G.K. Mitter J. - This is a reference under section 66(1) of the Indian Income-tax 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 section 10 of the Indian Income-tax 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 re-invest in any shares, stock, etc.
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 June 30, 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 so interest on moneys borrowed for the purchase of shares. In the next accounting period for the assessment year 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 Income-tax Officer arrived at this figure as the unabsorbed business loss. But the Appellate Assistant Commissioner revised the figure to Rs. 73,324 describing it as a loss under 'other sources.' In the assessment year 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 Income-tax Officer and the Appellate Assistant Commissioner 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 section 12 and not under section 10. Before the Tribunal the assessees 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 assessment years 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 section 12 and not under section 10 and loosed 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 section 24 of the Indian Income-tax 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 section 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-section (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 section 6 of the Act the following heads of income, profits and gains are chargeable to income-tax in the manner hereinafter appearing, namely :
(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.
The computation of tax on salaries is to be done under section 7, that on 'interest on securities under section 8, that on income from property under section 9, that on business, profession or vocation under section 10 and as regards other sources' under section 12. Income from dividend will therefore fall under section 12. The contention of the assessee before us is that inasmuch as dividend is not expressly mentioned in section 12 in the case of an investment company, the assessee whose business is to invest in shares, the dividend income therefrom should be computed under section 10 as it is business income with the result that the assessee can claim the benefit of section 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. v. Commissioner of Income-tax, that the mandatory character of section 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 Income-tax Officer 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 section 24. It was further contended that the assessees 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 Income-tax Officer took the view that there was a loss under the head 'business' and hence it could not be set off under section 24(2). Before the Supreme Court an argument was put forward on behalf of the assessee that 'sections 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 section 10 and not section 8 which must be restricted to capital investments only'. The arguments before us is practically the same except for the substitution of sections 8 and 10 by sections 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 sections 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 section 8 and not under section 10, no matter whether such securities were held as a trading asset or capital asset.
Section 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-section (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 section 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 section 10. In the above case the Supreme Court relied on the case of Fry v. Salisbury House Estates Ltd. 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 rule 8(c)(i) of Schedule A, No. VII of the Income Tax 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 profit and loss account 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 compute 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 Statue 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'.
Lord Warrington said :
'There is nothing in the facts stated in the Case which would properly lead to the conclusion that in dealing with the property the Company is acting otherwise than an ordinary landowner would act in turning to profitable account the land of which he is the owner. It would in my opinion be impossible to hold that in such a case, the landowner is carrying on a trade. Such a person would, I think, clearly be assessable under Schedule A only, and his taxable income would be measured by the conventional annual value and not by the amounts of the rents he actually received.
But the Crown contends that the fact that the taxpayer is a limited company may distinguish its operations from those of an individual. Assuming the Memorandum of Association allow it, and in this case it unquestionably does, a Company is just as capable as an individual of being a landowner, and as such deriving rents and profits from its land, without thereby becoming a trader, and in my opinion it is the nature of its operations, and not its own capacity, which must determine whether it is carrying on a trade or not.'
Lord Atkin observed that :
'The scheme of the Income tax Acts is and always has been to provide for the taxation of specific properties under Schedules appropriate to them and under a general Schedules D to provide for the taxation of income not dealt with specifically. Schedule A provides for the taxation of income derived from property in land; B for income derived from the occupation of land; C for income derived from government securities; E for income derived from employment is public service.'
It was pointed out that Schedule D covered a wide variety of subjects including, in fact, all source of income assessable to tax which were not specifically charged under any of the other four schedules. Case I of this schedule refers to trades and Case II deals with tax in respect of profession or vocation...............
It would appear that the scheme of the Indian Income-tax Act is similar to that of the corresponding English statute. Under sections 7, 8, 9, and 10 of the Indian Income-tax Act specific heads of income, profits and gains are chargeable to tax. Section 12 is the residuary taxing provision with regard to items not covered by sections 7 to 10. If therefore an item of income, profits and gains falls within any of the sections 7 to 10 the assessability arises and the computation has to be done exclusive. The result is that although the total income of the assessee has to be found out by adding up the computations under the different sections, income, profits and gains which would fall under section 12 would be classified separately from that under section 10 and a loss suffered by the assessee under one head in a particular year cannot be set off towards its income from another year...................
On behalf of the assessee reliance was placed on certain observations in Commissioners of Inland Revenue v. Korean Syndicate Ltd. There the question was whether the assessee, a company incorporated under the English Companies Act, had any liability to excess profits duty on the basis that it was carrying on a business. Its objects as set forth in clause 3 of its memorandum of association includes the following : (1) to apply for, purchase or otherwise acquire concessions, rights and privileges of any and every kind for or in relation to mining, electrical, agricultural, land or water or control of works of any kind and to work, exploit and turn the same to account, and in particular to enter into an agreement with reference to a mining concession already granted by the Imperial Household Department to the Korean Government in the terms of a draft agreement prepared and signed for identification by one Herald Brown, to carry the same into effect either with or without modification. (3) To carry on the business of miners, metallurgists and engage in a number of other activities. (8) To receive money on deposit and to lend money to any company, etc., (15) To improve, manage, work, develop and turn to account any property, real or personal, acquired by or in which the company was interested. The company upon its formation entered into an agreement referred to in the memorandum of association and became entitled to acquire and interest in a company called the American Koran Mining Co. The assessees interest in this agreement was sold in 1907 in consideration of certain shares, debentures and bonds in the Korean Wate Words Ltd., which were held by the assessee up to the year 1911. During the year 1911 the Japanese Government purchased for cash the waterworks and the Korean Water-works Ltd. went into liquidation and the money received by the assessee for its holding in the company was placed on deposit with a bank. The assessee had also acquired in 1905 a half right to a concession in Korea extending over a big stretch of land on which was situated a gold mine. It had originally been intended that the assessee should itself develop and work the concession for which preliminary negotiations had been made. These expectations were however not fulfilled and the assessee entered into an agreement with reference to its share in the concession with another company formed by an American firm. This agreement was described as a lease by the terms of which the lessee was to pay to the assessee by way of royalty or rents sums equal to eight per cent. of the net profit realised by the lessee from the working of the property, and the assessee was to have the right to determine the agreement by giving six months notice in certain circumstances. The assessee employed as its agent a resident in Korea at a small retaining fee but, unless the taking of steps to ascertain the true amounts of royalties receivable the receiving of such amounts, and the distributing of the sea amongst the members of the assessee were held to constitute the carrying on of a trade or business, the assessee did not carrying on any trade or business in the years under review. In these circumstances the Court of Appeal held that the assessee was carrying on a business. Lord Sterndale M.R. said that one would have to see what the assessee was doing and why he was doing it '.......... and if he was doing it under the circumstances in which the Syndicate was doing it -namely, trying to attain the object of acquiring a concession and turning the same to account - then I think he might very well be carrying on a business.'
In my view the judgment in the above case does not help the assessee before us.
It cannot be suggested in this case that the assessee investment company had no business of any kind. It certainly had one but when it held shares on which dividends were received tax has to be commuted under section 12 and the assessee cannot say that this being its main activity the income received was its 'business income' under section 10.
In view of the above the question referred must be answered in the negative. The assessee must pay the costs of this reference.
RAY. - I agree.
Question answered in the negative.