passive income such as rent in business profits under specific legal provisions.

Keywords: Excess Profits Tax, Rental Income, Business Income, Banking Company, Section 2(5), Rule 4(4), Income Tax, Supreme Court, Interpretation of Statutes, Fiscal Legislation.

B) CASE DETAILS

i) Judgement Cause Title:
Commissioner of Income-Tax, West Bengal v. Calcutta National Bank Limited (In Liquidation)

ii) Case Number:
Civil Appeal No. 4 of 1956

iii) Judgement Date:
April 20, 1959

iv) Court:
Supreme Court of India

v) Quorum:
Justice B.P. Sinha, Justice J.L. Kapur, Justice M. Hidayatullah

vi) Author:
Justice B.P. Sinha (majority), Justice J.L. Kapur (dissenting)

vii) Citation:
[1959] Supp. S.C.R. 660

viii) Legal Provisions Involved:
Section 2(5), Section 2(19), Section 4, Schedule I Rule 4(4) of the Excess Profits Tax Act, 1940

ix) Judgments overruled by the Case:
None explicitly overruled, but reversed the High Court of Calcutta’s ruling in ITR No. 39 of 1952.

x) Case is Related to which Law Subjects:
Taxation Law, Corporate Law, Statutory Interpretation, Business Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case arose from a dispute over the taxability of rental income under the Excess Profits Tax Act, 1940. The Calcutta National Bank Ltd., a banking entity in liquidation, had constructed a six-storeyed building in which it used part for its head office while letting out a substantial portion to tenants. The income from this rental was questioned by the Revenue as taxable under the Excess Profits Tax framework.

While the Department and the Income Tax Appellate Tribunal supported taxation of the income, the Calcutta High Court held that the rental income did not qualify as business income under the relevant statutory provision. This ruling necessitated the appeal before the Supreme Court, which eventually settled the law on this point, analyzing the interplay between corporate objects, statutory definitions, and the scope of “business”.

D) FACTS OF THE CASE

The respondent, Calcutta National Bank Ltd., owned a building in Calcutta used partially for its own operations and largely let out to tenants, generating an annual rent of Rs. 86,000. The Department, invoking Section 2(5) read with Rule 4(4) of Schedule I of the Excess Profits Tax Act, included this amount in the business profits liable for excess profits tax.

The Appellate Assistant Commissioner upheld this inclusion, reasoning that rental income, being part of the bank’s investment activity, formed part of its business. The Appellate Tribunal supported this view. However, the Calcutta High Court overturned the Tribunal’s decision, stating that rental income could not be termed as business income unless the company’s main or sole function was holding of property or investments.

The Revenue, aggrieved by the High Court’s ruling, secured special leave to appeal before the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the rental income received from letting out part of a building owned by a banking company constituted business income liable to Excess Profits Tax under Section 2(5) read with Rule 4(4) of Schedule I to the Excess Profits Tax Act, 1940.

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that:

The term “business” in Section 2(5) of the Excess Profits Tax Act should be interpreted broadly, encompassing all income-generating activities aligned with the company’s objectives, including rental income. They emphasized the Memorandum of Association of the Bank, which permitted holding and management of immovable properties as a business object.

The rental income resulted from a deliberate investment in property, made with the intention to generate profits, hence it was inherently part of the company’s business. The appellant cited English precedents like Commissioners of Inland Revenue v. Desoutter Bros. Ltd., (1945) 29 T.C. 158, and The Korean Syndicate Ltd., (1921) 12 T.C. 181, to support a broader view of business that includes passive earning activities.

They further argued that Rule 4(4) explicitly includes rental income in computing profits from a business that consists wholly or partly in letting property, regardless of whether the income is assessed under Section 9 of the Indian Income-tax Act.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that:

The core activity of a banking company was dealing in money and credit, not property letting. Hence, the rental income could not be characterized as business income under the Excess Profits Tax Act.

They emphasized that Section 2(5) applied only if the business primarily involved holding of property or investments, which was not the case here. They further argued that Rule 4(4) could not override the substantive limits of “business” as defined in the Act, and any broader interpretation would render the statutory proviso redundant.

The respondent also drew on precedents such as Salisbury House Estate Ltd. v. Fry, (1930) 15 T.C. 266, where similar passive income was not treated as business profits.

H) RELATED LEGAL PROVISIONS

i) Section 2(5) – Definition of “Business” under Excess Profits Tax Act
ii) Section 2(19) – Definition of “Profits”
iii) Section 4 – Charging section for excess profits
iv) Schedule I Rule 4(4) – Inclusion of rental income in profits

I) JUDGEMENT

a. RATIO DECIDENDI

i) The majority held that the term “business” must be construed broadly. The Memorandum of Association of the Bank included property management as a permissible business activity. Therefore, rental income from a part of the building constructed and let out by the bank was a profit from business under Section 2(5) and taxable under Rule 4(4).

The Court reaffirmed that Rule 4(4) could apply independently of the proviso to Section 2(5), which was not exhaustive. Thus, even if the company’s principal business was not property holding, income from such activities could still be business income when pursued as a commercial strategy.

The judgment relied on Commissioners of Inland Revenue v. Desoutter Bros. Ltd., and The South Behar Railway Co. Ltd., (1923) 12 T.C. 687, which interpreted “business” expansively to include quiescent or passive earning activities.

b. OBITER DICTA 

i) Justice Sinha observed that it is incorrect to confine the meaning of “business” under the Excess Profits Tax Act strictly to that under the Income Tax Act, since the former had broader scope and purpose.

c. GUIDELINES 

• Rental income may qualify as business income under fiscal statutes if derived from company objects.

• Interpretation of “business” under tax statutes must account for the company’s memorandum.

• Rule 4(4) of Schedule I has an independent and wider application.

• Passive income can fall under business income when part of a deliberate investment strategy.

J) CONCLUSION & COMMENTS

This judgment stands as a significant exposition on the scope of business income in Indian taxation jurisprudence. It clarifies that activities authorized by a company’s memorandum, even if passive, may attract business income classification under tax laws. The ruling departs from rigid interpretations tied solely to operational income or primary functions.

It also demonstrates the judiciary’s preference for a purposive and commercial reality-based approach in interpreting fiscal statutes, rather than relying solely on formal distinctions. This case thus fortified the Revenue’s powers in assessing tax on multifaceted income sources of corporations.

K) REFERENCES

a. Important Cases Referred

[1] Commissioners of Inland Revenue v. Desoutter Bros. Ltd., (1945) 29 T.C. 158
[2] The South Behar Railway Co., Ltd., (1923) 12 T.C. 687
[3] Commissioners of Inland Revenue v. The Korean Syndicate, Ltd., (1921) 12 T.C. 181
[4] Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, Punjab, (1940) A.C. 1055; [1940] 8 I.T.R. 635
[5] Sardar Indra Singh and Sons Ltd. v. Commissioner of Income-tax, West Bengal, [1954] S.C.R. 167
[6] United Commercial Bank Ltd., Calcutta v. Commissioner of Income-tax, West Bengal, [1958] S.C.R. 79
[7] Salisbury House Estate Ltd. v. Fry, (1930) 15 T.C. 266

b. Important Statutes Referred

[8] Excess Profits Tax Act, 1940, Sections 2(5), 2(19), 4, Schedule I Rule 4(4)
[9] Indian Income Tax Act, 1922, Sections 8, 9, 10