The Judgment of the Court was delivered by

Rajagopalan, J.:— The assessee firm carried on a money-lending business abroad, in the territory then known as the Federated Malay States. In the course of its money-lending business it acquited and held several items of immoveable properties (houses) which, it was common ground, the firm always treated as part of its stock-in-trade. In computing the income of the assessee firm in the year of account which ended on 12-4-1948, for assessment to income-tax in the assessment year 1948–1949, the income from these items of house property was computed under Section 9 of the Income-tax Act, and the quantum under that head was determined at 63,345 dollars. The assessee firm was also assessed to business profits tax under the provisions of the Business Profits Tax Act, 21 of 1947, and in that assessment the income from the house properties was included in the income from the business of the assessee. That was ultimately sustained by the Tribunal, and that led to a reference of the following question to this Court:

“Whether on the facts and in the circumstances of the case, the income from properties are chargeable to tax under the Business Profits Tax Act, as income from business.”

2. Factually the income from the property, though it was admittedly part of the stock-in-trade of the business in money-lending the assessee carried on, was dealt with under Section 9 of the Income-tax Act for assessment to income-tax. It was common ground before us that the procedure adopted by the Department was the one sanctioned by the Income-tax Act. It is not really necessary to examine the earlier case law on the subject in view of the authoritative pronouncement of the Supreme Court in United Commercial Bank Ltd. v. Commr of Income-tax, West Bengal, 1957-32 ITR 688 : ((S) AIR 1957 SC 918). The headnote runs:

“Under the Indian Income-tax Act, 1922, the income of an assessee is one, and Sections 7 to 12 of the Act direct the modes in which the income-tax is to be levied. No one of those sections can be treated to be general or specific for the purpose 4 of any one particular source of income. They are all specific and deal with the various heads in which an item of income, profits and gains of an assessee falls. These sections are mutually exclusive and where an item of income falls specifically under one head it has got to be charged under than head and no other.”

3. No doubt in that case the learned Judges had to decide whether the interest on securities, which fall under Section 8 of the Income-tax Act, also came within the scope of S. 10 of that Act. But what applies to S. 8 obviously also applies to S. 9 in relation to S. 10. What has to be computed for purposes of assessment under S. 9 cannot be brought within the scope of Section 10 of the Income-tax Act. With reference to the interest on securities what the Supreme Court laid down was:

“Income from ‘interest on securities’ falls under Section 8 of the Act and not under Sec., 10; it cannot be brought under a different head of income, viz., ‘profit and gains of business' under Sec. 10, even though the securities are held by a banker as part of his trading assets in the course of his business”. Therefore, the fact that the house properties in question constituted the stock-in-trade or the trading assets of the assessee firm made no difference to the question, was the income from these properties assessable under Section 9 or under Section 10 of the Income-tax Act. It was assessable only under section 9, and it was correctly assessed under Section 9 of the Income-tax Act in the course of the proceedings to assess the assessee to income-tax.

4. The question now is, whether the income from the properties, computable and factually computed only under Section 9 of the Income-tax Act, was part of the taxable profits of the business of the assessee liable to the charge imposed by Section 4 of the Business Profits Tax Act. That question has to be answered primarily with reference to the definition of “business” in Section 2(3) of the Business Profits Tax Act, which runs:

“Business includes any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, the profits of which are chargeable according to the provisions of Section 10 of the Indian Income-tax Act, 1922:

Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of this definition to be a business carried on by such company or society;

Provided further that all business to which this Act applies carried on by the same person shall be treated as one business for the purposes of this Act.”

5. Schedule 1 of the Business Profits Tax Act sets out the rules for the computation of the profits for the purpose of the Business Profits Tax Act. The relevant portion of Rule 1 of schedule I provides:

“The profits of a business during any chargeable accounting period shall be separately computed, and shall, subject to the provisions of this Schedule, be computed in accordance with the provisions of Section 10 of the Indian Income-tax Act, 1922.”

6. Rule 3 in schedule I runs:

“Income received from investments or other property shall be included in the profits only as-provided in this rule, that is to say:

(a) in the case of the business of a building society, or a banking business, insurance business, or business consisting wholly or mainly in the dealing in or holding of investments or other property, the profits shall include all income received from investments or other property; or

(b) in the case of a business part of which consists in banking, insurance or dealing in investments or other property, not being a business to which clause (a) applies, the profits shall include all income received from investments or other property held for the purposes of that part of Chat business;

Provided that

(i) income received directly or indirectly by way of dividend or distribution of profits from a body corporate carrying on business as defined in this Act, and

(ii) income to which the persons carrying on the business are not beneficially entitled shall in no case be included.”

7. Rule 3 of Schedule 1 has obviously to be correlated to the proviso to Section 2(3) of the Business Pro-1 fils Tax Act. Neither the proviso to S. 2(3) nor rule 3 of schedule I applies to the assessee, whose business, it should be remembered, was only money lending.

8. The money lending operations that the assessee carried on would certainly constitute business, as that expression has been defined by the Income-tax Act and even by the Excess Profits tax Act. The provisions of the Business Profits Tax Act, however, import a restrictive factor in considering what constitutes business for the purpose of business profits tax. Unless the profits of the business are chargeable under Section 10 of the Income-tax Act, they have to be left out of account for the levy of business profits tax under Section 4 of the Business Profits Tax Act. That, in our opinion, results from the definition of business in S. 2(3) and is further emphasised by the definition of profits in Section 2(16) of the Business Profits Tax Act. S. 2(16) defines profits,

“Profits means profits as determined in accordance with schedule 1”

9. We have already set out Rule 1 of schedule I, which like Section 2(3) of the Act takes us back to Section 10 of the Income-tax Act Obviously it is not every item of income of a person who carried on a business that comes within the scope of profits assessable to Business Profits tax. Nor even is every item of income from business within the scope of the charging section, Section 4 of the Business Profits Tax Act What falls within the scope of S. 4 is only such profits from the business as can be computed under Section 10 of the Income-tax Act.

10. Any other item of income or profits of a person who carries on a business and even any other item of income which could be traced to the business activities of that person will stand excluded from the scope of Section 4 of the Business Profits Tax Act, because the statutory test is, does the income, profits or gains fall within the scope of Section 10 of the Income-tax Act. In the case of the assessee, the income from the property did not satisfy that test. It was not and could not have been computed to income-tax under Section 10 of the Income-tax Act and was not therefore income which was ‘chargeable according to the provisions of Section 10 of the Income-tax Act’ within the meaning of Section 2(3) of the Business Profits Tax Act.

11. The proviso to Section 2(3) of the Business Profits Tax Act creates a legal fiction. Income from property is deemed to be income from business only in the circumstances specified in the proviso, emphasising the main features of S. 2(3), that but for that legal fiction such income from property, which could not be charged under Section 10 of the Income-tax Act would not constitute profits from business for purposes of the Business Profits Tax Act.

12. Mr. Rama Rao Sahib, learned counsel for the department pointed out that the assessee obtained the income in question, the income from the houses, in the course of his business activities. He had acquired houses as part of his business activities, and he held them as part of the stock-in-trade in that business, though the business was money lending. Learned counsel urged that if should, in the circumstances of the case, be treated as income from business for purposes of levy of business profits tax. Learned counsel relied on the observations at page 181 (of ITR): (at p. 936 of AIR) in Commissioner of Income-tax, West Bengal v. Calcutta National Bank Ltd., 1959-37 ITR 171 : (AIR 1959 SC 928).

13. That was a case which dealt with the liability of an assessee to tax under the Excess Profits Tax Act we have already pointed out that the definition of business in Section 2(3) of the Business Profits Tax Act differs from that in the In-come-tax Act and the Excess Profits Tax Act the restrictive factor we have referred to, that only profits chargeable under Section 10 of the Income-tax Act are assessable as profits under the Business Profits Tax Act and is not one of the requirements of liability to excess profits tax. In 1959-37 ITR 171, at p. 181 : (AIR 1959 SC 928 at p. 936) the learned Judges examined the scope of the Income-tax Act and that of the Excess Profits Tax Act and pointed out:

“It is not therefore correct to say that what would not come within the ambit of Section 10 of the Income-tax Act would also not come within the ambit of the Act (Excess Profits Tax Act). On a proper construction of the provisions of the Act it has got to be held that what has been covered by Section 8, 9 and 10 at least in parts of the Income-tax Act, comes within the purview of the Act (Excess Profits Tax Act).”

14. That principle cannot apply to an assessment under the provisions of the Business Profits Tax Act because, as we have already pointed out, S. 2(3) definitely restricts the assessment of profits to profits from business computable under Section 10 of the Income-tax Act. To accept the contention of the learned counsel for the department, that because the income from houses was income that accrued in the course of the business activities of the assessee it was liable to be assessed under Section 4 of the Business Profits Tax Act, Section 2(3) of the Act should have run something on these lines,

“Business includes trade, commerce or manufacture, or any adventure in the nature of trade, commerce or manufacture of any profession or vocation.”

15. And Section 2(16) of the Business Profits Tax Act should have run “Profits means profits from a business,” without any further reference to the mode of computation of those profits in schedule I, that is read with Section 10 of the Income-tax Act.

16. As we have already pointed out both the definition of profits in Sec. 2(16) and the definition of business in S. 2(3) and Rule 1 of schedule I require that before income is treated as income from a business within the scope of Section 4 of the Business Profits Tax Act it should be income which falls within the scope of Section 10 of the Income-tax Act.

17. Income, whatever be the source of that income, which does not fall within the purview of Sec. 10 with which has to be read Section 6(iv) of the Income-tax Act is outside the scope of the charge imposed by Section 4 of the Business Profits Tax Act. We have already pointed out that there was no dispute about the position that the income the assessee derived from the house properties came within the scope of S. 9, which meant that the operation of Section 10 of the Income-tax Act was excluded. As it was not income or profits within the scope of Section 10 of the Income-tax Act, it could not have been charged to business profits tax.

18. We answer the question referred to us in the negative and in favour of the assessee. As the assessee has succeeded he will be entitled to his costs of this reference. Counsel's fee Rs. 250/-.

JD/V.R.B

19. Answer in negative.