Case Note & Summary
The Supreme Court considered an appeal by the Commissioner of Income-tax against a decision of the Andhra Pradesh High Court in a reference under the Indian Income-tax Act, 1922. The assessee, a private limited company carrying on banking business, had income from banking business and interest on government securities. For the assessment year 1949-50, its banking business incurred a loss of Rs. 64,400, while interest on securities yielded Rs. 84,880, resulting in a net loss of Rs. 55,912. This loss was set off in that year against interest on securities. For the three succeeding assessment years (1950-51, 1951-52, 1952-53), the Income-tax Officer allowed the carried-forward loss to be set off only against income under the head 'business' and disallowed set-off against income under the head 'interest on securities'. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal confirmed this view. The Tribunal referred to the High Court the question whether the assessee was entitled to set off the business loss brought forward from the preceding year against the entire income including interest on securities. The High Court initially remitted the case to the Tribunal for a finding on whether the securities formed part of the assessee's trading assets. The Tribunal held that receipt of interest from securities was as much the assessee's business as its other banking activities. The High Court then answered the reference in favour of the assessee. The Revenue appealed to the Supreme Court by special leave. The Revenue argued that income from business and income from securities fell under different heads, Sections 10 and 8 respectively, and were mutually exclusive, so losses under the business head could not be carried forward and set off against income from securities. The assessee contended that if securities were part of trading assets, income therefrom was part of business income, and the carried-forward loss could be set off against the total business income including interest on securities. The Court examined Section 24 of the Act. Sub-section (1) permits setting off loss under one head against profit under another head in the same year. Sub-section (2) permits carrying forward loss to subsequent years and setting it off against profits of the same business. The Court held that the crucial words in Section 24(2) are 'profits and gains of the assessee from the same business'. The scheme of the Act is that income-tax is one tax, and Section 6 only classifies income under different heads for computation. Interest on securities does not cease to be part of business income if the securities are part of trading assets. Whether income is part of business income must be decided on commercial principles, not solely on the provisions of Section 6. The Tribunal and High Court had found that the securities were trading assets and the income therefrom was business income, so Section 24(2) was attracted. The Court also noted that the deliberate omission of the word 'head' in sub-section (2) as contrasted with sub-section (1) showed legislative intent to give further relief to assessees carrying on business with loss. Distinguishing cases relied on by the Revenue, the Court dismissed the appeals and held that the assessee was entitled to set off the business loss against interest on securities.
Headnote
A) Income Tax - Set-off and Carry Forward of Losses - Scope of 'same business' under Section 24(2) - Indian Income-tax Act, 1922, Section 24(2) - Loss incurred in a business can be carried forward and set off against profits of the same business in subsequent years even if such profits are classified under different heads like interest on securities. The expression 'profits and gains of the assessee from the same business' is not confined to the head under which the loss was originally computed but extends to all income of that business, including income from securities if they form part of trading assets. Held that the assessee bank was entitled to set off carried-forward business loss against interest on securities because securities were trading assets and income therefrom was business income (Paras 4-6). B) Income Tax - Heads of Income under Section 6 - Income from Interest on Securities - Doctrine of Mutually Exclusive Heads - Indian Income-tax Act, 1922, Section 6 - Classification of income under different heads is only for computation; it does not determine whether income is from business if the underlying asset is a trading asset. Whether particular income is part of business income is decided on commercial principles, not solely on the statutory head under which it is computed. Held that interest from government securities held as trading assets by a bank was business income, and the loss from banking business could be set off against it under Section 24(2) (Paras 5-7). C) Income Tax - Statutory Interpretation - Distinction between Section 24(1) and Section 24(2) - Indian Income-tax Act, 1922, Sections 24(1), 24(2) - Sub-section (1) permits inter-head set-off in the same year; sub-section (2) permits carry forward against same business without reference to heads. Omission of 'head' in sub-section (2) is deliberate and gives further relief to an assessee carrying on business with loss across heads. Held that the legislative intent supports carrying forward business loss against all income of the same business irrespective of statutory head (Paras 6-8).
Issue of Consideration
Whether under Section 24(2) of the Indian Income-tax Act, 1922, a loss incurred in a business under one head of income can be carried forward and set off against income from the same business in subsequent years even if such income is classified under a different head, such as interest on securities held as trading assets; and whether heads of income under Section 6 are mutually exclusive for carry-forward and set-off purposes.
Final Decision
The Supreme Court dismissed the Revenue's appeals and upheld the High Court's decision in favour of the assessee. The Court held that the securities in question were the assessee's trading assets, income therefrom was business income, and under Section 24(2) of the Indian Income-tax Act, 1922, the business loss brought forward could be set off against that income.
Law Points
- Income-tax is one tax
- Section 6 only classifies income for computation
- interest on securities held as trading assets is business income
- Section 24(2) permits carry forward of business loss and set-off against profits of same business without reference to heads
- heads of income are not mutually exclusive
- commercial principles determine whether income is from business
- deliberate omission of 'head' in Section 24(2) indicates legislative intent.
