Bhagwati, J.:— The question arising in this reference lies in a very narrow compass and the principles governing its determination are well-settled. The only controversy is as regards the application of those principles and it is, therefore, necessary to state the facts. The reference arises out of an assessment made on the assessee for the assessment year 1960-61, the relevant account year being the calendar year 1959. The assessee is a limited company and, according to the finding of fact recorded by the Tribunal, it carried on two businesses since 1947-48. One was money-lending business and the other was business of dealing in investments which included properties. The assessee in the course of its money-lending business borrowed moneys from directors and their friends, relatives and acquaintances and advanced the same on interest to diverse parties. One of the advances so made by the assessee was by way of fixed deposit of Rs. 6,00,000 with the Bhavnagar branch of a company called Godhra Electricity Company Limited. The interest on this fixed deposit was treated by the assessee as income of its money-lending business and was taxed as such by the revenue authorities during the relevant assessment years. Some time in the beginning of 1954, the business of the Bhavnagar branch of the Godhra Electricity Company Limited was taken over by a new company called Bhavnagar Electricity Company Limited by virtue of an order passed by the District Judge, Ahmedabad, in Civil Miscellaneous Application No. 12 of 1954 and under the terms of that order the Bhavnagar Electricity Company Limited was also directed to take over the liabilities of the Bhavnagar branch of the Godhra Electricity Company Limited amounting to Rs. 18,36,737 which included the liability in respect of the fixed deposit of Rs. 6,00,000 due to the assessee and it was also provided that the said liability should be discharged by the Bhavnagar Electricity Company Limited by issuing shares of the face value of Rs. 100 each to the extent of multiples of Rs. 100. Pursuant to this order the liability in respect of the fixed deposit of Rs. 6,00,000 was taken over by the Bhavnagar Electricity Company Limited and in May 1954, the Bhavnagar Electricity Company Limited allotted 5,799 shares of the face value of Rs. 100 each to the assessee in payment of Rs. 5,79,900 out of the fixed deposit of Rs. 6,00,000. It may be pointed out at this stage that the directors of the assessee were interested in the Bhavnagar Electricity Company Limited and one of the directors of the assessee was managing director of that company. Now, for some years no dividend was declared by the Bhavnagar Electricity Company Limited and the only income of the assessee from the money-lending business was, therefore, a small amount which was realised by way of interest on the remaining advances made by the assessee. The assessee was, however, required to pay interest on the amounts borrowed from the directors and their friends, relatives and acquaintances and consequently there were losses incurred by the assessee in the money-lending business. The losses incurred by the assessee in the money-lending business for the assessment years 1955-56 to 1958-59 were determined as under by the Income-tax Officer:

Assessment year Loss determined. Rs. 1955-56 21,918 1956-57 27,427 1957-58 30,257 1958-59 20,102 Total: 99,704

2. These losses were held by the Income-tax Officer to be losses arising in the money-lending business of the assessee which the assessee was entitled to carry forward and set off in accordance with the provisions of section 24(2). During the previous year for the assessment year 1959-60, the Bhavnagar Electricity Company Limited declared a dividend and the assessee earned income of Rs. 34,794 by way of dividend on 5,799 shares of the company. In the assessment of the assessee for the assessment year 1959-60, therefore, its income from dividends was determined to be Rs. 34,794 while its business loss was determined to be Rs. 30,149 leaving a net resultant income of Rs. 4,645.

3. The carried forward loss of Rs. 99,704 was not set off against the income of Rs. 4,645 but the assessee did not challenge the assessment and it was allowed to become final. In the previous year relevant to the next assessment year, namely, 1960-61, being the assessment year with which we are concerned in the present reference, the assessee earned Rs. 562 representing interest on advances and Rs. 34,794 representing dividend on 5,799 shares of Bhavnagar Electricity Company Limited and as against this income the assessee incurred expenditure amounting to Rs. 29,308 which included Rs. 27,845 payable as interest on the amounts borrowed by the assessee. The Income-tax Officer treated the sum of Rs. 29,308 as business expenditure and after taking into account the income of Rs. 562 earned as interest on advances, he determined the business loss of the assessee to be Rs. 28,646 and then he set off this business loss of Rs. 28,646 against the income of Rs. 34,794, representing dividend on 5,799, shares of Bhavnagar Electricity Company Limited in accordance with the provisions of section 24(1) and arrived at the resultant income of Rs. 6,148 which he brought to tax. The assessee claimed to set off the carried forward loss of Rs. 99,704 against the resultant income of Rs. 6,148, which was earned as dividend but this claim was rejected by the Income-tax Officer on the ground that the income by way of dividend was not income of business and section 24(2) was, therefore, not attracted. The assessee carried the matter in appeal before the Appellate Assistant Commissioner but the appeal was unsuccessful. A further appeal was thereupon brought to the Tribunal. The Tribunal held that 5,799 shares of Bhavnagar Electricity Company Limited were trading assets of the business of the assessee and the income received as dividend on those shares though assessable under section 12 was income of the business and the assessee was, therefore, entitled to set off the carried forward loss of Rs. 99,704 against the income from dividend to the extent permissible under section 24(2). This view taken by the Tribunal is challenged on the present reference made by the Tribunal at the instance of the Commissioner.

4. The short question that arises for consideration is whether the assessee is entitled to set off the carried forward loss of Rs. 99,704 against the income of Rs. 6,146, which represents the dividend earned on 5,799 shares of Bhavnagar Electricity Company Limited after setting off against it the loss of Rs. 28,646 incurred in the business of money-lending in the relevant accounting year. Now section 24(2) says that the carried forward loss of earlier years can be set off against the profits of any business carried on by the assessee in the relevant year of account (provided of course the business in which the loss was originally sustained continues to be carried on by him in that year) and it is well-settled that the profits of business against which such set off can be claimed are not only the profits of business computed under section 10 but also include other income which, though computed under another head, is in reality derived from a business activity. Whatever be the head under which the income is earned, so long as it is income from business, carried forward loss of earlier years can be set off against it to the extent permitted by section 24(2): vide Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. [1965] 57 I.T.R 306 S.C.. It is, therefore, clear that the mere fact that the income against which the carried forward loss of the earlier years is sought to be set off by the assessee is income from dividend assessable under section 12 would not exclude the applicability of section 24(2) but the relevant question would be whether such income is income of business carried on by the assessee during the relevant year of account or, in terms of facts of the present case, whether 5,799 shares of the Bhavnagar Electricity Company Limited on which such income was earned formed part of the trading assets held by the assessee in the course of its business. If these shares formed part of the trading assets of the assessee, the income from them would be part of the income of the business and section 24(2) would be immediately attracted and the carried-forward loss of the earlier years would be liable to be set off against the total income of the business, that is the income of the business including the income from these shares. We must, therefore, proceed to consider the question whether these shares formed part of the trading assets of the assessee.

5. Now, in order to understand the nature and character of these shares acquired by the asssssee, it is necessary to bear in mind the circumstances in which they came to be acquired. The assessee was admittedly carrying on money-lending business and in the course of the money-lending business it had advanced a sum of Rs. 6,00,000 by way of fixed deposit to the Bhavnagar branch of the Godhra Electricity Company Limited: that was a debt plainly due to the assessee in the course of its money-lending business. Then by an order made by the District Judge, Ahmedabad, in Civil Miscellaneous Application No. 12 of 1954, the debt was transferred from the Bhavnagar branch of the Godhra Electricity Company Limited to the Bhavnagar Electricity Company Limited and it was directed to be satisfied by issue of shares of Rs. 100 each. Pursuant to this order of the District Judge, Ahmedabad, 5,799 shares of the face value of Rs. 100 each were allotted to the Bhavnagar Electricity Company Limited in satisfaction of the debt to the extent of Rs. 5,79,900 and the balance of the debt remained due and payable by the Bhavnagar Electricity Company Limited to the assessee. 5,799 shares of the Bhavnagar Electricity Company Limited were thus received by the assessee in part satisfaction of the debt due originally from the Bhavnagar branch of the Godhra Electricity Company Limited and subsequently from the Bhavnagar Electricity Company Limited. The assessee had no choice but to accept these shares in part satisfaction of the debt. The shares were thus received by the assessee as stock-in-trade of the money-lending business and unless there is clear and cogent evidence produced on behalf of the revenue to show that the assessee withdrew these shares from its money-lending business and treated them as investments, they must be held to be trading assets of the money-lending business carried on by the assesses.

6. Now, the balance-sheet of the assessee, which, though not originally part of the statement of the case, was taken by us on record with the consent of parties since it was on the record of the Tribunal, shows that during the relevant year of account the paid-up capital of the assessee was Rs. 2,60,000, its reserve fund was Rs. 29,841 and the moneys borrowed by it from directors and their friends, relatives and acquaintances aggregated to Rs. 4,92,596. The paid up capital and the reserve fund were clearly insufficient to provide the moneys invested in 5,799 shares of Bhavnagar Electricity Company Limited. The moneys borrowed from directors and their friends, relatives and acquaintances were, therefore, to a large extent utilised in these shares and were represented by these shares. Now, interest was payable on the borrowed moneys and the interest on the borrowed money was treated by the assessee as expenditure in its money-lending business and it was accepted as such by the revenue authorities for all the assessment years subsequent to the allotment of the shares. Even in the assessment for the assessment years 1959-60 and 1960-61 in which income by way of dividend on these shares was received by the assessee, the entire interest payable on the borrowed moneys was treated as expenditure incurred in the money-lending business and the revenue authorities accepted it as business expenditure. These shares of the Bhavnagar Electricity Company Limited were, therefore, regarded by the assessee as part of the stock-in-trade of the money-lending business and interest payable on the borrowed moneys representing these shares was treated as expenditure in the money-lending business. If these shares had been taken out of the money-lending business and had been treated as capital investments of the assessee, the borrowed moneys to the extent to which they were invested in these shares would also have ceased to form part of the money-lending business and the interest payable on them by the assessee would not have been an expenditure of the money-lending business liable to be deducted in computing the income from business.

7. Strong reliance was placed on behalf of the revenue on the circumstance that these shares remained with the assessee from May, 1954, up to 31st December, 1959, and it was urged that this circumstance that the shares remained with the assessee for such a long period of 5½ years and were not sold by the assessee with a view to realising the moneys represented by them for the purpose of carrying on the money-lending business showed that these shares were not treated by the assessee as trading assets in the business of money-lending but were regarded as investments of the assessee. Now, there can be no doubt that this is a relevant circumstance and it must receive its due weight but there are two considerations which considerably affect the strength and validity of this circumstance. The first is that these shares were, as the balance-sheet shows, not quoted in the market and there is nothing to show that they were easily realisable. As a matter of fact for about four year they did not yield any income and it was only in the assessment years 1959-60 and 1960-61 that they gave a dividend of 6 per cent. In the absence of evidence to show that these shares could have been sold by the assessee in the market but were still unsold, it is difficult to conclude from the mere fact of the assessee having retained these shares for about 5½ years that these shares were not treated by the assessee as stock-in-trade but were regarded as investments by the assessee. Moreover, it may be noted that this circumstance which, even at its best, is not a conclusive circumstance is more than offset by the fact that the interest payable on the borrowed moneys represented by those shares was treated as business expenditure over the entire period of 5½ years and was accepted as such by the revenue authorities. As a matter of fact, it is difficult to see how in the assessment for the assessment year 1960-61, with which we are concerned, the revenue could in one breath regard the entire interest payable on the borrowed moneys as business expenditure and in another breath say that these shares representing practically the whole of the borrowed moneys were investments and not trading assets of the assessee. We are, therefore, of the view that the inference drawn by the Tribunal from the facts on record was correct and the Tribunal was right in holding that the shares of Bhavnagar Electricity Company Limited were the trading assets of the business of money-lending carried on by the assessee. The income from dividends on these shares must, therefore, be held to be income of the business and the carried-forward loss of the earlier years must be permitted to be set off against the income of Rs. 6,148 representing the dividend on these shares.

8. The question referred to us does not appear to be properly framed and we would, therefore, reframe it as follows:

“Whether, on the facts and in the circumstances of the case, the dividend income of Rs. 6,148 though chargeable under section 12 of the Indian Income-tax Act, 1922, is part of the income of the business of the assessee for the purpose of set off of the loss of Rs. 99,704 brought forward under section 24(2) of the Indian Income-tax Act, 1922?”

9. Our answer to the question as reframed is in the affirmative. The Commissioner will pay the costs of the reference to the assessee.