Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH
Vs.
RESPONDENT:
THE COCANADA BANK LTD. KAKINADA
DATE OF JUDGMENT:
02/04/1965
BENCH:
SUBBARAO, K.
BENCH:
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1966 AIR 47 1965 SCR (3) 619
CITATOR INFO :
RF 1966 SC1514 (9)
RF 1967 SC 193 (9)
E 1968 SC 55 (6)
R 1971 SC2274 (8)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s.
24(2)--Carry-forward of loss--Loss under one head of income
whether can be set-off against income under other heads in
succeeding years--Heads of income whether mutually
exclusive.
HEADNOTE:
The respondent bank had income from banking business and
interest on securities. For the assessment year 1949-50 its
loss from banking business was set-off against the income
from interest on securities but for the succeeding three
years the income-tax officer set-off the said loss which had
been carried forward, only against the income. from banking
business and disallowed it against the income under the head
’interest on securities’. The view of the Income Tax Officer
was upheld by the Appellate Assistant Commissioner and on
further appeal by the Appellate Tribunal. The Tribunal
however referred to the High Court, at the instance of the
assessee, the question whether the assessee was entitled to
set-off business loss brought forward from the preceding
assessment year against the entire income including interest
on securities. The High Court remitted the case to the
Tribunal for a finding whether the securities in Question
formed part of the trading assets held by the assessee. The
Tribunal held that the receipt of interest from securities
was as much the assessee’s business as its other banking
activities. On receipt of the supplementary statement of
case the High Court answered the reference in favour of the
assessee. The Revenue appealed to this Court.
It was urged for the Revenue that the income from
business and securities fell under different heads, namely
s. 10 and s. 8 of the Act respectively, that they were
mutually exclusive and, therefore, the losses under the head
"business" could not be carried forward from the preceeding
year to the succeeding year and set-off under s. 24(2) of
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the Act against the income from securities held by the
assessee.
HELD: (i) While subs. (1) of s. 24 provides for setting
off of the loss in a particular year under one of the heads
in s. 6 against the profit under a different head in the
same year, subs. (2) provides for the carrying forward of
the loss of one year and setting off the same against the
profit or gains of the assessee from the same business in
subsequent years. This cl. (2) of s. 24 in contradistinction
to cl. (1) thereof is concerned only with the business and
not with its heads under s. 6 of the Act. This designed
distinction brings out the intention of the legislature to
give further relief to an assessee carrying. on business and
incurring loss in the business though the income therefrom
falls under different heads under s. 6 of the Act. [622E;
623E-F]
(ii) The scheme of the Act is that income-tax is one tax.
Section 6 only classifies the income under different heads
for the purpose of computation of the net income of the
assessee. Though for the purpose of computation of the
income, interest on securities is separately classified,
income by way of interest on securities does not cease to be
part of the income from business if the securities are part
of the
620
trading assets. Whether a particular income is part of the
income from a business falls to be decided not on the basis
of the provisions of s.6 but on commercial principles.
[622G-H]
(iii) In the present case the Tribunal and the High Court
found that the securities were the assessee’s trading assets
and the income therefrom was, therefore, the income of the
business. If it was income of the business, s. 24(2) of the
Act was immediately attracted. If the income from the
securities was the income from its business, the loss could,
in terms of that section, be set-off against that income.
[622H-623A]
The Punjab Co-operative Bank Ltd. v. Commissioner of
Incometax, Punjab, (1940)8 I.T.R. 635 and Commissioner of
Income-tax Bombay City I v. Chugandas & Co. (1965) 55 I.T.R.
17, relied on.
United Commercial Bank Ltd. v. Commissioner of Income tax
West Bengal, (1958) S.C.R. 79, East India Housing and Land
Development Trust Ltd. v. Commissioner of Income-tax, West
Bengal (1961) 42 I.T.R. 49, and Commissioner of Income-tax,
Madras v. Express Newspapers Ltd. (1964) 53 I.T.R. 250,
distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos./55--157
1964.
Appeals by special leave from the judgment and order dated
August 8, 1961 of the Andhra Pradesh High Court in Case
Referred No. 25 of 1957.
S. V. Gupte, Solicitor-General, N. D. Karkhanis
and R.N. Sachthey, for the appellant (in all the appeals).
G.S. Pathak, B. Datta and T. Satyanarayan, for the
respondent (in all the appeals).
The Judgment of the Court was delivered by
Subba Rao, J. These appeals by special leave raise the
question of construction of s. 24(2) of the Indian Income-
tax Act, 1922, hereinafter called the Act.
The material facts may briefly be stated. The, Cocanada Bank
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Ltd., Kakinada, hereinafter called the assessee, is a
private limited company carrying on banking business with
its head office at Kakinada and a branch at Dayal Bagh. The
assessee’s sources of income are banking business and
interest from government securities. For the assessment year
194950 its income was assessed as follows:
Interest on securities ... Rs. 84,880
Other banking activities ... Rs. 64,400
(loss)
------------------
---
Net loss ... Rs. 55,912
--------------------
The following tabular form shows at a glance the factual
position in regard to the income of the assessee under
different heads during the said three years:
Business
Year of assessment Interest on income or
securities loss as finally Total
decided by
the A.A.C.
1 2 3 4
Rs. Rs. Rs.
1. 1950-51 ... 5,191 886 6077
2. 1951-52 .. 2174 1,177 3351
3. 1952-53 ...1885 9,121 11,006
621
For the three succeeding years the department showed the
income under the said two separate heads but allowed the
said loss to be set off against the income under the head
"business" and disallowed it against the income under the
head "interest on securties". The view of the Income-tax
Officer was confirmed, on appeal, by the Appellate Assistant
Commissioner and’, on further appeal, by the Income-tax
Appellate Tribunal. The following question was referred by
the Tribunal to the High Court for its opinion:
"Whether on the facts and in the circumstances
of the case, the assessee was entitled to set
off the business loss of Rs. 55,912 brought
forward from the preceding year against the
entire income including interest on securities
held by the assessee."
The High Court, having regard to the decision of this Court
in United Commercial Bank Ltd., Calcutta v. Commissioner of
Income-tax, West Bangal(1) remitted the case to the Income-
tax Tribunal, Hyderabad Bench, for making a fuller statement
of case on the question whether these securities in question
formed’ part of the trading assets held by the assessee in
the course of its business as a banker and whether its
dealing with the securities from which it received interest
was as much the assessee’s business as receiving deposits
from clients and withdrawals by them. The Income-tax
Tribunal, on a further hearing, held that the receipt of
interest from securities was as much the assessee’s business
as its other banking activities like receiving deposits from
the clients and withdrawals by them. On receipt of the
supplementary statement of case from the Tribunal the High
Court answered the reference in favour of the assessee.
Hence the present appeals.
Learned counsel for the Revenue argued that the income from
business and securities fell under different heads, namely,
s. 10 and s. 8 of the Act respectively, that they were
mutually exclusive and, therefore, the losses under the head
"business" could not be carried forward from the preceding
year to the succeeding year and set off under s. 22(4) of
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the Act against the income from securities held by the
assessee.
Learned counsel for the assessee, on the other hand,
contended that though for the purpose of computation of
income, the income from securities and the income from
business were calculated separately, in a case where the
securities were part of the trading assets of the business,
the income therefrom was part of the income of the business
and, therefore. the losses incurred under the head
"business" could be set off during the succeeding years
against the total income of the business, i.e., income from
the business including the income from the securities.
The relevant section of the Act which deals with the matter
of set off of losses in computing the aggregate income is s.
24. The
(1) [1958] S.C.R. 79.
622
relevant part of it, before the Finance Act, 1955, read:
"(1) Where any assessee sustains a loss of
profits or gains in any years under any of
the heads mentioned in section 6, he shall be
entitled to have the amount of the loss set
off against his income, profits or gains under
any other head in that year."
(2) Where any assessee sustains a loss
of profits or gains in any year, being a
previous year not earlier than the previous
year for the assessment for the year ending on
the 31st day of March, 1940, in any business,
profession or vocation, and the loss cannot be
wholly set off under subsection (1), so much
of the loss as is not so set off or the whole
loss where the assessee had no other head of
income shall be carried forward to the
following year and set off against the profits
and gains, if any, of the assessee from the
same business, profession or vocation for that
year; and if it cannot be wholly set off, the
amount of loss not so set off shall be carried
forward to the following year...
While sub-s. (1) of s. 24 provides for setting off of the
loss in a particular year under one of the heads mentioned
in s. 6 against the profit under a different head in the
same year, sub-s. (2) provides for the carrying forward of
the loss of one year and setting off of the same against the
profit or gains of the assessee from the same business in
the subsequent year or years. The crucial words, therefore,
are "profits and gains of the assessee from the same
business", i.e., the business in regard to which he
sustained loss in the previous year. The question,
therefore, is whether the securities formed part of the
trading assets of the business and the income therefrom was
income from the business. The answer to this question
depends upon the scope of s. 6 of the Act. Section 6 of the
Act classified taxable income under the following several
heads: (i) salaries; (ii) interest on securities; (iii)
income from property; (iv) profits and gains of business,
profession or vocation; (v) income from other sources; and
(vi) capital gains. The scheme of the Act is that income-
tax is one tax. Section 6 only classifies the taxable income
under different heads for the purpose of computation of the
net income of the assessee. Though for the purpose of
computation of the income, interest on securities is
separately classified, income by way of interest from
securities does not cease to be part of the income from
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business if the securities are part of the trading assets.
Whether a particular income is part of the income from a
business falls to be decided not on the basis of the
provisions of s. 6 but on commercial principles. To put it
in other words, did the securities in the present case which
yielded the income form part of the trading assets of the
assessee? The Tribunal and the High Court found that they
were the assessee’s trading assets and the income therefrom
623
was, therefore, the income of the business. If it was the
income of the business, s. 24(2) of the Act was
immediately attracted. If the income from the securities
was the income from its business, the loss could, in terms
of that section, be set off against that income.
A comparative study of sub-ss. (1) and (2) of s. 24 yields
the same result. While in sub-s.(1) the expression "head"
is used in sub-s. (2) the said expression is conspicuously
omitted. This designed distinction brings out the intention
of the Legislature. The Act provides for the setting off
of loss against profits in four ways. To illustrate, take
the head "profits and gains of business, profession or
vocation". An assessee may have two businesses. In
ascertaining the income in each of the two businesses, he
is entitled to deduct the losses incurred in respect of
each of the said businesses. So calculated, if he has
loss in one business and profit in the other both falling
under the same head, he can set off the loss in one
against the profit in the other in arriving at the income
under that head. Even so, he may still sustain loss under
the same head. He can then set off the loss under the head
"business" against profits under another head, say "income
from investments", even if investments are not part of the
trading assets of the business. Notwithstanding this process
he may still incur loss in his business. Section 24(2)
says that in that event he can carry forward the loss to the
subsequent year or years and set off the said loss against
the profit in the business. Be it noted that clause (2) of
s. 24, in contradistinction to cl. (1) thereof, is concerned
only with the business and not with its heads under s. 6
of the Act. Section 24, therefore, is enacted to give
further relief to an assessee carrying on a business and
incurring loss in the business though the income therefrom
falls under different heads under s. 6 of the Act.
Some of the decisions cited at the Bar may conveniently be
referred to at this stage. The Judicial Committee in The
Punjab Cooperative Bank Ltd. v. Commissioner of Income-tax,
Punjab(1) has clearly brought out the business connection
between the securities of a bank and its business, thus:
"In the ordinary case of a bank, the business
consists in
its essence of dealing with money and
credit. Numerous
depositors place their money with the
bank often receiv-
ing a small rate of interest on it. A
number of borrowers
receive loans of a large part of these
deposited funds at
somewhat higher rates of interest. But
the banker has al-
ways to keep enough cash or easily
realisable securities to
meet any probable demand by the
depositors ............."
In the present case the Tribunal held, on the evidence, and
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that was accepted by the High Court, that the assessee was
investing its amounts in easily realisable securities and,
therefore, the said securities were part of the trading
assets of the assessee’s banking business. The decision of
this Court in United Commercial Bank Ltd.,
624
Calcutta v. Commissioner of Income-tax, west Bengal(1) does
not lay down any different proposition. It held, after an
exhaustive review of the authorities, that under the scheme
of the Income,tax Act, 1922, the head of income, profits and
gains enumerated in the different clauses of s. 6 were
mutually exclusive, each specific head covering items of
income arising from a particular source. On that reasoning
this Court held that even though the securities were part
of the trading assets of the company doing business, the
income therefrom had to be assessed under s. 8 of the Act.
This decision does not say that the income from securities
is not income from the business. Nor does the decision of
this Court in East India Housing and Land Development. Trust
Ltd., v. Commissioner of Incometax, West Bengal(2) support
the contention of the Revenue. There. a company, which was
incorporated with the objects of buying and developing
landed properties and promoting and developing markets,
purchased 10 bighas of land in the town of Calcutta and set
up a market therein. The question was whether the income
realised from the tenants of the shops and stalls was liable
to be taxed as "business income" under s. 10 of the Income-
tax Act or as income from property under s. 9 thereof. This
Court held that the said income fell under the specific head
mentioned in s. 9 of the Act. This case also does not lay
down that the income from the shops is not the income in the
business. In Commissioner of Income-tax, Madras v. Express
Newspapers Ltd.,C), this Court held that both s. 26(2) and’
the proviso thereto dealt only with profits and gains of a
business, profession or vocation and they did not provide
for the assessment of income under any other head, e.g.,
capital gains. The reason for that conclusion is stated
thus:
"It (the deeming clause in s. 12B) only
introduces a limited fiction, name
ly, that
capital gains accrued will be deemed to be
income of the previous year in which the sale
was effected. The fiction does not make them
the profits or gains of the business. It is
well settled that a legal fiction is limited
to the purpose for which it is created and
should not be extended beyond its legitimate
field ..........
The profits and gains of business and capital
gains are two distinct concepts in the
Income,tax Act; the former arises from the
activity which is called business and the
latter accrues because capital assets are
disposed of at a value higher than what they
cost the assessee. They are placed under
different heads; they are derived from
different sources; and the income is computed
under different methods. The fact that the
capital gains are connected with the capital
assets of the business cannot make them the
profit of the business. They are only deemed
to be income of the previous year and not the
profits or gains arising from the business
during that year."
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(1) [1958] S.C.R. 79.
(2) [1961] 42 I.T.B. 49.
(3) [1964] 53 I.T.R. 250, 260
625
It will be seen that the reason for the conclusion was that
capital gains were not income from the business. Though some
observations divorced from content may appear to be wide,
the said decision was mainly based upon the character of the
capital gains and not upon their non-inclusion under the
heading "business". The limited scope of the earlier
decision was explained by this Court in Commissioner of
Income-tax, Bombay City Iv. Chugandas & Co.(1). Therein this
Court held that interest from securities formed part of the
assessee’s business income for the purpose of exemption
under s. 25(3). Shah, J., speaking for the Court, observed:
"The heads described in s. 6 and further
elaborated for the purpose of computation of
income in sections 7 to 10 and 12, 12A, 12AA
and 12B are intended merely to indicate the
classes of income: the heads do not
exhaustively delimit sources from which income
arises. This is made clear in the judgment of
this Court in the United Commercial Bank
Ltd.’s case("’). that business income
is broken
up under different heads only for the purposes
of computation of the total income: by that
break up the income does not cease to be
income of the business, the different heads of
income being only the classification
prescribed by the Indian Income-tax Act for
computation of income."
The same principle applies to the present case.
We, therefore, hold that under s. 24(2) of the Act the
income from the securities which formed part of the
assessee’s trading assets was part of its income in the
business and, therefore, the loss incurred in the business
in the earlier year could be set off against that income
also in the succeeding years.
In the result, we hold that the High Court was right in
answering the question referred to it in the affirmative.
The appeals are dismissed with costs. One hearing fee.
Appeals dismissed.
(1) [19651 55 I.T.R. 17, 24.
(2) [1958] S.C.R. 79
(3) L/P(N)4SCI--14
626