Full Judgment Text
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PETITIONER:
THE UNITED COMMERCIAL BANK LTD.,CALCUTTA
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX,WEST BENGAL
DATE OF JUDGMENT:
23/05/1957
BENCH:
KAPUR, J.L.
BENCH:
KAPUR, J.L.
BHAGWATI, NATWARLAL H.
AIYYAR, T.L. VENKATARAMA
CITATION:
1957 AIR 918 1958 SCR 79
ACT:
Income Tax-Business loss of Previous Year-Set-off against
income of the Assessment Year-Income from "interest on secu-
rities"-Banking business-Securities, part of trading assets-
Indian Income-tax Act, 1922 (XI Of 1922), SS.6,8,10, 24(2).
HEADNOTE:
For the assessment year (1945-46) the assessable income of
the appellant bank was computed by the Income-tax Officer by
splitting up its income into two heads " interest on
securities " and " business income ", and deducting the
business loss from interest on securities. In the previous
year the assessment showed a loss which was computed by
setting off the " business loss against " interest on
securities The appellant claimed that in the computation of
its profits for the assessment year in question it was
entitled to set off the carried over loss of the previous
year under s. 24(2) Of the Indian Income-tax Act, 1922. The
Income-tax Officer rejected the claim on the ground that the
loss was under the head " business " and so could not be set
off against income from securities under S. 24(2) of the
Act. Both the Income-tax Appellate Tribunal and the High
Court, on reference, held that in view of ss. 6, 8 and 10 of
the Act " interest on securities " could not be treated as
business income and therefore the appellant could not claim
a set-off under S. 24(2). On appeal to the Supreme Court it
was contended for the appellant that (1) ss. 8 and 10 should
be so read that where the securities in the hands of an
assessee are trading assets, s. 8 would be excluded, being
restricted to capital investments only, and the matter would
fall under the head " business " within s. 10, and (2) in
any case, even if the income from securities fell under s.
8, the appellant would be entitled to a set-off under -s.
24(2) because it carried on only one business, namely
banking, and the holding of securities by it was part of the
said business.
Held, that the scheme of the Indian Income-tax Act, 1922, is
that the various heads of income, profits and gains
enumerated in s. 6 are mutually exclusive, each head being
specific to cover the item arising from a particular source
and, consequently, " interest on securities " which is
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specifically made chargeable to tax under s. 8 as a distinct
head, falls under that section and cannot be brought under
s. 10, whether the securities are held as trading assets or
capital asset,"
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Commissioner of Income Tax v. Chunnilal B. Mehta, [1938] 6
I.T.R. 521 Salisbury House Estate Ltd. v. Fry, (1930) 15 T.
C. 266, Commercial Properties Ltd. v. Commissioner of Income
Tax, Bengal, (1928) 3 I.T.C. 23 and H. C. Kothari v.
Commissioner of Income Tax, Madras, [1951] 20 I. T. R. 579,
relied on.
The question whether the holding of securities by the
appellant formed part of the same business within S. 24(2),
could not be decided in the absence of a finding that the
securities in question were a part of the trading assets
held by the appellant in the course of its business as a
banker, and the case was remitted to the High Court for a
fresh decision on the reference after getting from the
Tribunal a fuller statement of facts.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 161 of 1954.
Appeal from the judgment and order dated, May 18, 1953, of
the Calcutta High Court in Income-tax Reference No. 72 of
1951.
N. A. Palkhivala, P. D. Himatsingka, J. B. Dadachanji, S.
N. Andley Rameshwar Nath and P. L. Vohra, for the appellant.
G. N. Joshi and R. H. Dhebar, for the respondent.
1957. May 23. The Judgment of the Court was delivered by
KAPUR J.-This appeal brought on a certificate of the High
Court raises a point of far-reaching consequence as to the
interpretation of ss. 8, 10 and 24(2) of the Indian Income-
tax Act (hereinafter termed the Act).
The assessee (who is the appellant before us) claims that in
the computation of its profits for the assessment year under
review (1945-46), it is entitled to set off the carried over
loss of the previous year against the profits of the year of
assessment under s. 24(2) of the Act. The assessee is a
Bank carrying on banking business. For the assessment year
its assessable income was computed by the Income Tax Officer
at Rs. 14,95,826 "by splitting up" its income into 2
heads ..................... "interest on securities"
and .................... business income ". " Interest on
securities" in the year of assessment was Rs. 23,62,815 and
under the head " business income " there was a
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loss of Rs. 8,86,972. After making the necessary adjust-
ments and deducting the business loss from " Interest on
securities ", the net income was determined at Rs.
14,95,826. In the previous year there was a loss of Rs.
3,21,929 which was computed by setting off the business loss
against "interest on securities ".
Before the Income-tax Officer the assessee made its claim on
the basis that it was a part of " the business of the Bank
to deal in securities............................. and "
that no distinction should be made between income from
securities and income from business for the purpose of set-
off under s. 24 ". It also claimed that it carried on only
one business, namely banking as defined by s. 277F of the
Indian Companies Act in the’ course of which the " Bank has
to receive money on deposits and invest such deposits in
securities, loans and advances " and therefore holdings of
securities by it could not be treated as its separate
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business. The Income-tax Officer was of the opinion that,
as there was a loss under the head " business " its claim
could; not be sustained and hence it could not be set off
under s. 24(2) of the Act.
On appeal to the Assistant Commissioner of Income-tax it was
again contended that the assessee was a dealer in securities
and that the two heads of income, " Interest on securities "
and " profits and gains " in banking business could not be
treated separately and were part of the same business of the
assessee and therefore it could claim a set-off under s.
24(2) of the Act. But this contention was repelled. The
matter was then taken to the Income-tax Appellate Tribunal
where again the contention was repeated that the business of
the assessee could not be split up into two heads under "
interest on securities " and banking business". The
Tribunal, however, held:
" Reading ss. 6, 8 and 10 it appears to us that the
legislature wanted to keep the income from the two sources
as separate. We are therefore of the opinion that the
Income-tax Officer was right in splitting up the income of
the appellant into two heads and in refusing the set-off of
the business loss brought forward
11
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from last year against income from Govt. securities earned
this year."
It therefore did not allow the loss of the previous year to
be set off against the computed profits of the assessment
year.
The assessee thereupon asked for a case to be stated to the
High Court and inter alia raised two questions;
(1) Whether interest on securities was a part of Bank’s
income from business carried on by it.
(2) Whether the assessee was entitled to set off the
carried over loss of the previous year against income during
the assessment year.
The assessee contended that it was carrying on banking
business in various towns in India, that " in the usual
course of its business it invests moneys in Securities and
receives interest thereon " and therefore it claimed that
the loss of Rs. 3,21,929, carried forward from the previous
year could be set off under s. 24(2) of the Act.
The Tribunal stated the case and sought the opinion of the
High Court on the following three questions;
(1) " Whether on the facts and in the circumstances of this
case, the assessee was entitled to set off the business loss
of Rs. 3,21,929 brought forward from the preceding year
against this year’s income from interest on securities held
by the assessee.
(2) Whether on the facts and in the circumstances of this
case the assessee was entitled under s. 8 to deduct any part
of the administrative expenses out of the income from
interest on securities.
(3) Whether in the circumstances of this case, the assessee
was entitled under the first proviso to s. 8 of the Income-
tax Act to deduct any interest on money borrowed and
utilised for investment in tax-free securities."
The High Court answered all the questions in the negative.
The learned Chief Justice during the course of his judgment
said:
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" It appears to me, therefore, that because the several
heads under s. 6 in the Indian Act are mutually exclusive
and because under any Income-tax Law, an item coming under
an exclusive head cannot in any circumstances be charged
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under another head and also because the interest on
securities in the hands of a banker cannot be treated as
business income on the principles explained by Mr. Justice
Rowlatt, I must hold that the contention of the
asesssee.................................. must be
rejected." We had the benefit of a full and able argument
from counsel on both sides. Counsel for the appellant has
raised three points:
(1)That ss. 8 and 10 of the Act should be so read that
"interest on securities", in cases where the true nature and
character of the securities in the hands of an assessee is
one of trading assets, would be excluded from the scope of
s. 8 and would fall under the head "business" within s. 10
of the Act
and alternatively even if ss. 8 and 10 are read as specific
heads then s. 10, being more appropriate, should be applied
to the facts of the present case ;
(2)If ss. 8 and 10 are equally applicable the assessee has
the option to be taxed under that head which imposes a
lighter burden on him; and
(3)Lastly he contended that even if the heads of income were
to be taken as mutually exclusive so that the "interest on
securities" falls under s. 8 and "business" under s. 10 of
the Act, the assessee would be entitled to a set-off under
s. 24 (2) because "interest on securities" and "profits and
gains" from business result from different operations of the
same business, the two being different forms of the same
business of the assessee.
We may now turn to the scheme of the Act. Section 2(15)
defines "total income" to mean "total amount of income,
profits and gains.................computed in the manner
laid down in the Act." Chapter I of the Act deals with
"Charge of income-tax". It consists of two sections-3 & 4.
Section 3 provides that "income-tax shall be charged for any
year at any rate or rates in
84
accordance with and subject -to the provisions of this Act."
Section 4 provides’ that "the total income of any previous
year of any person includes all income, profits and gains
from whatever sources derived".
Chapter 3 deals with "Taxable income". Section 6 enumerates
the heads of income chargeable to incometax. It says as
under :
S. 6 "Save as otherwise provided by this Act, the
following heads of income, profits and gains, shall be
chargeable to income-tax in the manner hereinafter appearing
namely
(i) Salaries.
(ii) Interest on securities.
(iii) Income from property.
(iv) Profits and gains of business, profession or vocation.
(v) Income from other sources.
(vi) Capital gains."
The two relevant heads for the purpose of this appeal are
(ii) & (iv), i.e., " interest on securities " and " profits
and gains of business" which are dealt with under ss. 8 and
10 of the Act respectively. Section 8 provides that " the
tax shall be payable by an assessee under the head "
interest on securities " in respect of interest receivable
by him on any security of the Central
Government................. and in the provisos to this
section are given the allowable deductions. The amendment
made in the proviso by the Act of 1955 is very relevant for
the purpose of this appeal and we &hall advert to it at a
later stage.
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Section 10 provides:
" The tax shall be payable by an assessee under the head "
profits and gains of business, profession or vocation" in
respect of the profits or gains of any business, profession
or vocation carried on by him "... The assessee contends
that securities are a part of its trading assets and this
position has throughout been accepted by the Department, and
any income which accrues in respect of these assets in the
form of interest
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has the same characteristics as profits or gains of "
business " and therefore must be treated as income falling
under the head " business " under s. 10 of the Act. In
other words the income of the assessee from its banking
business which includes dealing insecurities is,really
income from the same source and whatever accrues in the form
of interest whether from securities or from any other source
of investment would fall under s. 10 and not s. 8 because
all the interest accrues from the business carried on by the
assessee and this business is only one business. The
argument thus is that ss. 8 & 10 have to be so construed as
to harmonise with each other and the only way they can be
harmonised is that income accruing in the form of "interest
on securities" should be taken to be accruing from the
business of the assessee because securities form part of its
trading assets and thus fall within s. 10 and not s. 8,
which must be restricted to capital investments only. It is
further contended that if the object of the legislature was
to give a separate and exclusive identity to the income from
" interest on securities", it would have made the language
of s. 8 of the Act as specific as it has made in the case of
income from dividends from shares, which income by the
addition of sub-s. (I-A) to s. 12 has come to have a
specific place under the head "other sources" and is no
longer within the head "business" under s. 10 of the Act and
thus by statute its nature and character have undergone a
change. Reference is in this connection made to
Commissioner of Income-tax v. Ahmuty & co. Ltd. (1) where it
was held by the High Court of Bombay that dividend income
received by a dealer in shares is chargeable under s. 10 and
not under s. 12 of the Act. It is thus contended that in
order to preserve the unity and oneness of the business of
the assessee and to maintain the unity of its business
income the applicability of s. 8 should be circumscribed to
"interest on securities" when they are -not trading assets
of the assessee.
According to the scheme of the Act discussed above income-
tax has to be charged in respect of the "total
(1) (1955] 27 I.T.R. 63.
86
income" of the previous year of every assessee and "total
income" is defined under s. 2(15) to comprise all income,
profits and gains from whatever source derived subject to
certain exemptions. Chapter 3 which is entitled "Taxable
income" comprises ss. 6 to 17 (both sections inclusive ).
Section 6 enumerates the various heads of income, profits
and gains which are chargeable to income-tax. Each of these
heads of income, profits and gains is dealt with under a
separate section and these sections also give the details of
allowances and exemptions in regard to each different head.
The argument raised by counsel for the Revenue is that
according to the decision of the Privy Council in Probhat
Chandra Barua v. The King Emperor (1) s. 6 is the charging
section and that the words of ss. 7 to 12 show that the
various heads of income are mutually exclusive and items
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which specifically fall under these various heads have to be
charged under only that head and would fall under one of
these several but appropriately specific sections. It is
true that the Privy Council in Probhat Chandra Barua v. The
King Emperor (supra) did point out that s. 6 was a charging
section, but this was because ss. 3 and 4 were then
differently worded as pointed out by Kania, J., in B.M.
Kamdar, In re (2 ) at p. 43 and by Chagla, J., in the, same
case at p. 57. The Federal Court in Chatturam and others
v. Commissioner of Income-tax, Bihar(3) said:
The liability to pay the tax is founded on ss. 3 and 4 of
the Income-tax Act which are the charging sections".
The judgment of the Privy Council in Wallace Brothers & Co.
Ltd. v. Commissioner of Income-tax (4) also shows s. 3 to
be the charging section.
It is then argued that s. 6 of the Act being mandatory all
items of income, from whatever source they arise, would fall
only under one of the heads enumerated under s. 6 and
therefore one of the ss. 7 to 12 would specifically apply
and s. 8 which relates to " interest on securities" must be
held to apply to income from that source. It is also
contended by counsel for the
(1) (1930) L.R. 57 I.A. 228, 238.
(2) [1946] 14 I.T.R. 10.
(3) [1947] 15 I.T.R. 302, 308.
(4) [1948] 16 I.T.R. 240.
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Revenue that even if there is any overlapping between ss. 8
and 10 "interest on securities" whether accruing from
securities held as a capital asset or trading assets falls
under s. 8 alone and s. 10 should be so read as to
altogether exclude the income from " interest on
securities".
Counsel for the Revenue has referred us to the form of the
Return, prescribed under s. 22(1) of the Act at the relevant
time of the assessment under review. The heads there shown
are (1) Salary, (2) Interest on securities, (3) Property,
(4) Business, profession or vocation, (5) other sources, and
income from each source is to be shown in a separate column,
in each one of which reference is made to a particular note
relevant to that head of income. In the column under the
head "interest on securities" reference is made to note 9
which is in the following words:
"Interest on securities" means interest on promissory notes
or bonds issued by the Government of India or any other
State Government or the interest on debentures or other
securities issued by or on behalf of a local authority or
company. The gross amount before deduction of income-tax
should be entered.
Entries under this head should be accompanied by persons
paying the interest under section 18(9) of the Act.
Deductions are allowable in respect of-
(a) Commission charged by a banker for collecting the
interest.
(b) Interest payable on money borrowed for the purpose of
investment in the securities except certain interest payable
to persons abroad from which tax has not been deducted (see
section 8 of the Act for details). Full particulars (in a
separate statement if necessary) should be given of any
deduction claimed."
This is a statutory form and it gives what is meant by "
interest on securities ", what documents are to accompany
the Return in order to entitle an assessee to claim refund
and what deductions are to be made."
The mandatory character of s. 6 is indicated by the language
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employed in that section and the phraseology of all the
sections following, i.e., 7 to 12, employing the words " the
tax shall be payable under
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the head................... in respect of " the different
and distinct heads of income, profits and gains, salaries "
Interest on securities ", and "property ", business etc. is
indicative of the intention of the legislature making the
various heads of income, profits and gains mutually
exclusive. So every item of income, whatever its source,
would fall under one particular head and for the purpose of
computing the income for charging of income-tax the
particular section dealing with that head will have to be
looked at. The various sources of income, profits and gains
have been so classified that the items falling under those
heads become chargeable under ss. 7 to 12 according as they
are income of which the source is "salaries’) " interest on
securities property business, profession or vocation ", "
other sources or " capital gains ". Looked at thus the
contention of counsel for the Revenue that under the scheme
of the Act and on a true construction of these relevant
sections" interest on securities " by whomsoever and for
whatever purpose held has to be taxed under s. 8 and under
no other section is well founded and must be sustained. It
being a specific head of chargeability of tax, income from "
interest on securities " whether held as a trading asset or
capital asset would have to be taxed under s. 8 and not
under s. 10 of the Act.
The amendment made in the proviso to s. 8 in the year 1955
allowing a deduction in respect of any remuneration paid to
any person other than the banker for realising interest on
behalf of the assessee, supports this interpretation. Thus
this proviso now provides that reasonable amount can be
deducted by an assessee for commission paid to a Bank or
remuneration paid to anybody else for realising interest on
its behalf which clearly indicates the intention of the
legislature that interest on securities specifically falls
under s. 8 and under no other section. This amendment shows
that even a Bank, if it buys securities as a part of its
trading assets, is entitled to make a deduction for
remuneration paid by it to any person for realising interest
which postulates that "interest on securities" would fall
under s, 8 of the Act,
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This interpretation receives further support from the
language of s. 18 which deals with payment after deduction
at source. Section 18(3) requires a person responsible for
paying " interest on securities " to deduct income tax on
the amount of the interest payable at the maximum rate and
the person so responsible is required, after deduction of
the income-tax, to pay to the account of the Central
Government within 7 days of the deduction, the sum so
deducted and under s. 18(5) the maximum rate is to be
charged for the year in which the the amount is paid and not
at the rate of the assessment year.
A combined reading of ss. 3,4,6, 8,10,18 and refund section,
s. 48, shows that income-tax is to be charged at the rate or
rates prescribed in the Finance Act on the total income of
the assessee as defined in s. 2(15) of the Act and computed
in the manner given in as. 7 to 12 which are not charging
sections but are provisions for the computation of " total
income ". In the words of Viscount Dunedin in Salisbury
House Estate v. Fry(1):
" Now, the cardinal consideration in my judgment is that the
income tax is only one tax, a tax on the income of the
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person whom it is sought to assess, and that the different
schedules are modes in which the Statute directs this to be
levied ".
As has been pointed out in that judgment there are no
separate taxes under the various schedules but only one tax.
But in order to arrive at the total income on which tax is
to be charged " you have to consider the nature, the
constituent parts, of his (assessee’s) income to see which
schedule you are to apply." If these words may be used with
reference to the language of the Indian Act, we have to look
at the source of " income, profits and gains" and then see
under what head it appropriately and specifically falls and
if it falls under one particular head then computation is to
be made under the section which covers that particular head
of income. We cannot treat any one of the sections from ss.
7 to 10 to be general or specific for the purpose of any one
particular source of income. The
(1) (1930)15 T.C.266,306.
90
language shows that they are all specific and deal with the
various heads in which the item of income, profits and gains
in the case of an assessee falls.
Sir George Rankin in Commissioner of Income Tax v. Chunilal
B. Mehta(l) said:
" The effect of s. 6 is to classify profits and gains, under
different heads for the purpose of providing for each
appropriate rules for computing the amount; its language is
" shall be chargeable in the manner hereinafter appearing."
One of the heads is " business ", which as a head of income
stands alongside salaries, interest on securities,
professional earnings and other sources. True, the
classification of income is according to the character of
the source But the list of " heads in s. 6 is a list of
sources not in the sense of attributing the income to one
property rather than another, one business rather than
another, but only in the sense of attributing it to property
as distinct from employment, or business as distinct from
investment............ What is to be learnt from an
examination of the language of sub-s. (1) of s. 4-income,
profits and gains, described or comprised in s. 6 from
whatever source derived-is that s. 6 is intended as
describing different kinds of profits
In that case the question for decision was whether a
resident carrying on business in India and controlling
transactions abroad in the course of such business was
liable to income tax on such transactions, it was held that
the profits arising under such transactions do not arise or
accrue in India merely because of control by the assessee in
India. The judgment of the Privy Council shows what s. 6 of
the Act means-each head refers to income, profits and gains
attributable to the source-salary, interest on securities,
property, business, profession etc. This supports the
contention of each head being separate, exclusive and
specific.
Decided cases all support the contention of counsel for the
Revenue that the various heads of income enumerated in s. 6
of the Act and more particularly
(1) [1938] 6 I.T.R. 521, 529.
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dealt with in ss. 7 to 12 are exclusive heads and if an item
of income falls under one of these heads then it has to be
treated for the purpose of income tax under that head and no
other. In Salisbury House Estate Ltd. v. Fry (1) the
assessee was a limited company which was formed for the
express purpose of acquiring Salisbury House and utilising
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it. In this building there were 800 rooms which were let to
tenants. The company also maintained a staff of servants to
render various kinds of services to the occupants of the
rooms. The company was assessed to income tax under Sch. A
upon gross valuation of the premises and as the actual rent
received was higher, the Revenue wanted to assess income
again under Sch. D. The company contended that so far as
the proceeds of the property were concerned they had already
been taxed under Sch. A and could not again be brought "in
computo" under Sch. D.
Viscount Dunedin at p. 306 observed:
" Now, if the income of the assessee consists in part of
real property you are, under the Statute, bound to apply
Sch. A ".
Lord Atkin at p. 319 said:
" the dominance of each Sch. A, B, C & E over its ’own
subject matter is confirmed by reference to the Sections and
Rules which respectively regulate them in the Act of 1842.
They afford a complete code for each class of income,
dealing with allowances and exemptions, with the mode of
assessment, and with the officials whose duty it is to make
the assessments. ............ .....................I find no
ground for assessing the taxpayer under Sch. D for any
property or gains which are the subject matter of the other
specific Schedules."
At p. 320, he pointed out that Sch. D is a residuary
Schedule and all Schedules are mutually exclusive.
Referring to investments in securities he said:
Income derived by a trading company from investments of its
funds, whether temporary or permanent, in government
securities must be taxed under
(1) (1930) 15 T.C. 266.
92
Sch. C, and cannot for the purposes of assessment under
Sch. D be brought into account."
This shows that even though Sch. D is residual all
Schedules are mutually exclusive and if income falls under
one Schedule, it must be assessed under that Schedule
because the Schedules are a complete code for each class of
income, dealing with, allowances and exemptions and with the
mode of assessment. A significant passage in the judgment
of Lord Atkin (at p. 321) is:
" I find it difficult to say that companies which acquire
and let houses for the purposes of their trade, such as
breweries in respect of their tied tenants, and collieries
and other large employers of labour in respect of their
employees, do not let the premises as part of their
operation of trading. Personally I prefer to say that even
if they do trade in letting houses their income so far as it
is derived from that part of their trading must be taxed
under Sch. A and not Sch. D."
Thus even though the assessee was a company carrying on
business or trade, income from the head " property " was
taxed under Sch. A and not Sch. D. This case supports the
contention that different Schedules being distinctly
applicable to each individual head of income would exclude
the applicability of any other head.
In Butler v. The Mortgage Company of Egypt Ltd. (1), a
British company controlled in Egypt was carrying on business
of lending money on mortgage of land in Egypt or on the
security of debentures by mortgage of land. In case of
default the bank could take action in the Egyptian Courts
either to sell the property or to take possession with a
view to future sale. The General Commissioners held that
the acceptance of ,securities for money lent was only an
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incident of the company’s business and that income was not
assessable under Case 4 of Sch. D. The company claimed that
the assessment should be under Case 5 of Sch. D and not
Case 4. It was held that the Crown had the right to tax
under Case 4 but even if the assessee satisfies
(1) (1928) 13 T.C. 803, 809, 810.
93
that Case 5 is also applicable it was still for the Crown to
decide and tax under Case 4 provided both cases applied
equally. Rowlatt J. said:
"A banker could never ask to be repaid the tax which had
been deducted from the Government securities which he held,
because he held them as a banker, the point being that when
you have once got a security (we will say) the interest on
which is taxed by the Act, you cannot get out of it because
you say that you look a little further and see this is only
embedded in a business."
It means in terms of the Indian Statute that in the case of
interest on securities if chargeable under a specific
section, the assessee even though he is a banker cannot
claim that they be treated as "business income."
in Thompson v. The Trust and Loan Company of Canada (1), the
respondent company carried on business as a loan and finance
company. During the material years the company bought
treasury bonds cum-coupons and on the same day sold bonds of
the same nominal value retaining the coupons and received on
encashment a half year’s interest under deduction of income
tax. The Crown contended that in computing the Company’s
profits for assessment to income tax under Case I of Sch. D
there, should be included, as receipts, the amounts realised
by the sale of bonds ex-coupons and the net proceeds of the
coupons and, as disbursements, the amounts paid by the
company for the bonds cum-coupons. But it was held that the
interest received by the company was income of the company
taxed by deduction under Sch. C and that no part of the
proceeds of the coupons should be included in the
computation of the company’s liability under Sch. D.
Rowlatt J. at p. 400 said:
" The Crown cannot treat a transaction which has its own
character for income tax purposes as if it were something of
a different character..."
and Lord Hanworth M.R. at p. 406 put the matter thus:
(1) (1932) 16 T.C. 394.
94
Now in the present case it is plain that this subject matter
of tax, government bonds and coupons payable out of the
government funds, have got to be taxed under Sch. C; they
cannot be taxed anywhere else."
In Volume I of Simon’s Income Tax (1948 Ed.) p. 54 the law
is thus stated:
" These Schedules are prima facie mutually exclusive and
consequently if a particular kind of income is charged under
one Schedule the Crown cannot elect to charge it under
another." This is in accord with the decisions discussed
above.
The Commercial Properties Ltd. v. Commissioner of Income-
tax, Bengal(1) was a case of a registered company whose sole
object was to acquire lands,, build houses and let them to
tenants, the sole business of the company being the
management and collection of rents from the properties. The
assessment was made under s. 9 of the Act but the company
claimed that they were carrying on a business assessable
under s. 10 and not under s. 9. The Court held that the
company was rightly assessed under s. 9, its income being
derived from its ownership of buildings.
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Rankin C. J. said at p. 26:
" In my judgment the words of s. 6 and s. 9 and s. 10 must
be read so as to give some effect to the contrast that is
there made between income, profits and gains from " property
" and from " business " and I entirely refuse my assent to
the proposition that because it happens that the owner of a
property is a company which has been. incorporated for the
purpose of owning such property, therefore the income
derived from " property must be regarded as income derived
from business ". In my judgment, income derived from "
property is a more specific category applicable to the
present case".
The decision in this case shows that the ownership of the
house property was not considered as "business" and that
income derived from such source would more specifically and
appropriately fall within the head "property".
(1) (1928) 3 I.T.C. 23.
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The applicability of s. 8 directly arose and was discussed
in H. C. Kothari v, Commissioner of Income-tax, Madras(1).
The assessees in that case had several sources of income,
one of which was interest on securities. The business of
the assessees showed a loss but the assessees claimed earned
income relief in respect of interest on securities on the
ground that securities, which they had purchased and sold as
part of their business, formed their stock-in-trade and the
interest therefrom should be treated as "business" profits.
But s. 8 of the Act was held applicable to the facts of that
case.
Satyanarayana Rao, J. said
"
of the Act which deals with interest on securities is a
separate and distinct head, and if an income is chargeable
under that head, it is not open either to the assessee or to
the department to change the head and claim to tax it under
a different head....
It was also pointed out in this judgment following
Commissioner of Income_tax v. Bosotto Bros. (2) that if
income falls under more than one head the assessee has the
option to choose the head which makes the burden on his
shoulders lighter.
The following two cases were relied upon by the assessee:-
(1) Mangalagiri Sri Umamaheshwara Gin and Rice Factory Ltd.
v. Guntur Merchants Gin and Rice Factory Ltd. (3) where a
limited company incorporated for the purpose of milling rice
leased out the buildings, plant, machinery etc., to another
company for a fixed annual rent. The lessees were to do the
necessary repairs to keep the mill in good working condition
and the lessors were to bear the loss of depreciation. The
assessee company claimed the allowances for depreciation
under s. 10(2) (vi) of the Act. It was held that the
company was carrying on the business of letting a rice mill
and as such was entitled to a deduction for depreciation.
The judgment of Krishnan, J., shows that it was clear from
the facts of the case that the company was carrying on
business
(1) [1951] 20 I.T.R. 579, 587. (3) (1926) 2 I.T.C. 251.
(2) [1940] 8 I.T.R. 41.
96
of letting the mill for the purpose of being worked by
lessees and it was under these circumstances that s. 10 was-
held applicable. The other case is Sadhucharan Roy
Chowdhry, In re (1) the facts of which were similar to the
facts of Mangalagiri Sri Umamaheshwara Gin and Rice Factory
Ltd. v. Guntur Merchants Gin and Rice Factory Ltd. (supra).
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It was held that letting of a Jute Press at rent was as much
a business as the letting of a ship to freight or letting of
motor-car or any other kind of machines or machinery for
hire, and therefore allowances for depreciation were allowed
like in Mangalagiri’s case (supra). Neither of these cases
throws any light on the question now before us.
The appellant’s contention that looking at the real nature
and character of the source of income arising from "interest
on securities" in the case of the present assessee, the
Bank, s. 10 of the Act would apply and not s. 8 can receive
no support from the decision in Davies v. Braithwaite (2).
That was a case where an actress earned her living by
accepting and fulfilling professional engagements, her
activities being acting in stage-plays in England and
America, performing for the films and on the wireless and
performing for gramophone companies. These were held to
fall under Sch. D and not E as whatever contracts she made
were nothing but incidents in the conduct of her
professional career. The use of the following words by Sir
George Rankin in Commissioner of Income-tax v. Chunilal
B. Metha (3):
But the list of "heads" in s. 6 is a list of sources not in
the sense of attributing the income to ............. one
business rather than another but only in the sense of
attributing it to business as distinct from investment." is
no surer foundation for saying that " interest on securities
" is severable into income from securities held as a capital
investment and income from those held as trading assets.
The language of ss. 6, 8 and 10 is destructive of any such
contention.
(1) [1935] 3 I.T.R. 114.
(2) [1931] 2 K.B. 628.
(3) [1938] 6I.T.R. 521, 529.
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Thus on a true construction of the various sections of the
Act the income of an assessee is one and the various ss. 7
to 12 are modes in which the Statute directs that income-tax
is to be levied and these sections are mutually exclusive.
The head of income of which the source is " interest on
securities " has its’ characteristics for income-tax
purposes and falls under the specific head covered by s. 8
of the Act, and where an item falls specifically under one
head it has to be charged under that head and no other.
This interpretation follows from the words used in ss. 6, 8
and 10 which must be read so as to give effect to the
contrast between " income, profits and gains " chargeable
under the head " interest on securities " and income,
profits and gains " chargeable under the head business ".
Thus on this construction the various heads of " income,
profits and gains " must be held to be mutually exclusive,
each head being specific to cover the item arising from a
particular source. It cannot, therefore, be said that qua
the assessee in the present case and for the purpose of
securities held by it, s. 8 is more specific and s. 10
general or vice-versa, and therefore no question of the
applicability of the principle " generalia specialibus non
derogant " arises. This finds support from the decided
cases which have been discussed above. Thus both on
precedent and on a proper construction, the source of income
" interest on securities " would fall under s. 8 and not
under s. 10 as it is specifically made chargeable under the
distinct head " interest on securities " falling under s. 8
of the Act and cannot be brought under a different head even
though the securities are held as a trading asset in the
course of its business by a banker. In this view of the
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matter no question of exercise of option by the assessee or
the Revenue arises. Consequently Lord Shaw’s observation in
The Liverpool and Land Globe Insurance v. Bennett (1):
" It appears to me that this selection is not only
justified in law but is founded upon the soundest and most
elementary principles of business,"
(1) (1913) 6 T.C. 327, 376.
98
will be inapplicable to the facts of the present case, and
so also the rule as to choosing the head which imposes on
the assessee’s shoulders burden which is highter as given in
Commissioner of Income-tax v. Bosotto Bros., (supra) and
reiterated in H. C. Kothari v. Commissioner of Income-tax,
Madras (supra).
To the third point raised by counsel for the assessee that
even if interest on securities falls under s. 8 of the Act
and not under s. 10 the assessee is entitled to ’Yet a set-
off under s. 24(2) of the Act, counsel for the Revenue has
taken the objection that this plea is not available to the
appellant because it was not placed before the Income Tax
Appellate Tribunal for being referred to the High Court nor
was it raised before the High Court. How the question was
specifically raised before the Income Tax Officer and the
Appellate Assist. ant Commissioner and also before the
Income Tax Appellate Tribunal has already been mentioned.
In its application to the Tribunal for stating the case to
the High Court the assessee specifically raised in two
suggested questions its right to set off the business loss
of Rs. 3,21,929 brought forward from the previous year
against the income of the assessee in the assessment year.
It does not appear from the judgment of the High Court that
the question was argued in the manner it has been debated in
this court. The appellant seems to have rested his case on
the applicability of s. 10 to the profits under the head
"interest on securities" because of the securities being
trading assets but this contention was repelled and the same
question has been raised before us but the assessee now
supports his case on an alternative argument that even if
the securities fall under s. 8 still the profits from that
source are from an item of the assessee’s business and
therefore the loss of the previous year from the banking
business of the assessee can be set off against the profits
of the assessment year whatever be the source of that
profit. The case is similar to the one in Commissioner of
Income-tax v. Messrs. Ogale Glass Works Ltd. (1). The
question framed by the Tribunal is a general one and what is
to be determined is whether
(1) [1955] 1 S.C.R. 185, 196, 198.
99
the loss of the previous year can be set off against the
income of the assessment year within the provisions of s.
24(2) of the Act. The question is wide enough to cover the
point raised before us. In the circumstances of this case
the third point, raised by counsel for the assessee, is open
to be canvassed before us.
Counsel for the Revenue contends that the words used in s.
24(2) were " the same business " and therefore this set-off
would be allowable only against any profits or gains of the
game business and no other business. He further contends
that the scheme of s. 24(1) and (2) shows that profits and
gains must be arising under s. 10 and not under any other
section because the expression used is profits or gains
which goes with " business " under s. 10 and cannot have
reference to income, profits and gains arising from interest
on securities " which are under s. 8 of the Act.
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Counsel for the assessee on the other hand submits that the
use of the word " same " signifies the identity of the
business in which the loss has occurred and has no reference
to the head under which the profits are chargeable. In
other words interest does not cease to be profits and gains
of the same business merely because for the purpose of
chargeability it falls under a different head, i.e., under
s. 8 and not under s. 10. Section 24 of the Act deals with
the set-off of loss in computing the aggregate income.
He also contends that the business which the assessee was
carrying on was the business of dealing in money and credit
and that banking and dealing in securities constitute one
and the same business. He refers to s. 277 F of the Indian
Companies Act and relies on the Privy Council decision in
Punjab Co-operative Bank Ltd. v. The, Commissioner of
Income-tax, Punjab(1) in which it was pointed out that in
the ordinary case ’of a bank the business consists in its
essence of dealing with money and credit. The banker has
always to keep enough cash or easily realisable securities
to meet any probable demand by depositors, and if some of
the securities are realised to meet
(1) [1940] 8 I.T.R. 635.
100
withdrawals by depositors, this is clearly a normal step in
carrying on the banking business. It is an act done in what
is truly carrying on of the banking business.
In view of the order we propose to make, we do not find it
necessary to express any opinion on the respective
contentions raised by counsel for the parties. In Punjab
Co-operative Bank’s case (supra) a finding had been given
that the purchase and sale of securities was as much the
assessee’s business as receiving deposits from clients and
withdrawals by them. In the case before us no such finding
has been given and in the absence of such finding no opinion
can be given as to whether the holding of securities out of
which interest was derived formed part of the same business
within s. 24(2) or not.
The appeal would therefore, be allowed and the case remitted
to the High Court for a fresh decision of the reference
after getting from the Tribunal a fuller statement of facts
about this part of the case, whether the securities in
question were a part of the trading assets held by the
assessee in the course of its business as a banker.
The costs of this appeal will be costs in the reference
before the High Court.
Appeal allowed. Case remitted.
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