Commissioner of Income-tax Vs. Narandas and Sons - Court Judgment

Kania, Actg. C.J.

1. These are three references on a case stated under section 256(1) of the Income-tax Act, 1961. The assessment years with which we are concerned are the assessment years 1963-64, 1964-65 andj1965-66. As the references arise on a consolidated statement of case and as the disputes are common judgment.

2. The respondent-assessee is a firm carrying of business in Bombay. The said firm consists of two partners and was duly registered under the Indian Income-tax Act, 1922. The said firm was a dealer in Government securities which formed its stock-in-trade. It appears that as pointed out by the assessee to the Income-tax Appellate Tribunal, 90% of the securities held by it stood in the names of banks which collected the interest on these securities from the Government as the holders of these securities and passed on the amounts collected to it after deducting collection charges. The statement of the case shows that these securities were pledged by the assessee to banks under letters of pledge containing a power of sale. The contention of the assessee before the Income-tax Officer was that in respect of its securities held by the banks as aforesaid the interest or income which the banks passed on to them should be considered as 'Income me from business' and not under the head of income 'Interest on securities' for the purpose of assessment. The Income-tax Office concerned treated this income as interest on securities falling under section 18 of the Income-tax Act, 1961, and taxed it as such in the hands of the assessee. On appeal from this order, the Appellate Assistant Commissioner took the view that it was only interest on securities held in the name of the assessee which was liable to be treated as interest on securities and that in respect of the securities of the assessee held by banks as a aforesaid, the income from the same received by the assessee should be treated as income from business. The Revenue preferred appeals against this decision of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal. The Tribunal took the view that the Government paid interest to the banks in respect of the aforesaid securities held in the names of the banks and what the assessee received from the banks was not interest in its hands but was something which was equivalent to interest which was assessable under the head 'Income from business'. The Tribunal took the view that the legal owners in respect of these securities were the respective banks in whose names the securities were held and not the assessee. On the basis of this conclusion, the Tribunal agreed with the view of the Appellate Assistant Commissioner.

3. From the aforesaid decision of the Tribunal, the following question has been referred to us in these references :

'Whether, on the facts and in the circumstances of the case, the interest received by the assessee on Government securities standing in the names of the banks and held by the assessee as its stock-in-trade is 'income from business' and not income from 'interest on securities' ?'

4. Before going into the arguments of respective counsel, it would be useful to note that Chapter IV of the Income-tax Act, 1961, deals with the computation of total income and provides that the total income has to be computed under what are known as 'Heads of income'. Section 18 of the said Act deals with the 'Head of income 'known as 'Interest on securities'. This income is referred to as 'Head of income-B'.'Head of income-D' is profits and gains of business or profession. Section 28 provides that certain income will be chargeable to income-tax under the head 'Profits and gains of business or profession'. The submission of Mr. Jetly, learned counsel for the Revenue, is that the income of an assessee has to be computed, assessed and taxed under one head of income or the other. These heads of income are mutually exclusive and where a particular income or the other. These heads of income are mutually exclusive and where a particular income falls within one head of income, it cannot then be regarded as falling under any other head of income. In support of this submission, Mr. Jetly cited the decision of this court in CIT v. Narandas & Sons, a case of the very assessee before us, reported in : [1978]115ITR587(Bom) . In that case, the Act with which the court was concerned was the Indian Income-tax Act, 1922, but there is no dispute that the scheme of assessment under that Act and the Income-tax Act, 1961, is the same. In that judgment, this court relied upon the decision of the Supreme Court in United Commercial Bank Ltd. v. CIT : [1957]32ITR688(SC) , which took the view that income from interest on securities falls under section 8 of the Indian-tax Act, 1922, and is not business income falling under section 10, even though the securities are held by a dealer as his stock-in-trade, and this court followed the said decision. The Division Bench of this court which decided the aforesaid case has pointed out (at p. 589) that the view taken by the Supreme Court was that the sections dealing with the heads of income are mutually exclusive and where an item of income falls specifically under one head, it has to be charged under that head and no other and that income from 'interest on securities ' falls under section 8 of the Income-tax Act, 1922, and not under section 10. It cannot be brought under a different head of income, namely, 'profits and gains of business' under section 10, even though the securities are held by a banker as part of his trading assets in the course of his business. Although the said decision of this court as well as the decision of the Supreme Court referred to above have been rendered in connection with the Indian Income-tax Act, 1922, it is an undisputed position that the scheme of computation and assessment of total income under the said Act is similar to the scheme of computation of total income and its assessment under the Income-tax Act, 1961, and hence the principles laid down in the aforesaid decision must apply to cases falling under the Income-tax Act, 1961. In view of this decision, it appears to us that there is considerable substance in the submission of Mr. Jetly.

5. In the present case, it is beyond dispute that the income received by the banks on the securities held in their names was income from 'interest on securities'. The certificates issued by the banks endorsed at the back of the interest warrants in respect of the securities read as under :

'Certified that interest on the within mentioned securities was merely collected by us on behalf of M/s. Narandas & Sons.'

6. This shows clearly that the interest on these securities was merely collected by the banks concerned on behalf of the assessee and passed on to the assessee after deduction of collection charges. We fail to understand how it can be said, in these circumstances, that the nature of income which was 'interest on securities' in the hands of the banks, changed into 'income from business' when the interest was collected by the banks on behalf of the assessee and given or credited to the assessee.

7. Mr. Mehta, learned counsel for the assessee, submitted that as the securities in question did not stand in the name of the assessee but in the names of the banks concerned which received interest thereon, the amounts passed on by the said banks to the assessee after deduction of collection charges was not interest but something equivalent to interest on securities. It was submitted by him that in the present case, it should be regarded as income from business. It was urged by him that it was the banks concerned who were the holders of these securities and hence the income from the securities received by the assessee could not be regarded as 'interest on securities'. In support of this submission, Mr. Mehta relied on the decision of a Division Bench of this court in Shree Jagdish Mills Ltd. v. CIT : [1959]36ITR279(Bom) . In that case, in accordance with the Baroda Excess Profits Ordinance 1943, of the former Baroda State, the assessee paid the demands for excess profits tax for the chargeable accounting periods 1942, 1943 and 1944, in the shape of Government of India securities of the face value of Rs. 38,43,000 and the balance by cheque. All the securities were tendered to the Accountant-General, endorsed in his favour and continued to stand in his name so long as they formed part of the Baroda Excess Profits Fund in accordance with clause 4 of the Ordinance. Interest on these securities was realised by the Accountant-General and the certificates of deduction of tax were also issued in his favour. Ultimately, on November 7, 1947, a sum of Rs. 40,51,351 was directed to be refunded and out of the sum so refunded, the Income-tax Department sought to assess a sum of Rs. 28,718 as business income. This amount represented the interest paid on these securities during the period they were held by the Accountant-General. The assessee claimed that the said amount represented interest on securities covered under section 8 of the Indian Income-tax Act, 1922, and the assessee was entitled to credit for tax deducted in respect thereof under section 18 of that Act. It was held that as the securities were transferred in the name of the assessee, it was the Fund that owned the securities and held them and the assessee was not in any manner legally or beneficially entitled to receive the interest on those securities and, therefore, the sum of Rs. 28,718 was not interest on securities in the hands of the assessee and the assessee was not entitled to any credit for tax deducted in respect thereof. In our view, this decision ins of no assistance at all to Mr. Mehta. In that case, as it was pointed out by the Division Bench, the securities had been deposited by the assessee with the Accountant-General in payment of demands for excess profits tax and the Accountant-General did not hold the said securities on behalf of the assessee, but in his own right. The argument of Mr. Palkhivala, learned counsel for the assessee in that case, that the amounts deposited with the Accountant-General were in the nature of compulsory deposits was categorically rejected by the Division Bench, and it was held that the securities were deposited towards payment of 'tax'levied under the said Ordinance. It was pointed out that the fact that the amounts collected had to be repaid for the benefit of the industry could not affect or alter the true nature and incidence of the amount paid. In that case, therefore, the Accountant-General was the legal as well as the equitable owner of the securities deposited with him and during the subsistence of the operation of the Ordinance, there was no question of any liability on the Accountant-General to hand over interest to the assessee. This decision is, therefore, on completely different facts and has no application to the case before us.

8. Mr. Mehta next relied on the decision of the Supreme Court in CIT v. Chugandas & Co. : [1965]55ITR17(SC) . It was held in that case that the interest on securities which were held by the assessee as business assets formed part of the assessee's business income for the purpose of exemption from tax under section 25(3) of the Indian Income-tax Act, 1922. It has been pointed out in that case that the heads of income described in section 6 of the said Act were intended merely to indicate classes of income. It was held that business income is broken up under different heads only for the purpose of computation of the total income. By that breaking up, the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Income-tax Act for computation. This decision also does not carry any future the submission of Mr. Mehta. In that case, the question was not under which head the interest on securities earned by the assessee was to be taxed, but whether the assessee was entitled to exemption under section 25(3) in respect of intereston securities, which was a different question altogether. In fact, in that decision, the Supreme Court reaffirmed the correctness of the decision in United Commercial Bank Ltd. v. CIT : [1957]32ITR688(SC) and reaffirmed the principle that the various heads of income, profits and gains enumerated in section 6 are mutually exclusive, each head being specified to cover the income arising from a particular source, and consequently 'interest on securities', which is specifically made chargeable to tax under section 8 as a distinct head, falls under that section and cannot be brought under section 10, whether the securities are held as trading assets or capital assets.

9. We are unable to accept the argument of Mr. Mehta. As we have pointed out earlier, the income in question in this case was interest on securities. The banks in question, although they were the holders of these securities in the sense that the securities stood in their names, merely collected the interest on the securities and passed on the same to the assessee after deduction of collection charges. The certificates referred to earlier show that the banks accepted that they were holding these securities as belonging to the assessee and collecting the interest for the assessee. It is true that the said banks were pledgees of the respective securities in their names. But as pledgees they were not full owners of the securities concerned, but only limited owners, their right being not to part with securities till they were paid the amount for which the securities were pledged, and in case the pledgor, namely, the assessee, was unable to pay in time the debt to secure which the securities were pledged, they were entitled to sell the same and appropriate the sale proceeds towards payment of their claim. We fail to see how, in these circumstances, the nature of the interest from the said securities got converted by the fact that the banks collected the interest and passed on the same to the assessee after deduction of their collection charges.

10. It was argued by Mr. Mehta, in the alternative, that whatever was the nature of the income earned by the assessee from interest on these securities, the assessee was entitled to set off that income against a carried forward business loss, and this would show that that income was business income. There is no substance whatever in this argument. We are not called upon to decided whether the assessee 'in fact' was entitled to set off the income earned by it from these securities against a carried forward business loss, and even assuming that they were so entitled, that would not necessarily show that the income received by the assessee from these securities ceased to be income liable to be computed and taxed under the head 'Interest on securities'.

11. In the result, the question referred to us is answered in the negative and in favour of the Revenue. We may clarify that, in our view, the income from the Government securities standing in the names of the banks held by the assessee as its stock-in-trade is income liable to be computed and taxed under the head 'Interest on securities'. The respondent-assessee to pay the costs of these references to the applicant-Commissioner in one set.