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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