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Commissioner Of Income-Tax, Madhya Pradesh v. Shrikishan Chandmal
Structured Summary of the Opinion
Factual and Procedural Background
The Income-tax Appellate Tribunal, Bombay, referred a question of law to the court under section 66(1) of the Income-tax Act, 1922 for the assessment year 1956-57. The specific question was whether dividend income of Rs. 23,302 could be set off under section 24(2) against a brought-forward business loss of Rs. 4,17,255 (made up of Rs. 12,934 plus Rs. 4,04,321) from assessment year 1955-56.
The assessee is a Hindu undivided family dealing in shares and deriving income under three heads: income from property (s.9), profits and gains of business (s.10), and income under the residuary head which, after amendment, includes dividend income (s.12). In the two relevant assessment years the dividend income arose in respect of shares held as stock-in-trade.
The factual background provided a series of annual figures (for assessment years 1952-53 through 1956-57) showing losses and dividend components, and established that at the end of 1954-55 the assessee carried forward a business loss of Rs. 4,04,321 to 1955-56. In 1956-57 the assessee had business profits of Rs. 3,56,553 but this was less than the carried-forward loss; the dividend of Rs. 23,302 was also received that year, and the question of set-off under section 24(2) therefore arose in the assessment year 1956-57.
At the departmental levels, the Income-tax Officer and the Appellate Assistant Commissioner held that the phrase "profits and gains, if any, of any business, profession or vocation" in section 24(2)(ii) meant only those profits and gains assessable under section 10. The Tribunal disagreed and allowed the set-off, leading to the reference to this Court on the legal question.
Legal Issues Presented
- Whether the dividend income of Rs. 23,302 arising from shares held as stock-in-trade in assessment year 1956-57 can be set off under section 24(2) against the carried-forward business loss of Rs. 4,17,255.
- Whether, in view of section 12(1A) (which states that income from other sources shall include dividends), such dividend income must, for the purposes of section 24(2), be treated as income under the residuary head (other sources) and thus excluded from "profits and gains of any business, profession or vocation", or whether it can be regarded as income derived from the business for set-off purposes.
Arguments of the Parties
Department / Income-tax Officer and Appellate Assistant Commissioner
- The Officer and the Appellate Assistant Commissioner took the view that the phrase "profits and gains, if any, of any business, profession or vocation" in section 24(2)(ii) refers only to profits and gains that are assessable under section 10. By that reading, incomes classified under other heads (for example, dividends under section 12(1A)) would not fall within the scope of section 24(2)(ii) for set-off against carried-forward business losses.
Contentions (as described in the opinion)
- It was urged (as stated in the opinion) that, in view of the statutory insertion of section 12(1A) (making dividends part of "income from other sources"), dividend income from shares held as stock-in-trade should be regarded, for carry-forward and set-off purposes, as falling under the residuary head and not as business income.
- The Tribunal, by contrast, allowed the set-off and took a view that section 24(2) should not be read as limited only to incomes assessable under section 10; rather, classification for computation does not exhaustively delimit what counts as business income for other provisions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Ahmuty & Co. Ltd. | Held that dividend income from shares held as stock-in-trade was income earned in the course of or arising out of business (prior to insertion of s.12(1A)). | Used to demonstrate historical treatment: before s.12(1A) dividends on trading shares were treated as business income and thus capable of being regarded as part of business income for set-off purposes. |
| Commissioner of Income-tax v. Chugandas & Co. (Supreme Court) | Held that the classification of heads (s.6 and ss.7–10,12 etc.) is intended merely to indicate classes of income for computation; these heads do not exhaustively delimit sources from which income arises. | Relied upon to support the proposition that statutory classification for computation purposes does not rigidly determine the treatment of income for other provisions such as s.24(2). |
| United Commercial Bank Ltd. v. Commissioner of Income-tax | Addressed whether interest on securities (falling under s.8) could be set off under s.24(2) when securities formed part of the assessee's business; Supreme Court remitted the case for fuller facts about whether the securities were trading assets. | Quoted to show that whether particular receipts are part of business income depends on factual finding about whether the assets were trading assets; court used the case to underline that classification alone is not decisive. |
| Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax (Privy Council) | Noted that for a bank the business essentially consists of dealing with money and credit and that holding securities to meet probable demands can be a normal and integral step in banking business. | Referred to in the United Commercial Bank discussion to illustrate that holding securities can be a normal incident of a business and hence income from such securities may be business income. |
| Cocanada Radhaswami Bank Ltd. v. Commissioner of Income-tax | Held (in a brief judgment) that interest on securities held by a bank as part of its trading assets can be set off under s.24(2) against carried-forward business losses. | Adduced as authority that s.24(2) should not be regarded as restricted to profits and gains assessable under s.10; supports the proposition that income characterized under another head may be treated as business income for set-off. |
| Commissioner of Income-tax v. Chugandas & Co. (Bombay High Court — "Securities") | Held that interest on securities which formed part of the stock-in-trade of the assessee's business was part of the profits and gains of that business within the meaning of s.25(3) (a provision dealing with discontinued business); later affirmed by the Supreme Court. | Used to show that after the insertion of s.12(1A) the fact that dividends or interest were charged under another head did not mean the reliefs available to business income were intended to be withdrawn; analogous reasoning applied to s.24(2). |
Court's Reasoning and Analysis
The court framed the precise legal issue as whether dividend income from shares held as stock-in-trade, now included in "income from other sources" by the insertion of section 12(1A), must, for purposes of section 24(2), be treated as residuary income exclusively, or whether it can be regarded as income derived from the business so as to permit set-off against carried-forward business losses.
The court's analysis proceeded along these lines:
- The court emphasized that the statutory heads of income (as set out in section 6 and the subsequent sections including sections 7–10 and 12 etc.) are intended only to indicate classes of income for the purpose of computing total income and do not exhaustively delimit the sources from which income arises. The court quoted the Supreme Court's statement in Commissioner of Income-tax v. Chugandas & Co. to this effect.
- The court reviewed precedent addressing materially similar questions: the United Commercial Bank case (where the Supreme Court remitted the issue for fuller factual findings on whether securities were trading assets) and the Cocanada Radhaswami Bank decision (which held that interest on securities held as trading assets could be set off under s.24(2)). These authorities supported the proposition that income arising from assets held as part of a business may be treated as business income for particular statutory purposes, notwithstanding classification under another head for computation.
- The court considered the earlier position (as in Ahmuty & Co.) that dividends on trading shares were regarded as business income prior to the insertion of s.12(1A), and it considered the Supreme Court's reasoning in the Chugandas line of cases that the legislature, in inserting s.12(1A), was unlikely to have intended to withdraw benefits or alter substantive treatment of business income for other provisions merely by changing the head under which it was charged.
- On the basis of these authorities and principles, the court concluded that the classification of dividends under section 12(1A) for computation does not automatically prevent those dividends from being regarded as deriving from the business for the purposes of section 24(2). In other words, section 24(2) is not confined to profits assessable under section 10 where the relevant facts show that the dividend arose from shares held as part of the trading business.
The court therefore applied these legal principles to the facts stated by the Tribunal (dividends arising from shares held as stock-in-trade) and found that the dividend income in question could be treated as available for set-off against the carried-forward business loss under section 24(2).
Holding and Implications
Holding: The court held that the dividend income of Rs. 23,302 arising in the assessment year 1956-57 can be set off under section 24(2) against the business loss carried forward from earlier years.
Implications and direct effects:
- Direct effect on the parties: The assessee is entitled to set off the Rs. 23,302 dividend against the carried-forward business loss; the Tribunal's allowance of set-off is supported by the court's opinion.
- Costs: The department will bear its own costs and must pay the costs incurred by the assessee. A hearing fee of Rs. 100 was noted.
- Broader legal implication stated by the court: The decision applies the principle that the statutory classification of income under particular heads for computation does not rigidly determine treatment for other provisions (here, for the carry-forward and set-off rules in s.24(2)). Thus, where dividends or other receipts arise from assets held as part of the trading business, they may, for s.24(2) purposes, be regarded as business income notwithstanding their classification under section 12(1A). The opinion does not purport to lay down a novel territorial rule beyond the facts before it but applies established authority to the present factual situation.
End of summary.
- Under section 66(1) of the Income-tax Act, 1922, the Income-tax Appellate Tribunal, Bombay, has, at the instance of the Commissioner of Income-tax, referred to this court for its opinion the following question of law for the assessment year 1956-57 :
"Whether the dividend income of Rs. 23,302 can be set off under section 24(2) against the business loss of Rs. 4,17,255 (Rs. 12,934 plus Rs. 4,04,321) brought forward from the assessment year 1955-56 ?"
The material facts as appearing from the case stated by the Tribunal are these. The relevant assessment year are 1955-56 and 1956-57, the corresponding account years being 7th November, 1953, to 26th October, 1954 and 27th October, 1954, to 14th November, 1955. The assessee is a Hindu undivided family deriving income from several sources falling under the following three heads :
(i) Income from property (section 9);
(ii) Profits and gains of business, profession or vocation (section 10); and
(iii) Income under the residuary head which now includes dividend income (section 12).
It is also stated that the assessee is a dealer in shares and that in the two assessment years, the dividend income was derived in respect of shares held by it as stock-in-trade. The following table gives the figures of profits or losses under the various heads from the assessment year 1952-53 onwards :
Assessment year Income u/s. 9 Profit or loss under section 10 Income u/s. 17 Rs.
Rs.
Rs.
1952-53 27,917 Loss 2,42,681 2,06,610* (includes dividend income of Rs. 36,961). * (subject to some red-uction as per Tribun-al decision dated 23-4-1959).
1953-54 14,750 Loss 6,00,403 1,58,980 (includes dividend income of Rs. 65,045) 1954-55 12,436 Loss 36,462 90,188 (includes dividend income of Rs. 66,968) 1955-56 8,927 Loss 51,773 29,912 (includes dividend income of Rs. 23,131) 1956-57 8,927 Profit 3,56,553 34,736 (includes dividend income of Rs. 23,302) The cases for the two relevant assessment years proceeded on the footing that whatever loss remained to be set off for any previous statement year was on account of loss in the business of shares. So considered, the position at the end of the assessment year 1954-55 was that the assessee was entitled to carry forward a loss of Rs. 4,04,321 to the following assessment year 1955-56. In that year there was a loss under the business head and, therefore, the question of set-off under section 24(2) of the Act did not really arise. It did, however, arise in the assessment year 1956-57 because, though there was a profit of Rs. 3,56,553 under the business head, the loss of well over Rs. 4,00,000 which had been brought forward was larger than the profit. There was also the dividend income of Rs. 23,302. Therefore, it was really in that year that the question of set-off under section 24(2) of the Act arose. For each of the two assessment years, the Income-tax Officer and the Appellate Assistant Commissioner took the view that the profits and gains, if any, business, profession or vocation mentioned in section 24(2)(ii) meant only those profit and gains which were assessed under section 10. When those cases went to the Tribunal, it took a different view and allowed the set-off. Thereupon, two separate applications were made for stating the case and referring to this court an identical question of law for each of the two assessment years. In the opinion of the Tribunal, that question really arises for the assessment year 1956-57 and that is how this reference is before us.
The provisions of the Act, which have a material bearing on the questions, are contained in sub-section (1A) of section 12, which was introduced by section 9 of the Finance Act, 1955, and certain provisions of sub-section (2) of section 24 of the Act as in force at the material time after being amended by section 16 of the Finance Act, 1955. Section 12(1A) and the relevant parts of section 24(2) are reproduced :
"12, (1A) Income from other sources shall include dividends."
"24. (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, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and
(i) Where the loss was sustained by him in a business consisting of speculative transactions, it shall be set off only against the profits and gains, if any, of any business in speculative transactions carried on by him in that year;
(ii) Where the loss was sustained by him in any other business, profession or vocation, it shall be set off only against the profits and gains, if any, of any business, profession or vocation carried on by him in that year : provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year; and
(iii) if the loss in either case 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, but no loss shall be so carried forward for more than eight years....."
The precise question which we have to consider is whether dividend income derived from shares held, as in this case, as stock-in-trade should be regarded, in view of section 12(1A), as falling under the residuary head or whether, notwithstanding the classification made by that provision, the dividend income should, for purposes of section 24(2), be regarded as income derived from any business, profession or vocation.
Before section 12(1A) of the Act was enacted, dividend income from shares held as stock-in-trade was held to be income earned in the course of business or arising out of business : Commissioner of Income-tax v. Ahmuty & Co. Ltd. It is, however, urged that, in view of section 12(1A), such income should be regarded for purposes of carry-forward and as included in the residuary head. In our opinion, the heads described in section 6 and elaborated in the following sections do not exhaustively define sources only for the purpose of computation of the total income and that the breakup thereby indicated should not be regarded as rigidly delimiting the sources under different heads for purposes of other provisions of the Act. So, the Supreme Court observed in Commissioner of Income-tax v. Chugandas & Co. as follows :
"The heads described in section 6 and further elaborated for the purpose of computation of income in section 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income : the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this court in the United Commercial Bank Ltd.s case that business income is broken up under different heads only for the purpose of computation of the total income : by that break 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 Indian Income-tax Act for computation of income."
In United Commercial Bank Ltd. v. Commissioner of Income-tax the question was whether, when the purchase and sale of securities formed part of the assessees business, interest on such securities falling under section 8 could be set off under section 24(2) of the Act. The Supreme Court remanded the case and observed as follows :
"He also contends that the business which the assessee was carrying on was the business of dealing in money and credit and that banking and dealing in securities constitute one and the same business. He refers to section 277F of the Indian Companies Act and relies on the Privy Council decision in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax in which it was pointed out that in the ordinary case of a bank the business consists in its essence of dealing with money and credit. The banker has always to keep enough cash or easily realisable securities to meet any probable demand by depositors, this as clearly a normal step in carrying on the banking business. It is an act done in what is truly the carrying on of the banking business.
In view of the order we propose to make, we do not find it necessary to express any opinion on the respective contentions raised by counsel for the parties. In Punjab Co-operative Banks case a finding had been given that the purchase and sale of securities was as much the assessees business as receiving deposits from clients and withdrawals by them. In the case before us no such finding has been given and in the absence of such finding no opinion can be given as to whether the holding of securities out of which interest was derived formed part of same business within section 24(2) or not.
The appeal would, therefore, be allowed and the case remitted to the High Court for a fresh decision of the reference after getting from the Tribunal a fuller statement of facts about this part of the case, whether the securities in question were a part of the trading assets held by the assessee in the course of its business as a banker."
In Cocanda Radhaswami Bank Ltd. v. Commissioner of Income-tax Satyanarayana Raju J. opined in a very brief judgment, that interest on securities held by a bank as part of its trading assets can be set off under section 24(2) against business losses of earlier years which had been carried forward. It appears that the learned judge took into consideration the fact that, in the case of United Commercial Bank Ltd. the Supreme Court found it necessary to remit the case to the High Court for a fresh decision of the reference after getting from the Tribunal a fuller statement of facts whether the securities in question were a part of the trading assets held by the assessee in the course of the business as a banker. The view taken in the Andhra case contra-indicates that section 24(2) should be regarded as restricted to profits and gains assessable under section 10.
Another case, which was decided with reference to section 25(3) of the Act, also throws some light on the question before us. Notwithstanding some difference in language, that provision gives relief in certain cases of discontinued "business, profession or vocation". In Commissioner of Income-tax v. Chugandas & Co. (Securities) the Bombay High Court held that the interest on securities which formed part of the stock-in-trade of the assessees business was part of the income profits and gains of that business within the meaning of section 25(3) and the assessee was entitled to exemption from tax in respect thereof under that sub-section. This was affirmed in Commissioner of Income-tax v. Chugandas & Co. The Supreme Court considered the question at some length and took the view that the exemption granted to profits and gains from "business, profession or vocation" was not retracted to profits and gains assessable under section 10 of the Act. Shah. J., speaking for the court, further observed :
"It has also to be noticed that prior to the insertion of sub-section (1A) of section 12 by section 9 of the Finance Act, 1955, with effect from April 1, 1955, income from dividends was chargeable not under section 12 but under section 10, if the shares from which such income was received were the stock-in-trade of the assessee. The result of the insertion of section 12(1A) is that in respect of business in shares dividends received from the share were till March 31, 1955, regarded as profits and gains of business assessable to tax under section 10. After the enactment of the Finance Act of 1955, dividends became chargeable under section 12(1A) under the head income derived from other sources. Could it have been the intention of the legislature that dividend income of a business in respect of which tax was charged under the head income from shares under Act 7 of 1918 would not, after March 31, 1955, be entitled to the benefit of the exemption under section 25(3) merely because the head under which it was charged prior to the Finance Act of 1959 is now the head other sources ?"
Similar considerations, we think, ought to apply to the language employed in section 24(2).
For all these reasons, we are of opinion that the dividend income of Rs. 23, 302 arising in the assessment year 1956-57 can be set off against the business of the earlier assessment years which had been carried forward.
The department will bear its own costs and pay those incurred by the assessee. Hearing fee Rs. 100.
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