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Judgment
This is a reference by the Income Tax Appellate Tribunal, Hyderabad Bench, in compliance with the requisition of the High Court of Andhra in Civil Miscellaneous Petitions Nos. 122, 123 and 124 of 1955, dated August 5, 1955. The question of law referred to this court is an follows :
"Whether, on the facts and in the circumstances of the case, the assessee was entitled to set off the business loss of Rs. 55,912 brought forward from the preceding year against the entire income including interest on securities held by the assessee ?"
The relevant facts of the case are briefly as follows :
The assessee is the Cocanada Radhaswami Bank Limited at Kakinada. It is a private limited company carrying on banking business with its head office at Kakinada and a branch at Dayalbagh. The assessee receives interest from its investments in Government securities. It also derives loss in some years and profits in some years from its banking business. For the assessment years 1945-46 and 1946-47, the income from the two sources was cumulatively considered under the head "business" both by the assessee and by the department. In 1947-48 and 1948-49, the assessee continued to show all his income from all sources under the head "business". But the department proceeded to make the assessment determining the income under two separate appropriate heads, namely, (i) interest on securities u/s 8 and (ii) income from the head "business" u/s 10 of the Act. Accordingly, for the assessment year, 1949-50, the assessment was made as follows :
Rs. A. P.
Interest on securities
8,488-0-0
Business loss
64,400-0-0
Net loss
... 55,912-0-0
In the three succeeding years, the department accordingly showed the income under the two separate heads and allowed set-off only regarding the income which the department classified under the head "interest on securities", that is, interest received from its investment in Government securities. The department refused to agree with the contention of the assessee bank that the entire income, that is, interest on securities plus business income, should be the item against which the loss of Rs. 55,912 should be set off.
The position was as follows :
Year of assessment
Interest on securities
Business income or loss (as finally decided by the A.A.C.)
Total
Rs. A P.
Rs. A. P.
Rs. A. P.
(1) 1950-1951
5,191-0-0
886-0-0
6,077-0-0
(2) 1951-1952
2,174-0-0
1,177-0-0
3,351-0-0
(3) 1952-1953
1,885-0-0
9,121-0-0
11,006-0-0
For the sake of convenience of reference, the word "business" is used in the above tabulation in the sense in which it was used by the department. namely, to show the source of income other than by way of interest on securities.
The contention on behalf of the assessee is that the interest on securities was also income derived from its banking business and that banking and dealing in securities constituted one and the same business. But it is admitted on behalf of the assessee that the chargeability section regarding the interest on securities is section 8 and regarding the other income derived from the banking business concerned in this case (that is, income shown by the department under the head "business") is section 10. The difference between the department and the assessee was on the question whether the income under the head "interest on securities", though chargeable u/s 8, was also part of the income from business of the bank for the purpose of setting off the loss of Rs. 55,912. The contention of the assessee was that the amount against which loss of Rs. 55,912 could be set off was the amount shown in column 4 above, whereas the department allowed set-off only against the figures shown in column 3 in the tabulation given above in this judgment.
The Tribunal agreed with the contention of the department on the authority of the decision of the Calcutta High Court in United Commercial Bank Ltd. v. Commissioner of Income Tax. In that case, three questions were referred by the Tribunal to the Calcutta High Court. Of them, we are concerned only with the first question which ran as follows :
"Whether, on the facts and in the circumstances of this case, the assessee was entitled to set off the business loss of Rs. 3,21-929 bought forward from the preceding year against this years income including interest on securities held by the assessee."
Their Lordships of the Calcutta High Court answered that question in the negative. It may be observed that the question so decided by the Calcutta High Court was substantially the same as the question which has been referred to us in the present case. The above decision of the Calcutta High Court was taken up on appeal to the Supreme Court. The latter pronounced judgment on May 23, 1957, which was after the Tribunal made the reference to us in this case (It was of date February 28, 1957). In that decision, United Commercial Bank Ltd. v. Commissioner of Income Tax, their Lordships of the Supreme Court observed as follows :
"Counsel for the assessee on the other hand submits that the use of the word same signifies the identity of the business in which the loss has occurred and has no reference to the head under which the profits are chargeable. In other words interest does not cease to be profits and gains of the same business merely because for the purposes of chargeability it falls under a different head, i.e., u/s 8 and not u/s 10. Section 24 of the Act deals with the set-off of loss in computing the aggregate income.
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, and if some of the securities are realised to meet withdrawals by depositors, this is 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 in 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 the same business within section 24(2) or not."
The above observations would directly apply to the present case. We too feel that, in this case before us, the Tribunal has not given any finding as to whether the purchase and sale of securities and the holding of the securities in such a way that in yielded income by way of interest was as much the assessees business as receiving deposits from clients and withdrawals by them, and that no answer can be given to the question under reference as things stand. So, we respectfully follow the decision and example of the Supreme Court and remit the case to the Income Tax Appellate Tribunal, Hyderabad Bench, for giving 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 and whether its dealing with the securities (from which it received interest) was as much the assessees business as receiving deposits from clients and withdrawals by them ?"
The learned advocate for the petitioner contends that as per the amendments which have been made to section 24(2) in 1955 (after the reference was made) and in 1957, the assessee would be entitled to set off the loss of Rs. 55,912 not only against the profits of banking business but also against profits from interest on securities. But this is a point which has not been referred to us by the Tribunal u/s 66(1) of the Income Tax Act and we cannot go into such question now. It is open to the assessee to press this contention also before the Tribunal when the matter goes before it. There shall be no order as to costs.
In pursuance of the aforesaid order, the Income Tax Appellate Tribunal, Hyderabad Bench, submitted the following fuller statement of the case :
"In compliance with the requisition of the High Court of Judicature, Andhra Pradesh, at Hyderabad, u/s 66(4) of the Indian Income Tax Act, 1922, in Case Referred No. 25 of 1957, dated December 20, 1959, in the case of Cocanada Radhaswami Bank Ltd.; Kakinada v. Commissioner of Income Tax we draw up an agreed statement of the case and refer it to the High Court.
The question on which the Tribunal has been directed to give a fuller statement of facts is as follows :
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 and whether its dealing with the securities (from which it received interest) was as much the assessees business as receiving deposits from clients and withdrawals by them ?
A statement of case was submitted to the High Court by the Tribunal as per its directions on the assessees applications u/s 66(2) on the question :
Whether, on the facts and in the circumstances of the case, the assessee was entitled to set off the business loss of Rs. 55,912 brought forward from the preceding year against the entire income including interest on securities held by the assessee."
When the matter came up before their Lordships of the High Court, they felt that the Tribunal has not given any finding as to whether the purchase and sale of securities and the holding of the securities in such a way that they yielded income by way of interest was as much the assessees business as receiving deposits from clients and withdrawals by them. In those circumstances their Lordships felt that no answer could be given to the question under reference in the absence of any specific finding by the Tribunal. Hence their Lordships have called for a better statement of the case from the Tribunal on the question mentioned in paragraph 2 supra.
Notice was given both to the assessee and the department and both of them were heard. It was represented on behalf of the assessee that the assessee was not a dealer in securities, but that the securities were purchased for keeping them in lieu of liquid cash which the assessee had to keep to pay its constituents. Instead of keeping idle cash, it purchased some securities which could easily be concerted into cash as and when required and at the same time there was the advantage of some income to the assessee by way of interest on the said securities, which it could earn till the securities in question were sold for the said necessities. In this connection, our attention was also drawn to the annual report of the working of the assessee bank by way of example. For instance, the eighth annual report on the working of the assessee bank for the period ended 31st December, 1950, is as follows. In the second paragraph it is stated :
The paid up capital of the bank is Rs. 1,00,400. The working capital at the end of the year was Rs. 9,08,408 which was utilised as shown below :
Rs.
(1)
Money at call and short notice
59,138
(2)
Fully secured loans
95,965
(3)
Loans secured by personal security
20,647
(4)
Loans secured by personal security as well as personal liability of one or more parties
1,38,379
(5)
Government securities at cost
4,62,662
(6)
Cash in hand and with banks
71,311
(7)
Other assets
15,101
Total
8,63,203
The fifth item, which pertains to Government securities, is important. On the basis of Government securities being included in the working capital, it was argued on behalf of the assessee that its contention was correct. A copy of this eighth annual report of the working of the assessee bank is annexures "A" hereto forming part of the case. The assessee also filed before us a statement wherein the particulars of paid up capital, total working capital, etc., are given. A perusal of its also clearly showed how the securities formed part of the working capital. A copy of this statement is annexures "B" hereto forming part of the case.
On the other hand, it was submitted by the departmental representative that the securities were investments since they were purchased, according to him, out of surplus funds. This was not admitted by the assessee and it was contended that the assessee had no surplus funds at all to make such investments and that the securities were purchased out of the liquid cash which the assessee had to keep as stated supra. Since we find that what is stated by the assessee is borne out by the documents mentioned above, we hold that these securities were part of the trading assets in lieu of cash which the bank had to keen for disbursements to its constituents as and when demanded. In view of the above, the receipt of interest from the securities was as much the assessees business as its other banking activities like receiving deposits from clients and withdrawals by them.
There is another question about the assessee being entitled to set off the loss of Rs. 55,192 mentioned in the High Courts order, not only against the profits of banking business but also against profits of banking business but also against profits from interest on securities. Their Lordships have stated that this point was not referred to the High Court by the Tribunal u/s 66(1) of the Income Tax Act and as such they could not go into the said question. They have also observed that it was open to the assessee to press this contention also before the Tribunal when the matter came before it. Since the matter which we are disposing of is one in respect of the statement of the case submitted to the High Court on a question of law raised by the High Court and on which it called for a statement of the case from the Tribunal u/s 66(2) and since at this stage the Tribunal cannot refer any question otherwise than submitting a statement of case to the High Court on the question which was stated to arise out of the Tribunals order on the application of the assessee filed u/s 66(2), the assessee was not in a position to point out as to how any question could be considered in regard to the contention mentioned above and hence we leave the matter there.
ANNEXURE "A"
The Cocanada Radhaswami Bank Ltd., Kakinada.
Eighth annual report on the working of the Cocanada Radhaswami Bank Limited, Kakinada, for the period ended 31st December, 1960 :
The directors beg to submit their eighth annual report for the year ended 31st December, 1950, together with the profit and loss account and the balance-sheet.
The paid-up capital of the bank is Rs. 1,00,400. The working capital at the end of the year was Rs. 9,08,408 which was utilised as shown below :
Rs.
(1)
Money at call and short notice
59,138
(2)
Fully secured loans
95,965
(3)
Loans secured by personal security
20,647
(4)
Loans secured by personal security as well as personal liability of one or more parties
1,38,379
(5)
Government securities at cost
4,62,662
(6)
Cash in hand and with banks
71,311
(7)
Other assets
15,101
Total
8,63,203
The following figures indicate the progress of the bank during the year under report as compared with the previous years :
Year ending
Total working capital
Total demand and time liabilities
Loans, cash credits and overdrafts
Total liquid assets
Ratio of 5 :3
Rs.
Rs.
Rs.
Rs.
30-4-46
10,32,771
9,46,862
4,91,699
5,17,312
60%
30-4-47
10,52,118
10,45,560
4,99,695
6,38,154
61%
30-4-48
14,65,415
13,83,886
4,56,872
9,71,488
70%
30-4-49
15,51,068
14,47,918
4,78,315
9,99,511
69%
31-12-49
11,75,526
11,23,443
3,84,144
7,88,650
70%
31-12-50
9,08,408
8,11,718
2,54,991
5,93,311
73%
From the above-noted figures it would appear that a high degree of liquidity of assets was maintained.
The years working resulted in a profit of Rs. 4,374-3-5 as against Rs. 6,352-5-3 in the previous year. The fall in profit as compared to the previous year was due to reduction in business due to general slump in industrial activities.
Two directors, viz., Sri P.P. Khemani and Sri C.M. Sudhia, retired but are eligible for re-election.
The accounts of the bank were audited by Sri K. Ramachandra Rao, G.D.A., R.A., Chartered Accountant, Kakinada.
[This reference coming for hearing this day, after return of this statement of the case submitted by the Income Tax Appellate Tribunal, Hyderabad Bench, upon pursuing the statement of the case and upon hearing the arguments of Mr. B.V. Subrahmanyam, Advocate for the assessee, and of Sri C. Kondaiah, standing counsel for the Income Tax department, the court made the following order].
JUDGMENT
SATYANARAYANA RAJU J. - In view of the fuller statement of facts submitted by the Appellate Tribunal, the reference must be and is answered in favour of the assessee. The assessee will have his costs of the reference, Advocates fee Rs. 250.
Reference answered accordingly.