The United Commercial Bank Ltd., Calcutta vs. The Commissioner of Income-Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 161 of 1954

Decision Date: 23 May 1957

Coram: J.L. Kapur, Natwarlal H. Bhagwati

The case involved The United Commercial Bank Ltd., Calcutta as petitioner and the Commissioner of Income‑Tax for West Bengal as respondent, and was decided by the Supreme Court of India on 23 May 1957. The judgment was authored by Justice J. L. Kapur, with Justices Natwarlal H. Bhagwati, Aiyar and T. L. Venkatarama forming the bench. The citation for the decision is 1957 AIR 918 and 1958 SCR 79. The dispute concerned the application of the Indian Income‑Tax Act, 1922 (XI of 1922), in particular sections 6, 8, 10 and 24(2), to the manner in which the bank’s assessable income for the assessment year 1945‑46 was to be computed. The Income‑Tax Officer had divided the bank’s total income into two separate heads, namely “interest on securities” and “business income”, and had allowed a deduction of the loss shown under the business head against the amount of interest on securities. In the preceding year the officer had arrived at a loss by setting off the business loss against interest on securities. The bank contended that, for the assessment year in question, it was entitled to carry forward the loss incurred in the previous year and to set it off against its income of the current year under section 24(2) of the Act. The officer rejected this claim on the ground that the loss arose under the head “business” and therefore could not be set off against income that was classified as “interest on securities”. Both the Income‑Tax Appellate Tribunal and the Calcutta High Court, upon reference, held that, in view of sections 6, 8 and 10 of the Act, interest on securities could not be treated as business income, and consequently the bank could not rely on section 24(2) for a set‑off.

On appeal to the Supreme Court the bank advanced two principal arguments. First, it submitted that sections 8 and 10 should be interpreted so that where the securities held by a taxpayer are trading assets, section 8 would be excluded because it is limited to capital investments, and the income would then fall within the “business” head of section 10. Second, the bank argued that even if the income from securities were to be categorized under section 8, it should still be permissible to set off the loss under section 24(2) because the bank carried on only a single business – banking – and the holding of securities formed part of that business. The Court held that the scheme of the Indian Income‑Tax Act, 1922, provides that the various heads of income, profits and gains specified in section 6 are mutually exclusive, each head being intended to cover items arising from a distinct source. Accordingly, interest on securities is expressly made chargeable to tax under section 8 as a separate head and cannot be brought within section 10, irrespective of whether the securities are held as trading assets or as capital investments.

In this case, the Court noted that the parties relied on several earlier decisions, namely Commissioner of Income Tax v. Chunnilal B. Mehta, [1938] 6 I.T.R. 521; Salisbury House Estate Ltd. v. Fry, (1930) 15 T.C. 266; Commercial Properties Ltd. v. Commissioner of Income Tax, Bengal, (1928) 3 I.T.C. 23; and H. C. Kothari v. Commissioner of Income Tax, Madras, [1951] 20 I.T.R. 579. The Court observed that the question whether the appellant’s holding of securities formed part of the same business contemplated in section 24(2) could not be answered because the Tribunal had not made a finding that those securities were trading assets held by the appellant in the ordinary course of its banking business. Consequently, the Court directed that the matter be remitted to the High Court for a fresh decision on the reference after the Tribunal supplied a fuller statement of facts. The judgment concerned Civil Appeal No. 161 of 1954, which was an appeal against the judgment and order dated 18 May 1953 of the Calcutta High Court in Income‑tax Reference No. 72 of 1951. Counsel for the appellant and counsel for the respondent appeared for the parties. The appeal was decided on 23 May 1957, and the judgment was delivered by Kapur J. The appeal raised a substantial issue of interpretation of sections 8, 10 and 24(2) of the Indian Income‑tax Act. The appellant, a bank engaged in banking business, contended that for the assessment year 1945‑46 it was entitled to set off the loss carried forward from the previous year against the profits of the year under section 24(2). The Income‑Tax Officer had computed the appellant’s assessable income at Rs 14,95,826 by separating the income into two heads: interest on securities amounting to Rs 23,62,815 and business income showing a loss of Rs 8,86,972. After deducting the business loss from the interest on securities, the net income was fixed at Rs 14,95,826. In the preceding year the appellant had reported a loss of Rs 3,21,929, which it had computed by setting off the business loss against interest on securities. Before the Income‑Tax Officer the appellant argued that dealing in securities was part of the bank’s business and that no distinction should be drawn between income from securities and income from business for the purpose of set‑off under section 24. It also asserted that it carried on only one business, namely banking as defined by section 277F of the Companies Act, in the ordinary course of its operations.

The bank argued that its ordinary activity required it to receive deposits and to invest those deposits in securities, loans and advances, and therefore the holding of securities could not be treated as a separate line of business. Accordingly, the bank submitted that the income earned from securities should be considered part of its banking business and that no distinction should be drawn between “interest on securities” and “profits and gains” from the banking operation for the purpose of set‑off under section 24 of the Income‑Tax Act. The Income‑Tax Officer, on the other hand, held that because there was a loss shown under the head “business”, the bank’s claim could not be sustained and consequently the loss could not be set off under section 24(2). The Officer therefore split the bank’s total income into two distinct heads – interest on securities and business income – and refused to allow any set‑off of the loss carried forward from the previous year against the interest earned in the current assessment year.

When the matter was appealed to the Assistant Commissioner of Income‑Tax, the bank reiterated its position that it was a dealer in securities and that the two heads of income, namely interest on securities and profits and gains from the banking business, were inseparable components of a single business activity. The bank therefore contended that it was entitled to set off the loss under section 24(2). The Assistant Commissioner rejected this contention and upheld the Income‑Tax Officer’s view that the two heads should remain separate, thereby disallowing the set‑off.

The dispute was then taken before the Income‑Tax Appellate Tribunal, where the bank again argued that its business could not be divided into two separate heads of income. The Tribunal, after examining sections 6, 8 and 10 of the Act, concluded that the legislature intended the income from the two sources to be treated separately. Accordingly, the Tribunal affirmed the Income‑Tax Officer’s approach of splitting the bank’s income into two heads and refused to permit the loss from the preceding year to be set off against the income from government securities earned in the current year. The Tribunal thus rejected the bank’s request to allow the loss of Rs 3,21,929 to be set off against the computed profits for the assessment year.

Subsequently, the bank filed a petition before the High Court, seeking a declaration of the case and raising two specific questions: (1) whether interest on securities formed part of the bank’s income from its business, and (2) whether the bank was entitled to set off the loss carried forward from the previous year against the income earned in the assessment year. In its petition, the bank contended that it carried on banking operations in various towns across India and that, in the ordinary course of its business, it invested money in securities and received interest thereon. On that basis, the bank claimed that the loss of Rs 3,21,929, carried forward from the previous year, could be set off under section 24(2) of the Act. The Tribunal, after stating the case, referred the matter to the High Court and asked for its opinion on three questions: (1) whether, based on the facts and circumstances of the case, the bank could set off the business loss of Rs 3,21,929 brought forward from the preceding year against the current year’s income from interest on securities; (2) whether, under the facts and circumstances of the case, the bank was entitled under section 8 to deduct any portion of its administrative expenses from the income earned from interest on securities; and (3) whether, in the circumstances of the case, the bank could, under the first proviso to section 8 of the Income‑Tax Act, deduct any interest on money borrowed and used for investment in tax‑free securities.

The High Court responded negatively to all three questions that had been referred to it. In delivering its judgment, the learned Chief Justice observed: “It appears to me, therefore, that because the several heads under s. 6 in the Indian Act are mutually exclusive and because under any Income‑tax Law an item coming under an exclusive head cannot in any circumstances be charged under another head and also because the interest on securities in the hands of a banker cannot be treated as business income on the principles explained by Mr. Justice Rowlatt, I must hold that the contention of the assessee … must be rejected.” The Court then noted that it had heard a complete and competent argument from counsel on both sides. Counsel for the appellant advanced three distinct submissions. First, it argued that sections 8 and 10 of the Act should be interpreted so that “interest on securities,” when the securities in the assessee’s possession are essentially trading assets, should be excluded from the ambit of section 8 and instead classified under the head “profits and gains of business” provided in section 10; alternatively, even if sections 8 and 10 are read as separate heads, the more appropriate head, namely section 10, should be applied to the facts of the present case. Second, the counsel submitted that if both sections 8 and 10 were equally applicable, the assessee should be permitted to choose the head of income that results in the lighter tax burden. Third, the counsel contended that even assuming the heads of income are mutually exclusive so that “interest on securities” falls under section 8 and “business” under section 10, the assessee should still be allowed a set‑off under section 24(2) because the “interest on securities” and the “profits and gains” from business arise from different operations of the same overall business, representing two forms of the same commercial activity. The Court then proceeded to examine the structure of the Act. Section 2(15) defines “total income” as the total amount of income, profits and gains computed in the manner prescribed by the Act. Chapter I of the Act, comprising sections 3 and 4, deals with the charge of income‑tax. Section 3 provides that income‑tax shall be levied for any year at any rate or rates in accordance with, and subject to, the provisions of the Act. Section 4 states that the total income of any previous year of any person includes all income, profits and gains from whatever source they may be derived. Chapter 3, which addresses taxable income, contains section 6, which enumerates the heads of income subject to tax, subject to any other provision of the Act.

The Act enumerates the heads of income that are liable to income‑tax in the following order: (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. For the present appeal, only heads (ii) and (iv) are material, namely “interest on securities” and “profits and gains of business”, which are respectively governed by sections 8 and 10 of the Act. Section 8 stipulates that the tax shall be payable by an assessee under the head “interest on securities” in respect of interest receivable by him on any security of the Central Government, and the provisos to that section set out the deductions that may be allowed. The amendment introduced in the proviso by the 1955 Act is highly significant for this appeal and will be referred to later. Section 10 provides that the tax shall be payable by an assessee under the head “profits and gains of business, profession or vocation” in respect of the profits or gains of any business, profession or vocation carried on by him. The assessee argues that securities constitute part of its trading assets, a position that has consistently been accepted by the Department. Consequently, any income earned from those assets in the form of interest possesses the same characteristics as profits or gains of a business and therefore should be classified as income under the head “business” pursuant to section 10. In other words, the assessee’s banking business, which includes dealing in securities, generates income from a single source; whether the interest originates from securities or from any other investment, it should be taxed under section 10 and not under section 8 because the interest arises from the business carried on by the assessee, which constitutes one unified business. The contention is that sections 8 and 10 must be interpreted in a manner that allows them to harmonise, and the only way to achieve such harmony is to treat interest on securities as income derived from the assessee’s business, thereby bringing it within section 10 and limiting section 8 to interest on capital investments only. It is further argued that, had the legislature intended to give a distinct and exclusive identity to income from “interest on securities”, it would have drafted section 8 with the same specificity that it employed for dividend income from shares, which, by the addition of sub‑section (I‑A) to section 12, now falls under the head “other sources” and is no longer classified under the “business” head of section 10.

The Court noted that, pursuant to the amendment introducing sub‑section (I‑A) into section 12, the statutory character of dividend income had been altered so that it no longer fell within the “business” head under section 10. In support of this observation the Court referred to Commissioner of Income‑tax v. Ahmuty & Co. Ltd., where the High Court of Bombay had held that dividend income received by a dealer in shares was chargeable under section 10 and not under section 12 of the Act. The learned counsel for the Revenue argued that, in order to preserve the unity and oneness of the assessee’s business and to maintain the unity of its business income, the application of section 8 should be limited to “interest on securities” when such securities are not trading assets of the assessee. According to the scheme of the Act, income‑tax must be levied with respect to the “total income” of the previous year of every assessee, and “total income” is defined in section 2(15) as comprising all income, profits and gains from whatever source derived, subject to certain exemptions. Chapter 3, titled “Taxable income”, contains sections 6 to 17 inclusive. Section 6 enumerates the various heads of income, profits and gains that are chargeable to income‑tax, and each head is dealt with in a separate section which also specifies the allowances and exemptions applicable to that head. Counsel for the Revenue relied upon the Privy Council decision in Probhat Chandra Barua v. The King Emperor, asserting that section 6 is the charging section and that sections 7 to 12 are mutually exclusive, so that items falling under a particular head must be charged only under that head. While the Privy Council indeed identified section 6 as the charging provision, it was so because sections 3 and 4 were then worded differently, a point highlighted by Kania, J., in B.M. Kamdar, In re (at p. 43), and by Chagla, J., in the same case (at p. 57). The Federal Court in Chatturam and Others v. Commissioner of Income‑tax, Bihar held that the liability to pay tax is founded on sections 3 and 4, which are the charging sections. Likewise, the Privy Council in Wallace Brothers & Co. Ltd. v. Commissioner of Income‑tax identified section 3 as the charging section. The Revenue therefore contended that, because section 6 is mandatory, every item of income, irrespective of its source, must fall under one of the heads enumerated in section 6; consequently one of sections 7 to 12 would specifically apply, and section 8, which deals with “interest on securities”, must be construed to apply to income arising from that source.

In the matter before the Court, the revenue side argued that, even if there were any overlap between sections 8 and 10, the provision dealing with “interest on securities” should apply solely under section 8, irrespective of whether the interest arose from securities held as a capital asset or as a trading asset. The revenue counsel submitted that section 10 ought to be interpreted in a manner that completely excludes income classified as “interest on securities.” The revenue counsel supported this position by citing several authorities, namely (1) (1930) L.R. 57 I.A. 228, 238; (2) [1946] 14 I.T.R. 10; (3) [1947] 15 I.T.R. 302, 308; and (4) [1948] 16 I.T.R. 240.

The revenue counsel also directed the Court’s attention to the format of the income‑tax return prescribed under section 22(1) of the Act as it stood at the time of the assessment under review. That return required the assessee to disclose income under five distinct heads: (1) Salary, (2) Interest on securities, (3) Property, (4) Business, profession or vocation, and (5) Other sources. Each head was to be shown in a separate column, with a reference to a specific explanatory note applicable to that head. For the column labelled “interest on securities,” the return referred to note 9, which defined “interest on securities” as interest on promissory notes or bonds issued by the Government of India or any other State Government, or interest on debentures or other securities issued by or on behalf of a local authority or a company. The gross amount of such interest, before deduction of income‑tax, was to be entered, and the entry had to be accompanied by details of the persons paying the interest as required by section 18(9) of the Act.

The return further permitted deductions in respect of (a) commission charged by a banker for collecting the interest, and (b) interest payable on money borrowed for the purpose of investing in the securities, except for certain interest payable to persons abroad where tax had not been deducted, the latter being governed by section 8 of the Act. The return required the assessee to furnish full particulars of any deduction claimed, either within the return itself or in a separate statement if necessary. The form thus clarified the meaning of “interest on securities,” the documents required to accompany the return for a refund claim, and the deductions that could be allowed.

The Court observed that the mandatory nature of section 6 is evident from the language used in that provision and from the phrasing of the subsequent sections 7 to 12, each of which uses the expression “the tax shall be payable under the head … in respect of” followed by the distinct heads of income, such as “salary,” “interest on securities,” “property,” “business,” and so on. This wording reflects the legislature’s intention that the various heads of income, profits and gains be mutually exclusive. Consequently, every item of income, regardless of its source, must fall under one specific head, and the appropriate section dealing with that head must be applied for computing the taxable income. The classification of income sources into these distinct heads ensures that each item of income is charged under the correct provision.

In this case the Court observed that items falling under the various heads of income become chargeable under sections 7 to 12 according to the source of the income, whether it is salaries, interest on securities, property, business, profession, vocation, other sources, or capital gains. The Court then examined the argument advanced by counsel for the Revenue, which contended that, under the scheme of the Act and a proper construction of the relevant provisions, any interest on securities, irrespective of who holds it or for what purpose, must be taxed under section 8 and under no other section. The Court found this contention well founded and therefore sustained it. Because “interest on securities” constitutes a specific head of chargeability, the Court held that income derived from such interest, whether the security is held as a trading asset or as a capital asset, is to be taxed under section 8 and not under section 10 of the Act. The Court further noted that the amendment introduced by the proviso to section 8 in 1955, which permitted a deduction for any remuneration paid to a person other than the banker for realizing interest on behalf of the assessee, corroborates this interpretation. Consequently, the proviso now allows a reasonable amount to be deducted by an assessee for commission paid to a bank or remuneration paid to any other person for realizing interest, clearly indicating the legislature’s intention that interest on securities falls exclusively within section 8. This amendment also demonstrates that even a bank, when it purchases securities as part of its trading assets, may claim a deduction for remuneration paid to any person for realizing interest, thereby reinforcing the proposition that “interest on securities” is governed solely by section 8. The Court further supported this view by referring to the language of section 18, which deals with payment after deduction at source. Section 18(3) requires the person responsible for paying interest on securities to deduct income tax on the interest payable at the maximum rate and to remit the deducted amount to the Central Government within seven days of deduction. Section 18(5) specifies that the maximum rate is to be charged for the year in which the amount is paid, not for the assessment year. By reading sections 3, 4, 6, 8, 10, 18 together with the refund provision in section 48, the Court concluded that income tax is levied at the rates prescribed in the Finance Act on the total income of the assessee as defined in section 2(15) and calculated in accordance with sections 7 to 12, which are not charging provisions but rather rules for computing total income. In this regard the Court quoted Viscount Dunedin in Salisbury House Estate v. Fry, stating that income tax is a single tax on the income of the person being assessed, and that the various schedules merely prescribe the modes by which the statute directs that tax to be levied.

The Court observed that income‑tax is a single tax imposed on the income of the person who is being assessed, and that the various schedules in the statute are merely different modes prescribed for levying that one tax. The Court noted that, as indicated in the earlier judgment, there are not separate taxes corresponding to the different schedules; instead there is only one tax. However, to determine the total income on which the tax is to be charged, it is necessary to examine the nature and constituent parts of the assessee’s income in order to decide which schedule applies. Applying this principle to the Indian Income‑Tax Act, the Court explained that one must first identify the source of “income, profits and gains” and then determine under which specific head that source falls. If the income falls under a particular head, the computation must be made pursuant to the provision that covers that head. The Court warned that none of the provisions from sections 7 to 10 may be treated as generally applicable to any one source of income; each of those sections is specific and deals with distinct heads in which an item of income, profit or gain may be categorized, as shown by the language of the 1930 case reported at 15 T.C.266,306. Referring to Sir George Rankin’s observation in Commissioner of Income Tax v. Chunilal B. Mehta, the Court quoted that the effect of section 6 is to classify profits and gains under different heads so that appropriate rules for computing the amount may be applied, and that the language states the profits “shall be chargeable in the manner hereinafter appearing.” The head “business” is one of those heads of income and stands alongside other heads such as salaries, interest on securities, and professional earnings. While the classification of income follows the character of its source, the list of heads in section 6 is a list of sources rather than a means of attributing the same income to different properties, businesses or investments. Consequently, the examination of subsection (1) of section 4, together with the description in section 6, shows that section 6 intends to describe different kinds of profits. The Court recalled a previous decision concerning a resident who carried on business in India and controlled overseas transactions as part of that business. That decision held that profits from such transactions do not arise or accrue in India merely because the assessee exercised control in India. The Privy Council’s judgment, as cited, clarifies that each head in section 6 refers to income, profits and gains attributable to its source—salary, interest on securities, property, business, profession, etc.—thereby supporting the view that each head is separate, exclusive, and specific.

The Court observed that decided cases uniformly supported the argument advanced by counsel for the Revenue that the various heads of income listed in section 6 of the Act, and more specifically the heads dealt with in sections 7 to 12, are to be treated as exclusive categories. Accordingly, when an item of income falls within one of these heads, that income must be taxed solely under the corresponding head and under no other head. The Court then referred to the decision in Salisbury House Estate Ltd. v. Fry (1938) 6 I.T.R. 521, 529. In that case the assessee was a limited company created expressly for the purpose of acquiring the property known as Salisbury House and putting it to use. The building comprised eight hundred rooms which were let out to tenants, and the company employed a staff of servants to provide a variety of services to the occupants. The company was first assessed to income tax under Schedule A on the basis of the gross valuation of the premises. Because the actual rent actually received exceeded that valuation, the Revenue attempted to assess additional income under Schedule D. The company contended that the proceeds derived from the property had already been taxed under Schedule A and therefore could not be taken “in computo” again under Schedule D. The Court quoted Viscount Dunedin, who at page 306 noted: “Now, if the income of the assessee consists in part of real property you are, under the Statute, bound to apply Schedule A.” The Court also reproduced Lord Atkin’s passage at page 319, which stated: “The dominance of each Schedule A, B, C & E over its ‘own subject matter’ is confirmed by reference to the Sections and Rules which respectively regulate them in the Act of 1842. They afford a complete code for each class of income, dealing with allowances and exemptions, with the mode of assessment, and with the officials whose duty it is to make the assessments… I find no ground for assessing the taxpayer under Schedule D for any property or gains which are the subject matter of the other specific Schedules.”

Continuing, the Court noted that at page 320 Lord Atkin pointed out that Schedule D is a residuary Schedule and that all the Schedules operate on a mutually exclusive basis. He illustrated this principle by referring to investments in securities, explaining that income earned by a trading company from investing its funds—whether on a temporary or permanent basis—in government securities must be taxed under Schedule C, as indicated in the citation (1930) 15 T.C. 266, and cannot be brought into account for assessment under Schedule D. The Court emphasized that this illustration demonstrates that even though Schedule D functions as a residual Schedule, the mutually exclusive character of the Schedules requires that income be assessed under the Schedule that specifically governs it, because each Schedule provides a complete code for its respective class of income, covering allowances, exemptions, and the method of assessment. A noteworthy passage from Lord Atkin at page 321 was also cited: “I find it difficult to say that companies which acquire and let houses for the purposes of their trade, such as breweries in respect of their tied tenants, and collieries and other large employers of labour in respect of their employees, do not let the premises as part of their operation of trading. Personally I prefer to say that even if they do trade in letting houses their income so far as it is derived from that part of their trading must be taxed under Schedule A and not Schedule D.” This passage reinforced the principle that when income falls under a specific head, it must be taxed under the corresponding Schedule and not under the residuary Schedule D.

In this case, the Court observed that labour employed by a company for the purpose of its trade was not regarded as part of the ordinary trading activity when the company let premises to its employees. The Court expressed a personal preference that, even if a company engaged in the business of letting houses, the portion of income attributable to that activity should be taxed under Schedule A rather than Schedule D. Consequently, although the assessee was a company carrying on a trade, the income that arose from the head “property” was assessed pursuant to Schedule A and not Schedule D. This principle supported the argument that each Schedule applies distinctly to its respective head of income, thereby excluding the applicability of any other Schedule to the same head.

The Court further referred to the decision in Butler v. The Mortgage Company of Egypt Ltd., where a British‑controlled company in Egypt conducted a business of lending money secured by mortgages on land. The General Commissioners held that the acceptance of securities in connection with the loans was merely an incident of the company’s business and that the income could not be assessed under Case 4 of Schedule D. The company had argued that the assessment should instead fall under Case 5 of Schedule D, but the Court affirmed that the Crown possessed the authority to tax under Case 4 even if the circumstances also satisfied the requirements of Case 5; the Crown could therefore choose to tax under Case 4 when both cases applied equally. Rowlatt J explained that a banker could not demand the return of tax deducted on government securities held in a banking capacity, because once a security is subject to tax under the Act, the taxpayer cannot escape it by claiming a different character for the transaction. In Thompson v. The Trust and Loan Company of Canada, a loan‑finance company bought treasury bonds with coupons, sold the bonds on the same day while retaining the coupons, and later received interest on the coupons. The Crown argued that the amounts realized from the bond sales and the coupon proceeds should be included in the company’s profit computation under Case I of Schedule D. The Court held, however, that the interest received was taxable under Schedule C and that the coupon proceeds should not be incorporated in the Schedule D computation. Rowlatt J reiterated that a transaction possessing its own tax character could not be treated as something of a different character, and Lord Hanworth M.R. emphasized that government bonds and coupons payable from government funds must be taxed under Schedule C and nowhere else. Simon’s Income Tax (1948 ed.) reaffirmed that the Schedules are prima facie mutually exclusive, and therefore, once a particular kind of income is charged under one Schedule, the Crown may not tax it under another Schedule.

In the earlier decision the court examined the treatment of the amounts that the company had paid for bonds that included coupons, known as bonds cum‑coupons. The court held that the interest which the company received from these bonds was to be taxed as income under Schedule C, and that none of the proceeds from the coupons should be taken into account when calculating the company's tax liability under Schedule D. Rowlatt J, speaking at page 400, remarked that “the Crown cannot treat a transaction which has its own character for income‑tax purposes as if it were something of a different character.” Lord Hanworth, MR, likewise emphasized the point at page 406, referring to the authority reported in (1932) 16 T.C. 394. Applying this reasoning to the present matter, the court observed that the subject of taxation here—government bonds and the coupons payable out of public funds—must be taxed under Schedule C and cannot be taxed under any other schedule.

Simon’s Income Tax, Volume I of the 1948 edition, page 54, states the principle that the schedules are prima facie mutually exclusive, so that once a particular kind of income is charged under one schedule the Crown may not elect to charge it under another. This principle aligns with the earlier judgments that have been discussed. The court then turned to the case of Commercial Properties Ltd. v. Commissioner of Income‑Tax, Bengal, reported in (1928) 3 I.T.C. 23. In that case the company was a registered entity whose sole object was to acquire land, construct houses and let them to tenants, and whose only business activity was the management and collection of rents. The assessment of that company had been made under section 9 of the Act, but the company argued that its activities should be assessed under section 10 as a business rather than under section 9. The court rejected that argument, holding that the company was correctly assessed under section 9 because its income derived from ownership of buildings. Rankin C.J., at page 26, explained that the words of sections 6, 9 and 10 must be read so as to preserve the contrast drawn between income, profits and gains arising from “property” and those arising from “business.” He refused to accept the proposition that because a company is incorporated for the purpose of owning property, the income from that property must automatically be treated as business income. In his judgment, income derived from “property” is a more specific category applicable to the facts of that case. Consequently, the ownership of house property was not regarded as a business, and the income from such ownership appropriately fell under the head “property.” The court further noted that the applicability of section 8 of the Act arose in H. C. Kothari v. Commissioner of Income‑Tax, Madras, where the assessee had several sources of income, one of which was interest on securities, and the business of the assessee showed a loss.

In that earlier case, the assessors sought relief for earned income concerning interest earned on securities. They argued that the securities had been bought and sold as part of their ordinary trading activities, and therefore the securities formed part of their stock‑in‑trade. Consequently, they contended that the interest earned on those securities should be treated as profit from business rather than as income from investment. The Court, however, applied section 8 of the Income‑Tax Act to the factual situation and held that section 8 was the appropriate provision. Justice Satyanarayana Rao explained that the provision dealing with interest on securities creates a separate and distinct head of income. He stated that when income falls under that specific head, neither the taxpayer nor the tax authority may recharacterise the income and tax it under a different head. The judgment also referenced the earlier decision in Commissioner of Income‑Tax v. Bosotto Bros., observing that when an amount of income can be placed under more than one head, the assessee is permitted to select the head that results in a lighter tax burden. The assessors relied on two earlier decisions to support their claim. The first case was Mangalagiri Sri Umamaheshwara Gin and Rice Factory Ltd. v. Guntur Merchants Gin and Rice Factory Ltd., where a limited company that had been incorporated solely for the purpose of milling rice leased its buildings, plant and machinery to another company for a fixed annual rent. Under the lease, the lessee was required to carry out necessary repairs to keep the mill in good working order, while the lessor was responsible for bearing the loss of depreciation. The company claimed depreciation allowances under section 10(2)(vi) of the Act. The Court held that the company was engaged in the business of letting a rice mill and was therefore entitled to a deduction for depreciation. Justice Krishnan’s judgment made clear, from the facts, that the enterprise was carrying on the business of letting the mill to lessees for their own operation, and consequently section 10 was applicable. The second case cited was Sadhucharan Roy Chowdhry, In re, whose facts were analogous to those in Mangalagiri’s case. The Court in that matter determined that letting a jute press for rent constituted a business activity comparable to the letting of a ship for freight, a motor‑car, or any other machinery for hire. Accordingly, depreciation allowances were allowed in the same manner as in the Mangalagiri case. The present Court found that neither of those cases shed any light on the issue presently before it. The appellant contended that, given the true nature and character of the income arising from interest on securities earned by the bank in the present case, section 10 of the Act, rather than section 8, should apply. The Court observed that this contention could not be supported by the decision in Davies v. Braithwaite, a case in which an actress earned her living.

In the earlier case, the court examined the earnings of an actress who obtained her livelihood by accepting and performing professional engagements. Her work included acting in stage‑plays in England and America, performing in films, appearing on wireless broadcasts and providing services for gramophone companies. The court held that the income derived from these activities fell within Schedule D rather than Schedule E, because every contract she entered into was merely an incident of the conduct of her professional career. The court also quoted the words of Sir George Rankin in Commissioner of Income‑tax v. Chunilal B. Metha, where he observed that the list of “heads” in section 6 is a list of sources, not intended to attribute income to one business instead of another, but rather to distinguish income arising from business from that arising from investment. The court said that this statement did not provide a stronger basis for arguing that “interest on securities” could be split into income earned from securities held as a capital investment and income earned from securities held as trading assets. It further noted that the language of sections 6, 8 and 10 defeats any such contention. The observations were supported by the authorities cited as (1) [1935] 3 I.T.R. 114, (2) [1931] 2 K.B. 628 and (3) [1938] 6 I.T.R. 521, 529.

On a correct construction of the various provisions of the Income‑Tax Act, the court explained that an assessee’s total income is a single entity, and sections 7 to 12 merely prescribe the modes by which the statute directs that income‑tax be levied. These sections are mutually exclusive. The head of income described as “interest on securities” possesses distinct characteristics for income‑tax purposes and therefore falls under the specific head provided for in section 8 of the Act. Whenever an item of income falls specifically under one head, it must be charged under that head and not under any other. This interpretation follows from the wording of sections 6, 8 and 10, which must be read to give effect to the contrast between “income, profits and gains” chargeable under the head “interest on securities” and “income, profits and gains” chargeable under the head “business”. Consequently, the various heads of “income, profits and gains” are mutually exclusive, each head covering items that arise from a particular source. The court therefore rejected the suggestion that, for the present assessee and with respect to the securities it holds, section 8 was more specific while section 10 was general, or vice versa; the principle that general provisions do not override special ones (generalia specialibus non derogant) was deemed inapplicable. This conclusion was reinforced by the cases discussed earlier. Thus, both on precedent and on a proper construction of the statute, the source of income described as “interest on securities” falls under section 8 and not under section 10, because it is expressly chargeable under the distinct head of “interest on securities”. Even when the securities are held as a trading asset in the course of the bank’s business, the income cannot be taxed under a different head.

In the present matter, the Court observed that the relevant transaction was carried out by a banker and that, on this basis, there was no issue for either the assessee or the Revenue to exercise any option. Accordingly, the observation made by Lord Shaw in The Liverpool and Land Globe Insurance v. Bennett, namely that “it appears to me that this selection is not only justified in law but is founded upon the soundest and most elementary principles of business” (1913 6 T.C. 327, 376), did not apply to the facts before the Court. The Court also regarded the principle that a taxpayer should be placed under the head that imposes the higher burden – a rule articulated in Commissioner of Income‑tax v. Bosotto Bros. and reaffirmed in H. C. Kothari v. Commissioner of Income‑tax, Madras – as inapplicable in the present circumstances.

The third issue raised by counsel for the assessee concerned the right to claim a set‑off under section 24(2) of the Act even if the interest on securities was chargeable under section 8 and not under section 10. The Revenue opposed this plea, arguing that it could not be relied upon because the assessee had not placed the contention before the Income Tax Appellate Tribunal when the matter was referred to the High Court, nor had it been raised before the High Court itself. The Court noted that the same question had indeed been specifically presented to the Income Tax Officer, the Appellate Assistant Commissioner, and also before the Income Tax Appellate Tribunal, as had been previously recorded.

In the tribunal’s proceedings, the assessee submitted two suggested questions, seeking to set off a business loss of Rs 3,21,929 carried forward from the previous year against the income of the assessment year. The High Court’s judgment did not show that the question was argued in the same manner as it was before this Court. Initially, the appellant had based his case on the applicability of section 10 to the profits classified under the head “interest on securities” on the ground that the securities were trading assets. That contention was rejected, and the same issue resurfaced before the present Court. The assessee now advanced an alternative argument, contending that even if the securities fall under section 8, the profits derived from them constitute an item of the assessee’s business. Consequently, the loss incurred in the previous year from the banking business could be set off against the profits of the assessment year, irrespective of the source of those profits.

The Court observed that this situation was analogous to the case of Commissioner of Income‑tax v. Messrs Ogale Glass Works Ltd. (1955 1 S.C.R. 185, 196, 198). The question framed by the Tribunal was a general one, seeking to determine whether the loss of the previous year could be set off against the income of the assessment year within the provisions of section 24(2) of the Act. The formulation of the question was sufficiently broad to encompass the issue raised before this Court.

In the present matter, the third issue raised by the counsel for the assessee was permitted to be considered before the Court. The Court observed that this point was open to canvassing despite the earlier discussions of the other matters.

The revenue counsel argued that the expression “the same business” used in section 24(2) of the Income‑Tax Act limited the permissible set‑off to profits or gains arising from the very same business in which the loss occurred, and that it could not extend to any other business. He further contended that the structure of sections 24(1) and 24(2) indicated that only profits and gains falling under section 10 could be set off, because the term “profits or gains” in those provisions is linked with the word “business” as used in section 10. Consequently, the revenue counsel asserted that income, profits and gains derived from interest on securities, which are taxed under section 8, could not be included within the scope of the set‑off provision.

Conversely, counsel for the assessee submitted that the word “same” in section 24(2) merely identified the business in which the loss was incurred and did not refer to the head under which the corresponding profits were charged. In his view, interest earned on securities remained profits and gains of the same business even though, for tax classification, they fell under a different head, namely section 8 rather than section 10. He emphasized that section 24 of the Act governs the set‑off of loss when the aggregate income is computed, and therefore the nature of the head should not affect the applicability of the provision.

The assessee’s counsel also maintained that the business carried on by the assessee was essentially the business of dealing in money and credit, and that banking activities and dealing in securities were essentially one and the same business. To support this position, he referred to section 277 F of the Companies Act and relied upon the Privy Council decision in Punjab Co‑operative Bank Ltd. v. Commissioner of Income‑Tax, Punjab, where it was observed that, in the ordinary case of a bank, the business consists fundamentally of dealing with money and credit. The Privy Council explained that a banker must keep sufficient cash or readily marketable securities to meet probable demands from depositors, and that realizing such securities to meet withdrawals is a normal and integral part of banking operations.

After considering the arguments, the Court indicated that, in view of the order it was about to make, it was not necessary to express an opinion on the specific contentions raised by either side. The Court recalled that in the Punjab Co‑operative Bank case a finding had been recorded that the purchase and sale of securities formed as much a part of the assessee’s business as receiving deposits and processing withdrawals. In the present appeal, however, no such finding had been made, and consequently the Court could not form an opinion as to whether the holding of securities that generated interest fell within the “same business” contemplated by section 24(2). Accordingly, the appeal would therefore, be

The Court allowed the appeal and ordered that the matter be sent back to the High Court for a fresh determination of the questions referred by the Tribunal. The High Court was directed to obtain from the Tribunal a more detailed statement of facts concerning the portion of the case that concerned whether the securities at issue formed part of the trading assets that the assessee held in the ordinary course of its business as a banker. By requiring a fuller factual record, the Court intended that the High Court could decide, on the basis of a complete description of the securities and their use, whether those securities were integral to the banking activities of the assessee and therefore fell within the scope of the statutory provision under consideration.

The Court further stipulated that the costs of the appeal would be treated as costs of the reference before the High Court. In other words, the party that had unsuccessfully opposed the appeal would be liable for the expenses incurred in pursuing the reference at the High Court level. The order concluded by expressly stating that the appeal was allowed and that the case was remitted to the High Court for the specified further proceedings.