Case: Commissioner Of Income-Tax, Andhra Pradesh Vs. The Cocanada Bank Ltd. Kakinada

1. These appeals by special leave raise the question of construction of Section 24 (2) of the Indian Income-tax Act, 1922, hereinafter called the Act2. 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 assessees sources of income are banking business and interest from Government securities. For the assessment year 1949-50 its income was assessed as follows:Interest on securities Rs. 84,880Other banking activities Rs. 64,400 (loss)Net loss Rs. 55,912The 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 yearsYear of assessment Interest on securities Business income or loss (as finally decided by the A.A.C.) Total(1) (2) (3) (4)Rs. Rs. Rs1. 1950-515,191 886 6,0772. 1951-522,174 1,177 3,3513. 1952-531,885 9,121 11,006For 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 securities". 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 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. v. Commr. of Income-tax, West Bengal, 1958 SCR 79 : (S) AIR 1957 SC 918  ), 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 bank and whether its dealing with the securities from which it received interest was as much the assessees 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 assessees 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.

Court's reasoning:
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 assessees banking business. The decision of this Court in 1958 SCR 79: (S) AIR 1957 SC 918  ) 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 an 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. Commr. of Income-tax, West Bengal, (1961) 42 ITR 49 (SC) support the contention of the Revenue. There, a company, which was incorporated with the objects of having 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 Commr. of Income-tax, Madras v. Express Newspapers Ltd., (1964) 53 ITR 250     at p. 260 : (AIR 1965 SC 38 at p. 39) 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:"In (the deeming clause in S. 12B) only introduced a limited fiction, namely, 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."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 Commr. of Income-tax, Bombay City I v. Chugandas and Co., (1965) 55 ITR 17     at p. 24: (AIR 1965 SC 568   at p. 572). Therein this Court held that interest from securities formed part of the assessees 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 Ltds case, 1958 SCR 79: ((S) AIR 1957 SC 918  ), 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 case8. We, therefore, hold that under S. 24(2) of the Act the income from the securities which formed part of the assessees 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.