Appeals Nos55 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
section V Gupte Solicitor General N D Karkhanis and RN Sachthey for the appellant in all the appeals
GS 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 section 242 of the Indian Income tax Act 1922 hereinafter called the Act
The material facts may briefly be stated
The Cocanada Bank 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 84880 Other banking activities 
Rs 64400 loss Net loss 
Rs 55912 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 AAC 1 2 3 4 Rs Rs Rs 1
1950 51  5191 886 6077 2 1951 52  2174 1177 3351 3 1952 53  1885 9121 11006 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 55912 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 vs Commissioner of Income tax West Bangal1 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 section 10 and section 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 section 224 of 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 ie 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 section 24
The 1  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 section
1 of section 24 provides for setting off of the loss in a particular year under one of the heads mentioned in section 6 against the profit under a different head in the same year sub section
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 ie 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 section 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 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 section 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 section 242 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 sections
1 and 2 of section 24 yields the same result
While in sub s1 the expression head is used in sub section
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 242 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 section 24 in contradistinction to cl
1 thereof is concerned only with the business and not with its heads under section 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 section 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 vs Commissioner of Income tax Punjab1 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 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 vs Commissioner of Income tax west Bengal1 does not lay down any different proposition
It held after an exhaustive review of the authorities that under the scheme of the Incometax Act 1922 the head of income profits and gains enumerated in the different clauses of section 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 section 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 vs Commissioner of Incometax West Bengal2 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 section 10 of the Income tax Act or as income from property under section 9 thereof
This Court held that the said income fell under the specific head mentioned in section 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 vs Express Newspapers LtdC this Court held that both section 262 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 eg capital gains
The reason for that conclusion is stated thus It the deeming clause in section 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 Incometax 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 1  2 3  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  Co1
Therein this Court held that interest from securities formed part of the assessee s business income for the purpose of exemption under section 253
Shah J speaking for the Court observed The heads described in section 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 section 242 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   24


Summary:
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 section 10 and section 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 section 242 of the Act against the income from securities held by the assessee
HELD i While subs
1 of section 24 provides for setting off of the loss in a particular year under one of the heads in section 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 section 24 in contradistinction to cl
1 thereof is concerned only with the business and not with its heads under section 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 section 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 s6 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 section 242 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 vs Commissioner of Incometax Punjab 19408 ITR 635 and Commissioner of Income tax Bombay City I vs Chugandas  Co 1965 55 ITR 17 relied on
United Commercial Bank Ltd vs Commissioner of Income tax West Bengal   East India Housing and Land Development Trust Ltd vs Commissioner of Income tax West Bengal  and Commissioner of Income tax Madras vs Express Newspapers Ltd  distinguished