1. T.C. No. 67 of 1975 and T.C. No. 71 of 1977 arise out of the same order of the Tribunal for the assessment year 1965-66.
2. Originally three questions of law had been raised and only two of them were considered by the Tribunal to arise out of the Tribunal's order and, therefore, the Tribunal referred the following two questions under Section 256(1) of the I.T. Act, 1961:
'1. Whether, on the facts and in the circumstances of the case it has been rightly held that in computing the admissible deduction under Section 37(2) of the Income-tax Act, 1961, the interest on securities should also be considered as business income ?
2. Whether, on the facts and in the circumstances of the case, it has been rightly held that the entertainment expenditure to be considered for application of Section 37(2) should only be that after deduction of the amount allowable under Section 20 of the Income-tax Act, 1961 ?'
3. As the Tribunal had not referred the other question, the Addl. Commissioner obtained a direction from this court for reference of the following question:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and had jurisdiction to permit the assessee to raise by way of additional ground issues which were not raised before the Income-tax Officer and the Appellate Assistant Commissioner '
4. We would refer to this as the third question referred by the Tribunal for this year.
5. For the assessment years 1967-68 and 1969-70, the Tribunal has referred, under Section 256(1) of the Act, the following question :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amounts allowed as deduction under Section 20 in determining the income from interest on securities should not be taken into consideration for the allowance of entertainment expenses while applying the provisions of Section 37(2) of the Income-tax Act, 1961 ?'
6. It may thus be seen that the questions referred for all the three years raise more or less common issues. We are first setting out the facts relating to the assessment year 1965-66 as stated in T.C. No. 67 of 1975, and consider the questions in their background.
7. The assessee was a scheduled bank, licensed to do banking business in India and abroad; In making the assessment for the assessment year 1965-66, the total income determined was Rs. 38,91,952. The assessee derived income by way of interest on securities amounting to Rs. 35,94,385. The assessee incurred, inter alia, entertainment expenditure of Rs. 80,427 and claimed only Rs. 28,252 as admissible under Section 37(2) of the I.T. Act. There is a restriction on allowance of the expenditure incurred on entertainment under that provision. The amount that may be allowed as entertainment expenditure is not to exceed 1% of the profits on the firstRs. 10,00,000, 1/2% of the profits on the next Rs. 40,00,000, 1/4% on the next Rs. 1,20,00,000, and on the balance of the profits and gains nil. Having regard to this provision, the ITO had to consider the allowability of entertainment expenditure out of the said sure of Rs. 80,427 to the extent admissible under Section 37(2). He determined the admissible entertainment expenditure at Rs. 24,763 and allowed it as against the assessee's claim of Rs. 28,252.
8. The assessee appealed to the AAC who confirmed the assessment of the ITO with reference to this aspect. There was a further appeal to the Tribunal by the assessee and the Tribunal accepting the assessee's contentions held that the expenditure as claimed by the assessee was to be allowed. During the pendency of the appeal before the Tribunal, the assessee raised a point that it would be entitled to an allowance of Rs. 8,565 as entertainment expenses under the head 'Interest on securities' instead of Rs. 3,489, being the difference between Rs. 28,252 and Rs. 24,763 which was originally the subject-matter of the claim by the assessee. The Tribunal accepted the assessee's contention for allowance of this larger amount. The conclusion of the Tribunal on this aspect has given rise to the reference of the three questions mentioned already for the assessment year 1965-66.In order to appreciate the issues that arise in this case, it is necessary to start with the mode of computation of income in the case of a bank. A banking company, as any other assessee, may have income from different sources or heads as set out in Section 14 of the Act. Section 14 classifies the heads of income as (A) Salaries, (B) Interest on securities, (C) Income from house property, (D) Profits and gains of business or profession, (E) Capital gains, and (F) Income from other sources. With reference to each of these heads, separate provisions have been made for deduction of any allowance under the respective heads. In the present case, we are concerned only with the dispute relating to the allowability of the entertainment expenditure from the income by way of interest on securities. As far as interest on securities is concerned, Section 19 provides for the deductions from such interest on securities. The deductions permissible are : (i) any reasonable sum expended by the assessee for the purpose of realising such interest; and (ii) any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee. It may be seen that Section 19 is generally worded and applies to all types of assessees, whether they carry on banking business or not. Section 20 provides for deductions from interest on securities only in the case of a banking company. It is in the nature of an explanation of what is to be regarded as reasonable sum expended for realisation of interest in the case of a banking company. Thus, Section 20 is in the nature of a special provision, in so far as deductions from interest on securities are concerned, in the case of such a company.
9. At this stage, it may be material to reproduce the relevant part of Sections 19 and 20 of the Act:
'19. Subject to the provisions of Section 21, the income chargeable under the head ' Interest on securities ' shall be computed after making the following deductions-
(i) any reasonable sum expended by the assessee for the purpose of realising such interest;
(ii) any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee.'
' 20. (1) In the case of a banking company-
(i) the sum to be regarded as a sum reasonably expended for the purpose referred to in Clause (i) of Section 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisions of sections 30, 31, 36 and 37 [other than Clauses (iii), (vi) and (vii) of Sub-section (1) of Section 36] the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to income-tax under Section 18 bear to the gross receipts of the company from all sources which are included in the profit and loss account of the company; (2) The expenses deducted under Clauses (i) and (ii) of Sub-section (1) shall not again form part of the deductions admissible under sections 30 to 37 for the purposes of computing the income of the company under the head ' Profits and gains of business or profession.......'
10. Section 37 is a general provision for allowance of any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession in the computation of the income under the head ' Profits and gains of business or profession '. Sub-section (2), which is material for our purpose, may be reproduced here:
' Notwithstanding anything contained in Sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as here-under:--
(i)on the first Rs. 10,00,000 of the profits and gains of the business (computed before making any allowance under section 33 or section 33A or in respect of entertainment expenditure)
at the rate of 1% or Rs. 5,000, whichever is higher ;
(ii)on the next Rs. 40,00,000 of the profits and gains of the business (computed in the manner aforesaid)
at the rate of % ;(iii)on the next Rs. 1,20,00,000 of the profits and gains of the business (computed in the manner aforesaid)
at the rate of 1/4% ;(iv)on the balance of the profits and gains of the business (computed in the manner aforesaid)Nil. '
11. As we are concerned with the allowability of entertainment expenditure, it is enough to concentrate on Sub-section (2) of Section 37. Under that provision, profits and gains of the business would have to be computed in accordance with the provisions of the Act before making any allowance under Section 33 or Section 33A or in respect of entertainment expenditure. It is the profits so arrived at which will form the basis for the computation of the percentage specified in Section 37(2). Thus, in the case of a banking company also, what is to be arrived at is the profits and gains of the business before making allowance under Section 33 or Section 33A or of entertainment expenditure. The quantum of entertainment expenditure that will be available for allowance will thus be arrived at the percentage referred to in the section. It is this amount of entertainment expenditure, along with all other deductions provided in the statutes relating to a business, which will have to be considered for allowance under the respective heads, namely, interest on securities ' and ' income by way of profits and gains of business '. Section 20, sub- Section (2), which has already been extracted, makes it clear that the expenses deducted under Clauses (i) and (ii) of Sub-section (1) shall not again form part of the deductions admissible under, inter alia, Section 37 for the purposes of computing the income of the company under the head ' Profits and gains of business '. Thus, the proportionate part of the entertainment expenditure to be allowed has first to be considered under the head ' Interest on securities ', and it is the balance of the expenditure which will have to be allowed as deduction under Section 37, For our present purpose, it is necessary to remember that the sum of Rs. 24,763 is the sum arrived at as allowable under Section 37(2) of the Act, as and by way of entertainment expenditure out of the sum of Rs. 80,427. The gross receipts as per the assessment order came to Rs. 3,37,45,145. The receipts as and by way of interest on securities came to Rs. 35,94,385. The proportion of interest on securities to the total gross receipts came to 10.65%. The assessee took the sum of Rs. 80,427 and applying 10.65% to it wanted, in the appeal before the Tribunal, a sum of Rs. 8,565 to be allowed as deduction under the head ' Interest on securities ' apart from a sum of Rs. 24,763 as expenditure allowable under the head'business'. The ITO had held that any sum in. excess of Rs. 24,763 could not be allowed as deduction. It is the Tribunal which has accepted the assessee's claim for allowance of Rs. 8,565 and Rs. 24,763. The correctness of the Tribunal's conclusion is now in issue.
12. As far as the computation under Section 37(2) is concerned, it is with reference to business profits. In other words, the profits have to be computed after making the deductions due under the provisions of Sections 30 to 43A of the Act.
13. Learned counsel for the assessee submitted that even interest on securities would, for this purpose, have to be taken into account as business profits as the bank holds securities only as part of its stock-in-trade. In support of this submission, he relies on a decision in CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) . In that case, the assessee carried on business in banking. It held securities as part of its trading assets. For the assessment year 1949-50, it had incurred a loss of Rs. 64,400 under the head 'Business' and had earned Rs. 8,488 as 'interest on securities'. Thus, the net loss amounted to Rs. 55,912. For the three succeeding assessment years, the ITO allowed this loss to be set off against income under the head 'Business', but refused to set it off against the income computed under the head ' Interest on securities '. The assessee disputed the refusal to set off the loss against the income from securities because, according to the assessee, interest on securities would also be business income for this purpose. When the matter came before the Supreme Court, it held that the assessee was entitled to set off the loss of Rs. 55,912 brought forward from the assessment year 1949-50, against the entire income including the interest on securities in the succeeding years, as the income from securities, which formed part of the assessee's trading assets, was part of its income from business and that, therefore, the loss incurred in the business in the earlier years could be set off against the income from securities also in the succeeding years. In the course of the judgment of the Supreme Court, it was observed, after reference to Section 6 of the Indian I.T. Act, 1922, which corresponds to Section 14 of the I.T. Act, 1961, as follows (pp. 309, 310):
' Section 6 only classifies the taxable income under different heads for the purpose of computation of the net income 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 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 Section 6 but on commercial principles. To put it in other words, did the securities in the present case, which yielded the income, form part of the trading assets of the assessee ?.........If it was the income of the business,section 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.'
14. The principle that is sought to be deduced by Mr. Ramakrishna, appearing for the assessee, is that in the case of a banking business, the separate assessment of interest on securities loses much of its significance and that such interest also should be taken as forming part of the business income. We are unable to accept this broad proposition contended for by the counsel. In the judgment of the Supreme Court under consideration, reference has been made to its earlier decision in United Commercial Bank Ltd. v. CIT : 32ITR688(SC) . In that case, the Supreme Court was concerned with the assessee's claim that in the computation of its profits for the year 1945-46, the assessee was entitled to set off the carried over loss of the previous year against the profits of the year of assessment under Section 24(2) of the Act. The assessee in that case also was a bank carrying on banking business. For the relevant assessment year, ' interest on securities' yielded an income of Rs. 23,62,815 and there was a loss of Rs. 8,86,972 under the head ' Business '. The net income determined was thus Rs. 14,95,826. There was a loss of Rs. 3,21,929 carried forward from the earlier year, and the assessee wanted this loss to be set off against interest on securities. The Supreme Court remitted the matter to the High Court for fresh consideration after a finding was obtained on the question whether the securities in question were part of the trading assets held by the assessee in the course of its business as a banker. In the course of the judgment, at page 702, it was observed :
' Thus on a true construction of the various sections of the Act, the income of an assessee is one, and the various sections 7 to 12 are modes in which the statute directs that income-tax is to be levied and these sections are mutually exclusive. The head of income of which the source is ' interest on securities ' has its characteristics for income-tax purposes and falls under the specific head covered by Section 8 of the Act, and where an item falls specifically under one head it has to be charged under that head and no other. This interpretation follows from the words used in Sections 6, 8 and 10 which must be read so as 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'. Thus, on this construction the various heads of' income, profits and gains ' must be held to be mutually exclusive, each head being specific to cover the item arising from a particular source. It cannot, therefore, be said that qua the assessee in the present case and for the purpose of securities held by it, Section 8 is more specific and Section 10 general or vice versa ............Thus both on precedent and on a proper construction, the sourceof income ' Interest on securities ' would fall under Section 8 and not under Section 10 as it is specifically made chargeable under the distinct head ' Interest on securities ' falling under Section 8 of the Act and cannot be brought under a different head even though the securities are held as a trading asset in the course of its business by a banker.'
15. Thus it has been clearly laid down by the Supreme Court that in the case of banking business also, the provisions of Section 8 (of the 1922 Act) would continue to be operative and that the computation would have to be made under that provision. The principles set out in CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) , would have to be understood in the context of the claim for computation of loss. The decision in that case does not, in our opinion, do away with the distinction that has been pointed out in the United Commercial Bank's case  32 ITR 868 , with reference to the computations under different heads.
16. That this is the position is made clear by a later judgment of the Supreme Court in Bengal and Assam Investors Ltd. v. CIT : 59ITR547(SC) . In that case, the assessee, an investment company, wanted dividend income to be charged under Section 10. The Supreme Court negatived the assessees claim. In the course of the judgment, reference was made to the decisions in CIT v. Cocanada Radhaswami Bank Ltd. : 57ITR306(SC) and CIT v. Chugandas and Co. : 55ITR17(SC) , and it was pointed out that these two decisions had no bearing on the question as to whether any dividend income had to be computed under Section 10 or Section 12 of the Act of 1922. Thus, for purposes of computation of income as such, the distinction pointed out by Section 14 and the deductions specified in the other provisions following it in respect of each head will have to be borne in mind and applied. If we do so, then the assessee would be eligible, with reference to the assessment year 1965-66, only for the allowance of Rs. 24,763 as and by way of entertainment expenses under Section 37(2). It is this amount which, in accordance with the provisions of Section 20 of the Act, would have to be allowed proportionately in the manner contemplated by it as deductions from interest on securities. It is the balance of the amount remaining for allowance that will have to be considered under Section 37 as allowance from the income from business profits and gains.
17. In the course of the argument, learned counsel submitted that there was absolutely no reason why the restriction imposed by Section 37(2) with reference to entertainment allowance would have to be transported to Section 20. In other words, the submission was that the assessee would be eligible for allowance of entertainment expenditure without regard to the percentage set out in Section 37(2) of the Act. This submission cannot be accepted. In the computation of the income of a bank, the ITO will have to tabulate the various items of expenditure which are admissible under Section 30 onwards. Thetotal of those amounts will have to be made, and out of this total, there is a proportionate allowance first as against interest on securities and it is only the balance that would be allowable as against income from business. In this view, part of the entertainment expenditure, computed under Section 37(2), would qualify for allowance under Section 20 and the remaining part would be allowable under Section 37.
18. The distinction between a banking company and all other assessees deriving interest from securities may be described as follows : In the case of all other assessees the only deductions permissible from such interest are : (i) any reasonable expenditure incurred for realising the interest, and (ii) the interest payable on moneys borrowed for investment in securities. In the case of a banking company, the reasonable expenditure for realisation of interest will represent a proportionate part of the entire business expenditure allowable under Sections 30 to 43A. Even the expenditure for realising the interest will come within these allowances. While in any other case, any part of the entertainment expenditure would not be allowable, as no entertainment is necessary for realising the interest on securities, Section 20 provides for a proportionate allowance of this expenditure also. There is nothing in this scheme to warrant an independent allowance of entertainment expenditure under Section 20, or removal of the ceiling fixed under Section 37(2) in considering the deductions under Section 20.
19. With reference to the assessment year 1965-66, we have already referred to the fact that a sum of Rs, 24,763 has been computed as the amount allowable under Section 37(2) taking into account the restrictions imposed by it with reference to entertainment expenditure. When we see the computation as made by the ITO in his assessment order, it is not clear to us whether this sum of Rs. 24,763 has been distributed between the income from securities and the business income in the manner contemplated by Section 20 read with Section 37. If this has not been done, the ITO will have to do so. As far as the assessment years 1967-68 and 1969-70 are concerned, except for the figures, the principle applicable is the same. We do not, therefore, think it necessary to go into the facts for these years. We answer questions Nos. 1 and 2 in T.C. No. 67 of 1975 in the negative and in favour of the revenue. The question referred in T.C. No. 71 of 1977 does not survive for our consideration in the view we have taken on the main question raised for this year, viz., that there can be no allowance beyond Rs. 24,763 under both Sections 20 and 37. Therefore, T.C. No. 71 of 1977 is returned unanswered.
20. With reference to T.C. Nos. 853 and 854 of 1977, the question has been so framed, as if the problem was whether the amounts allowed as deduction under Section 20 should not be taken into consideration for the allowance of entertainment expenses while applying Section 37(2). If this were the realquestion, the answer would be self-evident as Section 20(2) prohibits what is allowed thereunder again forming part of the deductions under Sections 30 to 37. However, we understood the problem to be one and the same as question No. 2 in T.C. No. 67 of 1975. It is in that sense that we are answering this question in favour of the revenue. The revenue will be entitled to its costs. Counsel's fee Rs. 500 one set.