Commissioner of Incometax, Andhra Pradesh v. the Cocanada Bank Ltd. Kakinada
Sobba Rao, J. These appeals by special leave raise the ques·
tion of construct:on 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
Ltd. Kakinada. hereinafter called· the assessee. is a private limited
company carrying on banking business with its head office at Kaki
nada and a branch at Dayal Bagh. The assessee's sources of inctJme
are banking business and interest from government sec~rities. For
the assessment year 1949-50 its income was asse>sed as follows:
Interest on securities Rs. 84,880
Other banking activities Rs. 64,400 Ooss)
Net loss Rs. 55,912
The following tabular form shows at a glance. the factual posit~on
in regard to the income of the assessee under different heads dunng
the said three years :
BusinesB
year of assessment Interest on incomP..or
securities luss as finally T-1tE1l
decided b,v
the A.A.C.
2 3 4
Rs. Rs. RS.
5,191 886 6.077
2.174 1,177 3,3/il
1,885 9,12I n.oos
J. 1950-51
2. 1951-52
3. 1952-53
r. r. T. t>. COCAS-AD.\ RA'.'IK (811hba Rao .• l.) 621
For the three succeeding years the department showed the income
under the sa 'd two separate heads but allowed the said loss to be
set off against the income under the head "business" and disallow
ed it against the income under the head "interest on securit'e>''. 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 Tr'bunal. The following question was refer
red 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. hav;ng regard to the decision of this Court in
United Commercial Bank Ltd., Calcutta v. Ccmmissioner of In
rnme-tax. West Banga!(') rem;tted the case to the Income-tax Tribu
nal, Hyderabad Bench. for making a fuller statement of case on the
question whether these secur'ties 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 securit'es 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
hy 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 respect'vely. 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 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 sepa
rately, in a case where the securities were part of the trading assets
of the bus'ness, the income therefrom was part of the income of the
business and, therefore. the losses incurred under the head "busi
ness" could be.set off during the succeeding years against the total
income of the bt•siness, 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
(') [1958] S.C.R. 79.
622 SUP.RE)(~: COURT RE.PORTS fl965] S 1.0.a.
relevant part of it, before the Finance Act, 1955, read:
"(!) 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 pre
vious year for the assessment for the year ending on the.
31st day of March, 1940, in any bus;ness, profession or
vocation, and the loss cannot be wholly set off under sub
section (!), so mueh 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 ...
0
While sub-s. (I) of s. 24 provides for setting off of the loss in a parti
cular 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 B
the carrying forward of the los£ of one year and setting off of the
same against the profit or gains of the assessee from the same busi
ness in the subsequent year or years. The cruc;al 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 r
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 G
sources; and (vi) capital gains. The scheme of the Act is that in
come-tax is one tax. Section 6 only classifies the taxable income
under different heads for the purpose of computation of the net in
come 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 B
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 s. 6 but on commer-
cial principles. To put it in other words; did the securities in the
present case wh'ch 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
0
C. I. T. II. COCillADA BANK (8-ubba RM, J.) 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. (I) and (2) of s. 24 yields the
same result. While in sub-s.(I) the expression "head" is used in
sub-s. (2) the said expression is conspicuously omitted. This design·
ed 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 invest
ments are not part of the trading assets of the business. Notwith
standing 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 contradistinc
tion to cl. (1) thereof, is concerned only with the business and not
with its heads under s. 6 of the Act. Sect;on 24, therefore, is enact
ed 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 stago. The Judicial Committee in The Punjab Co
operative Banlf Ltd. v. Commissioner of Income-tax, Punjab(') 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. ca'e 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 secu·
rities were part of the trading assets of the assessee's banking busi
ness. The decision of this Court in United Commercial Bank Ltd.,
(') [19'0] 8 LT.B. 636, 6'5.
I
624 SUPREME COURT REPORTS (1965] 3 8.C.R.
Calcutta v. Commissioner of Income-tax, West Bengal(') 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 spec!fic 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 decis'on of this Court in East India Housing
and Land Develcpment. Trust Ltd., v. Commissioner of Income
tax, West Bengal(') 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 mar
kets, purchased I 0 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.,('), this Court held that both
s. 26(2) and the proviso thereto dealt only with profits and gains of B
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, 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 thorn the pro-
fits 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 ga'ns of business an.d 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 arc
placed under different heads; they are derived from diffe
rent 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
th.e profit of the business. They are only deemed to be in·
come of the previous year and not the profits or gams
arising from the business during that year."
(') [1961.J 42 I.T.B. •9. I') fI958) S.C.R. 79.
(') [1964] 53 I.T.R. 250, 260
p
0
c. I. T. v. COCANA.DA. BANK (SubbJ Rao, J.) 625
It will be seen that the reason for the conclusion was that capital
gains were not income from the business. Though some observa
tions divorced from content may appear to be wide, the said deci
sion was ma 'nly based upon the character of the capital gains and
not upon their non-inclusion under the heading "business". The
limited scope of the earlier decis;on was explained by this Court iii
Commissioner of Income-tax, Bombay City Iv. Chugandas & Co.(').
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 IO
and 12, 12A, 12AA and 128 are intended· merely to indi
cate 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 Commer·
cia/ Bank Ltd.'s case('). that business income is broken
up under different heads only for the purposes of computa
tion of the total income: by that break up the income does
not cease to be income of the business, the different heads
of income be'ng only the classification prescribed by the
Indian Income-tax Act for computation of inc.ome."
The same principle applies to the present case.
We, therefore, hold that under s. 24(2) of the Act the income
from the securities whkh 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.
Tn the re,Jlt. we hold that the High Court was right in answer
;ng the question referred to it in the affirmative. The appeals are
dismissed with costs. One hearing fee.
Appeals dismissed.
(1) [196,j] 55 1.T.R, 17, 24.
(I) [HlJS]S.C.R. 79
L!P(Xj4SCI-14