The Madras High Court in the case of CIT v. West Coast Electric Supplies Corpn. Ltd. (109TAX54) reversed the decision of the Tribunal holding that dividend income should be assessed as assessee’s income from business and its carried forward losses should be set off against it. In this case the assessee held 100% shares as investments in two subsidiaries and contended that the assessee was carrying on the business of the subsidiary companies in as much as it had control over the ventures of the subsidiaries as well as it had provided finance and stood as guaranter for loans. The Tribunal in this case after referring to the tests laid down in the decision in the case of Smith, Stone & Knight Ltd. v. Birmingham Corporation (4AllER116) held that the assessee was carrying on the business of the subsidiary companies and the dividend income should therefore be assessed as business income. The High Court held that the guidelines given in the ruling followed by the Tribunal are not conclusive but certainly they are useful. Following the Supreme Court ruling in the case of Bengal & Assam Investors Ltd. V. CIT (59ITR547) the Court however on facts declined to agree with the view of the Tribunal for the following reasons: –
- Shares are held as investments and not as stock in trade;
- Holding company and subsidiaries are separate legal entities;
- Profits of subsidiaries are not treaated as profits of holding company in Indian context;
- There is no agency contract between the two companies.
In respect of the interest income realised on compensation received by the assessee the Court reiterated the settled law laid down in this regard by the Apex court in the case of CIT v. T.N.K. Govindarajulu Chetty(165ITR231) that such income should be assessed on accrual basis and spread over the years between the date of acquisition of the undertaking and the date of actual payment.