TMI Blog1953 (5) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... 815. The profits or gains of business were computed under Section 10 and a loss of ₹ 8,86,972 was found. A small income from other sources, including some dividend income, was computed under Section 12. The loss under the business income was then set off against the income of interest on securities under Section 24(1) of the Act and after making some further adjustments, the net assessable income was determined at ₹ 14,95,826 as I stated a few moments ago. The assessee had no complaint to make about the amount at which the assessable income had been determined, but it objected to the method employed in arriving at that amount. The objection was that the interest on securities ought not to have been separately assessed under Section 8, but the income should have been taken to be a part of the business income and the whole of the profits or gains of business, including therein the interest income, should have been computed under Section 10 in a single operation. Prima facie, that objection would appear to be pointless, because if the business loss could be set off against the interest income even under the method of separate computations, as had in fact been done, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted from the interest income for purposes of assessment, it was entitled to some deduction under that head by way of administrative expenses, though actually it had collected the interest itself and had not paid any commission to any one. That contention also was rejected by all the Income-tax authorities and out of it has arisen the second question referred which is in the following terms:- Whether on the facts and in the circumstances of this case, the assessee was entitled under Section 8 to deduct any part of its administrative expenses out of the income from interest on securities . It was lastly contended by the assessee that it should be allowed a deduction from its interest income of not only the interest payable on borrowings which it had invested in taxable securities, but also of the interest payable on borrowings invested in securities which were tax-free. This contention also was rejected by all the Income-tax authorities and out of it has arisen the third question referred which is in the following terms:- Whether in the circumstances of this case, the assessee was entitled under the first proviso to Section 8 of the Income-tax Act to deduct any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquired with money borrowed for the purpose, the assessee will be allowed to deduct the interest payable on the moneys so borrowed and invested. The reason is plain, because the interest paid on the borrowings is expenditure incurred for the purpose of earning the interest income which is charged to tax. But as regards tax-free securities, the third proviso to Section 8 exempts the interest received on such securities from tax liability altogether and there is no valid reason why an assessee, while paying no tax to the State on a particular item of income, should yet receive from the State credit for the expenditure incurred for earing that income. Section 8 does not, in my view, provide for any such credit. I feel however bound to observe that the arrangement of the three provisos to Section 8 is not very logical and the proper order would be to place the second proviso first, the third proviso second and the first proviso last. But even under the arrangement as it is, the first proviso, which speaks of a deduction, can apply only when there is a chargeable income from which the deduction can be made and the fact that the proviso speaks of the securities generally without any qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chaudhuri very properly conceded before us that he could derive no assistance from that decision. The present question which concerns the interest on securities received by a banking company and where the contention is that such interest should not be assessed under Section 8 but should be assessed under Section 10 as a part of the company's business profits, is an entirely different question. To my mind, the assessee's contention is not tenable. Section 6 of the Income-tax Act sets out six heads under which income should be assessed and provides that those heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing . Interest on securities is a distinct category of income, forming the second head in the classification. Profits and gains of business come under the fourth head. The manner' of charging tax on the several distinct heads of income of' which Section 6 speaks is prescribed by subsequent sections. Section 8 deals with interest on securities and prescribes that the tax shall be payable under that head, that is, under the head Interest on securities receivable by the assessee on certain specified kinds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the heads of income, set out there, should not be literally construed, but if an item of income, nominally appearing to belong to one class, belonged in essence to another, then to that class it should be assigned and on that basis it should be assess* ed. I am unable to agree that the Indian Act allows such liberties to be taken with the heads of income set out in Section 6. Of the cases cited, the decision in Commercial Properties Limited v. Commissioner of Income-tax, Bengal [1928] ITR 55 Cal. 1057; 32 C.W.N. 413, does not exactly cover the point. There, a company formed with the object of acquiring lands, building houses and letting them out to tenants, owned just three houses and it was held that in respect of the income from those house properties, the company was liable to be assessed under Section 9 of the Act and not Section 10 on the basis that it had been carrying on business. The fact that the competing section in that case was Section 9 and not Section 8 is immaterial, but it appears to have been found as a fact that the company in that case was not carrying on business at all. The decision, therefore, amounts to no more than holding that income from house prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of such securities which is specifically chargeable under Section 8, as part of the profits of the business of the assessee . In taking that view, reliance was placed on the well-known decision in Fry v. Salisbury House Estate, Limited [1930] A. C. 432 and the case of Thompson v. Trust and Loan Company of Canada [1932] 1 K B 517; 16 tax Cas 394. Mr. Chaudhuri realised the force of the various considerations and the weight of authority against his contention and submitted that he would not have taken the point he was taking, but for the decision of this Court in the case of General Family PensionFund v. Commissioner of Income-tax Bengal [1946] 14 ITR 488 ; I.L.R. [1946] 2 Cas. 259. There, a mutual insurance company was first assessed under Rule 25 of the Rules framed under Section 59 of the Indian Income-tax Act which were then in force, i. e., on the average annual net profits disclosed by the last preceding quinquennial actuarial valuation, but upon the assessment being reopened under Section 34, the income from securities was assessed under Section 8 and that from certain other investments under Section 12. The company contended that it could not be assessed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 excluded it, but there would also be no income left on which Section 8 could operate. But the learned Judges also gave the reason on which Mr. Chaudhuri relied and I must deal with it. I am prepared to concede as a matter of theory that in the case of an assessee whose business it is to deal with money and credit, interest on securities cannot be summarily held to be outside his business income on the broad ground that it is not the product of business operations, but merely the yield of an investment which would be the same in the hands of any other assessee. A person or a concern may hold securities and may do no more than receive the interest on them. But he may also hold them, if he is engaged in business, not only in the course of but also as a requirement or a consequence of his activities which constitute a business or trade. In other words he may hold them or come to hold them in order to the carrying out of the mercantile operations which constitute his business. In such cases, it may not inappositely be said that the holding of securities is not merely investment of money in interest paying loans, but it is a part of the trading, and therefore the interest on the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if a company carries on a trade assessable under Case I of Schedule D (trade), an integral part of which consists in making investments from which it receives income which is also chargeable under Case III (interest) or Case IV (foreign possessions) or Case V (foreign securities), the profits may, at the option of the Crown, be assessed either under Case I or under any one of the Cases III, IV and V. Where, however, the question is whether an item of income coming directly under one Schedule can be assessed under another Schedule, the answer has always been in the negative, because as between Schedules the Act allows no option just as, as between the several heads under Section 6, no option is allowed by the Indian Act. The true position, where the competition is between two Schedules, was explained by Lord Atkin in the case of Fry's case (supra), in the following words:- Believing, as I do, that the specific Schedules A, B, C and E, and the rules thereunder contain definite codes applying exclusively to their respective defined subject-matters, I find no ground for assessing the taxpayer under Schedule D for any property or gains which are the subject-matter of the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Mortgage Company of Egypt, Ltd. [1928] 13 Tax Cas. 803, is whether you do not get the interest emerging as taxable under any Case at all till you get to the business . In other words, whether the investment is such that it is not an independent one and could not exist without the business, but is a necessary growth out of the business, so that one does not get the income as a separate subject-matter of charge till the business, by its necessity, has produced it. If a trading company merely holds investments in securities, the interest on such securities will not be business income. But if a trading company was bound to advance money to its customers on securities in the course of its mercantile operations, the interest on such securities might be treated as business income. It will be noticed that securities contemplated in the second illustration I have given are securities of a different character. Be that as it may, the case of a banker, holding securities in which a part of the business fund had been invested, was specifically considered by Mr. Justice Rowlatt in the case to which I have just referred He receives , observed his Lordship, no end of interest, which is a ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward from the preceding year against the interest on securities of the present assessment year. That he could do only under Section 24(2) of the Act, but that section, as recently interpreted by the Supreme Court in the case of Anglo-French Textile Co., Ltd. v. Commissioner of Income-tax, Madras [1953] 23 ITR 82, required that the income which had been carried over and which was intended to be set off against the present year's business income, must be such as had been set off under another head of income in the year from which it was being carried forward. Their Lordships pointed out that under Section 24(1) of the Act, loss under any of the heads mentioned in Section 6 is to be set off against income, profits or gains under any other head. Under Section 24(2), it is only the portion not so set off which can be carried forward. I pointed out to Mr. Chaudhuri that if he insisted that the income from interest on securities was a part of the business income and not a different income, his argument might recoil on himself, because, in that event, the two classes of income being the same as contended, there could be no question of setting off the loss under one head against the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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