TMI Blog1979 (1) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... fter deduction of the amount allowable under section 20 of the Income-tax Act, 1961 ? " As the Tribunal had not referred the other question, the Addl. Corn missioner obtained a direction from this court for reference of the following question : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and had jurisdiction to permit the assessee to raise by way of additional ground issues which were not raised before the Income-tax Officer and the Appellate Assistant Commissioner?" We would refer to this as the third question referred by the Tribunal for this year. For the assessment years 1967-68 and 1969-70, the Tribunal has referred, under s. 256(1) of the Act, the following question: " Whether, on the facts and in the circumstances of the case, the' Appellate Tribunal was right in holding that the amounts allowed as deduction under section 20 in determining the income from interest on securities should not be taken into consideration for the allowance of entertainment expenses while applying the provisions of section 37(2) of the Income-tax Act, 1961? " It may thus be seen that the questions referred for all the three years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or heads as set out in s. 14 of the Act. Section 14 classifies the heads of income as (A) Salaries, (B) Interest on securities, (C) Income from house property, (D) Profits and gains of business or profession, (E) Capital gains, and (F) Income from other sources. With reference to each of these heads, separate provisions have been made for deduction of any allowance under the respective heads. In the present case, we are concerned only with the dispute relating to the allowability of the entertainment expenditure from the income by way of interest on securities. As far as interest on securities is concerned, s. 19 provides for the deductions from such interest on securities. The deductions permissible are : (i) any reasonable sum expended by the assessee for the purpose of realising such interest; and (ii) any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee. It may be seen that s. 19 is generally worded and applies to all types of assessees, whether they carry on banking business or not. Section 20 provides for deductions from interest on securities only in the case of a banking company. It is in the nature of an explanation of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business (computed before whichever is higher; making any allowance under section 33 or section 33A or in respect of entertainment expenditure) (ii) on the next Rs. 40,00,000 of the profits at the rate of 1/2% and gains of the business (computed in the manner aforesaid) (iii) on the next Rs. 1,20,00,000 of the profits at the rate of 1/4% and gains of the business (computed in the manner aforesaid) (iv) on the balance of the profits and Nil." gains of the business (computed in the manner aforesaid) As we are concerned with the allowability of entertainment expenditure, it is enough to concentrate on sub-s. (2) of s. 37. Under that provision, profits and gains of the business would have to be computed in accordance with the provisions of the Act before making any allowance under s. 33 or s. 33A or in respect of entertainment expenditure. It is the profits so arrived at which will form the basis for the computation of the percentage specified in s. 37(2). Thus, in the case of a banking company also, what is to be arrived at is the profits and gains of the business before making allowance under s. 33 or s. 33A or of entertainment expenditure. The quantum of entertainment e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade. In support of this submission, he relies on a decision in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC). In that case, the assessee carried on business in banking. It held securities as part of its trading assets. For the assessment year 1949-50, it had incurred a loss of Rs. 64,400 under the head " Business " and had earned Rs. 8,488 as " interest on securities ". Thus, the net loss amounted to Rs. 55,912. For the three succeeding assessment years, the ITO allowed this loss to be set off against income under the head " Business ", but refused to set it off against the income computed under the head " Interest on securities ". The assessee disputed the refusal to set off the loss against the income from securities because, according to the assessee, interest on securities would also be business income for this purpose. When the matter came before the Supreme Court, it held that the assessee was entitled to set off the loss of Rs. 55,912 brought forward from the assessment year 1949-50, against the entire income including the interest on securities in the succeeding years, as the income from securities, which formed part of the assessee's trading assets, was part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was thus Rs. 14,95,826. There was a loss of Rs. 3,21,929 carried forward from the earlier year, and the assessee wanted -this loss to be setoff against interest on securities. The Supreme Court remitted the matter to the High Court for fresh consideration after a finding was obtained on the question whether the securities in question were part of the trading assets held by the assessee in the course of its business as a banker. In the course of the judgment, at page 702, it was observed: " Thus on a true construction of the various sections of the Act, the income of an assessee is one, and the various sections 7 to 12 are modes in which the statute directs that income-tax is to be levied and these sections are mutually exclusive. The head of income of which the source is ' interest on securities' has its characteristics for income-tax purposes and falls under the specific head covered by section 8 of the Act, and where an item falls specifically under one head it has to be charged under that head and no other. This interpretation follows from the words used in sections 8 and 10 which must be read so as to give effect to the contrast between ' income, profits and gains' chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will have to be borne in mind and applied. If we do so, then the assessee would be eligible, with reference to the assessment year 1965-66, only for the allowance of Rs. 24,763 as and by way of entertainment expenses under s. 37(2). It is this amount which, in accordance with the provisions of s. 20 of the Act, would have to be allowed proportionately in the manner contemplated by it as deductions from interest on securities. It is the balance of the amount remaining for allowance that will have to be considered under s. 37 as allowance from the income from business profits and gains. In the course of the argument, learned counsel submitted that there was absolutely no reason why the restriction imposed by s. 37(2) with reference to entertainment allowance would have to be transported to s. 20. In other words, the submission was that the assessee would be eligible for allowance of entertainment expenditure without regard to the percentage set out in s. 37(2) of the Act. This submission cannot be accepted. In the computation of the income of a bank, the ITO will have to tabulate the various items of expenditure which are admissible under s. 30 onwards. The total of those amounts w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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