G.K.Mitter, J. - (1.) THIS is a reference under s. 66(1) of the Indian IT Act for determination of the question : "Whether, in the case of the assessee, an investment company, its dividend income is part of its profits and gains chargeable to tax under s. 10 of the Indian IT Act, 1922 ?" The assessee company was incorporated in January, 1947, and commenced business on March 19, 1947. The objects for which the company was established are, inter alia : (1) to acquire and hold shares, stocks and debentures, securities, etc., issued or guaranteed by any company constituted for carrying on business in British India or elsewhere; (2) to acquire any such shares, stock and debentures, etc., by original subscription, tender, purchase exchange or otherwise and to exercise and enforce all rights and powers conferred by or incident to the ownership thereof; (3) to sell, invest in and vary the investment and to reinvest in any shares, stock, etc.
(2.) AS is usual with many companies the objects of the assessee were diverse and manifold. The company closed its accounts for the first time on 30th June, 1947, and its accounting period ended with the month of June. In the assessment for 1948-49 a net loss Rs. 2,194 was computed. This was primarily due to payment of interest on moneys borrowed for the purchase of shares. In the next accounting period for the asst. yr. 1949-50, the assessee received by way of dividends as registered shareholders a sum of Rs. 22,500 which when grossed up came to Rs. 32,727. The company paid interest on its borrowing to the extent of Rs. 1,04,808 and taking into account some other expenses the loss was computed at Rs. 1,06,583. In the net result there was a loss of Rs. 73,856. The ITO arrived at this figure as the unabsorbed business loss. But the AAC revised the figure to Rs. 73,324 describing it as a loss under "other sources." In the asst. yr. 1950-51, the assessee earned gross dividend to the extent of Rs 1,18,238 and its expenses mainly due to interest on borrowings came to Rs. 51,843, leaving a net income for the year June 30, 1949, of Rs. 66,395. Both the ITO and the AAC refused to allow losses of the preceding years to be set off against the figure of Rs. 66,395 on the ground that the dividend income was chargeable to tax under s. 12 and not under s. 10. Before the Tribunal the assessee's contention was that taking into consideration the objects for which the company was incorporated and the nature of the business carried on by it, its dividend income was the main and essential part of the profits and gains and as such the losses suffered in the asst. yrs. 1948-49 and 1949-50 were business losses which ought to be allowed to be carried forward and set off against any income. The Tribunal held that the dividend received as registered shareholders could only be considered under s. 12 and not under s. 10 and looses of the preceding years could not be adjusted against the dividend income of the assessee earned during the years 1949-50 and 1950-51. The material portion of s. 24 of the Indian IT Act as it stood at the relevant time was as follows : "24(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in s. 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 previous year for the assessment for the year ending on the 31st day of March, 1940, under the head 'Profits and gains of business, profession or vocation', and the loss cannot be wholly set off under sub-s. (1), the portion not so set off 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 so set off, the amount of loss not so set off shall be carried forward to the following year, and so on;.." Under s. 6 of the Act the following heads of income, profits and gains are chargeable to income- tax in the manner hereinafter appearing, namely : (1) Salaries. (2) Interest on securities. (3) Income from property. (4) Profits and gains of business, profession or vocation. (5) Income from other sources. (6) Capital gains.
(3.) THE computation of tax on salaries is to be done under s. 7, that on "interest on securities under s. 8, that on income from property under s. 9, that on business, profession or vocation under s. 10 and as regards other sources" under s. 12. Income from dividend will therefore fall under s. 12. THE contention of the assessee before us is that inasmuch as dividend is not expressly mentioned in s. 12 in the case of an investment company, the assessee whose business is to invest in shares, the dividend income there-from should be computed under s. 10 as it is business income with the result that the assessee can claim the benefit of s. 24(2) of the Act. In my view, this contention cannot be accepted. It was pointed out by the Supreme Court of India in the case of United Commercial Bank Ltd. vs. CIT (1957) 32 ITR 688; (1958) SCR 79 AIR 1957 SC 918, that the mandatory character of s. 6 of the Act was indicated by the language used and the phraseology of all the sections following from 7 to 12 show that the intention of the Legislature was to make the various heads of income, profits and gains mutually exclusive. In that case the assessable income of the bank was computed by the ITO for a particular year at Rs. 14,95,826 by splitting its income under two heads, namely (1) interest on securities and (2) business income. Interest on securities in the year of assessment was Rs. 23,62,815 and under the head "business income" there was a loss of Rs. 8,86,972. After making the necessary adjustments and deducting the loss from interest on securities the net income was determined as above. In the previous year there had been a loss of Rs. 3,21,929 computed by setting off the business losses against interest on securities. THE assessee contended that a part of the business of the bank was to deal in securities and, therefore, no distinction should be made between income from securities and income from business for the purpose of set-off under s. 24. It was further contended that the assessee's business was one, namely, banking, as defined by section 277F of the Companies Act in the course of which the bank had to receive money on deposits and invest such deposits in securities, loans and advances, and holding of securities by it could not be treated as a separate business. THE ITO took the view that there was a loss under the head "business" and hence it could not be set off under s. 24(2). Before the Supreme Court an argument was put forward on behalf of the assessee that "ss. 8 and 10 have to be so construed as to harmonize with each other and the only way they can be harmonised is that income accruing in the form of interest on securities should be taken to be accruing from the business of the assessee because securities form part of its trading assets and thus fall within s. 10 and not s. 8 which must be restricted to capital investments only". THE arguments before us is practically the same except for the substitution of ss. 8 and 10 by ss. 10 and 12. THE Supreme Court did not accept the contention put forward on behalf of the Untied Commercial Bank and observed that "every item of income whatever its source, would fall under one particular head and for the purpose of computing the income for charging of income-tax the particular section dealing with that head will have to be looked at. THE various sources of income, profits and gains have been so classified that the items falling under those heads became chargeable under ss. 7 to 12 according as they are income of which the source is "salaries", "interest on securities", "property", "business, profession or vocation", "other sources" or "capital gains". THE Supreme Court accordingly accepted the contention of counsel for the Revenue that "interest on securities" by whomsoever and for whatever purpose received must be taxed under s. 8 and not under s. 10, no matter whether such securities were held as a trading asset or capital asset. Sec. 12(1) of the Act provides that "the tax shall be payable by an assessee under the head 'Income from other sources' in respect of income, profits and gain of every kind which may be included in his total income (if not included under any of the preceding heads)." Sub-s. (2) of the section indicates the allowances for expenditure, etc., which can be claimed by an assessee. Income from dividend on shares is not covered by s. 7,8,9, and 10. Consequently, it is not open to an assessee whose business is to hold shares to have his income from shares computed under s. 10. In the above case the Supreme Court relied on the case of Fry vs. Salisbury House Estates Ltd (1930) AC 432 15 Tax Cases 266. No doubt the wording of the English statute is different from that of its Indian counterpart but the schemes of the two Acts are parallel. In England income from property is chargeable under Schedule A while income from trade falls under Case I of Schedule D. The assessee there was a company formed for the express purpose of acquiring the property known as Salisbury House with about 800 rooms and utilising the same by letting these out to tenants as offices. There was no residential occupation nor any furnishing provided. The company maintained a staff of servants to operate the lifts and look after building and do the cleaning work. The tenants had the exclusive use of the rooms let. There were some rooms retained by the company for officer purposes. By the terms of the leases the company had to pay all rates and taxes. The company was assessed to income tax under Schedule A upon the gross value of the premises as appearing in the valuation roll in accordance with the Valuation (Metropolis) Act, 1869. The assessment was imposed on the company as landlords instead of on the various individual tenants who were the occupiers in accordance with r. 8(c)(i) of Schedule A, No. VII of the IT Act, 1918. The Inspector of Taxes then served on the company a notice of assessment under Schedule D and he wanted to calculate the amount of profit as brought out in the PandL a/c of the company after deducting expenses of management and the amount already paid under Schedule A. The company admitted that they had to pay under Schedule D upon the amount of profits which they made from the cleaning and other services but contended that, so far as the rents were concerned, they had been taxed under Schedule A and could not be brought in computo under Schedule D. Rowlatt J. held in favour of the revenue Department but his judgment was upset by the Court of Appeal. The House of Lords dismissed the appeal. Viscount Dunedin observed : "Now, the cardinal consideration in my judgment is that the income tax is only one tax, a tax on the income of the person whom it is sought to assess, and that the different Schedules are the modes in which the Statute directs this to be levied. In other words, there are not five taxes which you might call Income Tax A, B, C, D and E, but only one tax. That tax is to be levied on the income of the individual whom it is proposed to assess, but then you have to consider the nature, the constituent parts, of his income to see which Schedule you are to apply. Now, if the income of the assessee consists in part of real property you are, under the Statute, bound to apply Schedule A. Schedule A, may, so to speak, get in touch with the assessee in different ways according to the condition of affairs...Of course that does not mean that the assessee may not be liable in respect of other income under other Schedules.. But he might be liable under any of the other Schedules if he has income to which they apply, and in particular he might be liable under Schedule D.... The rents, having been assessed under Schedule A, are, so to speak, exhausted as a source of income, and the so-called concession made by the Appellant that there should not be double taxation, and that therefore he would be willing to allow deduction of the sum paid under Schedule A, is a concession which is beside the mark. It is a concession to avoid double taxation, but the concession cannot come into being where double taxation does not exist, and here it does not exist because it being imperative to deal with the rents under Schedule A there is no possibility of subsequently dealing with them under Schedule D". ;